Funding Circle is boxing its investors in

By Oliver Smith 22 August 2017
Image: Getty/aluxum.

The latest sign that peer-to-peer lending is crumbling.

When lending services like Zopa, Ratesetter and Funding Circle launched they offered a clear alternative to banks, but now that difference is vanishing.

The peer-to-peer vision was that ordinary people could loan their hard-earned cash directly to others, who could borrow at far cheaper rates than from the bank.

But today Funding Circle joined Zopa and Ratesetter in abandoning that vision, instead announcing it will stop people from picking and choosing who to lend their money to, instead automatically pooling these investments across borrowers on the platform.

“We want to ensure investors lending through Funding Circle have an equal chance of accessing all loans, and earn the best possible return,” it said, revealing the change.

But it also seems to undermine the very notion of ‘person-to-person’ lending that Funding Circle and its peers were built on.

Funding Circle’s decision to streamline its investment options may, in part, be due to an upcoming FCA report later this year which is expected to standardise how peer-to-peer lenders report the performance of their loans (something difficult if every investor has their own portfolio of investments).

It’s just the latest example of big changes sweeping across the peer-to-peer lending sector.

Shifting gears

In July Ratesetter admitted that it had stepped in to bankroll a failing company with its own cash that investors had put money into, in order to stop its collapse and maintain its 100% return rate for investors.

By doing so Ratesetter again broke a core principle of the peer-to-peer lending industry, that investors should be directly exposed to risk, and withdrew from the P2P Finance Association trade body as a result.

Some have pointed out that these behaviours and changes now mean that these peer-to-peer platforms are now acting much more like a bank or a fund, becoming middle-men managing the investments they’re facilitating.

The Financial Conduct Authority is also clearly aware of the matter, sending a letter to CEOs of these platforms earlier this year warning that some of their behaviours were skirting along the legal lines of what a bank does.

Today it’s all-change in the world of peer-to-peer lending.