Peer to Peer Lenders Should State Capital Risk More Clearly

Written by Karen Bryan

fscsI received an email from Zopa, a peer-to-peer lending site, touting their 5% annual return during their ‘Rate Promise’ promotion. During the period 9 January – 3 February 2014, you’ll receive 5% interest on money lent out for five years through the Zopa website.

Now this does sound like a very competitive rate of interest. The highest rate that I could find on offer from a bank or building society on a five-year fixed rate savings account was 3.25% from First Save.

However, you need to be aware that the money lent out though a peer-to-peer lending site is not covered by the Financial Services Compensation Scheme (FSCS). This means that if the company goes bust, you could lose your cash.

What concerns me is that I don’t think this fact is made clear enough on the Zopa site.

On the ‘Grow Your Savings‘ page on the Zopa site, there’s a section enttitled ‘You’re Safeguarded’, which states “Earn great returns on your savings with peace of mind. The Safeguard is a fund designed to step in and give you back all your money, plus interest, in the rare event a borrower cannot repay.”

It’s only when you click through to the Safeguard Fund information page that the risk to your capital is mentioned in the fifth paragraph, which states “Zopa is supervised by the OFT but is not a bank and so the Zopa Safeguard is not part of the FSCS guarantee. The Zopa Safeguard isn’t an insurance or guarantee product, it’s just good sense for savers and borrowers looking for a better deal.”

In my opinion, safeguard sounds very similar to guarantee. I looked up the definition of safeguard – “something that provides protection against possible loss”.

I assume that Zopa will say that their ‘Safeguard Fund’ does provide some protection against possible bad debts reducing your rate of return, as long as they stay at a low percentage of overall lending. But surely the possible risk to capital is a crucial issue and a much larger potential loss to lenders?

I’d like to see peer-to-peer lending websites being legally obliged to have much more prominent warnings about the risk to lenders’ capital.

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