P2P Lending – Cutting out the banks

Over half a decade ago, in 2005, a new company called Zopa (which stands for “zone of possible agreement”) launched the first lending and borrowing exchange.  The concept was simple and innovative – a marketplace where creditworthy individuals could borrow money from others who were happy to lend, without a bank in the middle.  Thus peer-to-peer lending was born.

At the time, as someone who had been burnt by the tech crash a few years earlier, I was looking for something safer than the stock market, but with more growth potential than a standard savings account.  So I took the plunge and signed-up. … Continue Reading

Peer to Peer lending – Cutting out the banks

Guest Blogger, Rhydian Lewis, CEO of RateSetter shares his thoughts on the growth and opportunities that Peer to Peer Lending offers Savers

I was drawn to an article on Save our Savers a couple of months ago, on the risks and rewards of structured products. It neatly highlighted a “smoke and mirrors” approach that some operators employ to encourage the feeling of “risk-free returns”.

So, let me start by stating that P2P is not a risk-free investment, and that the returns are by no means guaranteed. It’s important to understand that P2P offers a low-risk investment, not no-risk. If Savers want a zero risk proposition, the FSCS is there for that very purpose; equally they should not expect high returns for taking no risk. The lesson of the last few years – for cautious savers at any rate – has been a confirmation that no banking or finance system is completely immune from risk.

The good news however is that the P2P sector is both growing and demonstrating very healthy returns for Savers who want to take a step up in risk profile to maximise their savings portfolio. We’d like to think we sit somewhere between the dreary uncompetitiveness of savings accounts, and the rollercoaster of the stock market. … Continue Reading

If its guaranteed, protected or secure make sure you read the small print

One of the results of low interest rates is to drive people into riskier investments that have the potential to pay out a far better return. Even better are investments that claim not to be risky and still pay that far better return.

In a recent review the Financial Services Authority (FSA) has concluded that some firms are marketing investment products describing them as “guaranteed”, “protected” or “secure” when in reality they are quite simply not.

These terms tend to be used when promoting structured products. We were warned about these products in the article Searching for a better return by John Kay back in January this year. John pointed out that there were two types of risk associated with these products. The first that the provider can’t pay out, an example of this occurred in 2008 with the collapse of Lehman Brothers. Thousands of investors lost their money, many of whom had no idea that Lehman’s was the Bank ultimately behind the investment.

Then other risk is that the investment does not generate the potential returns. Since most of these products are ultimately a bet on market performance, who is most likely to be right? You or the team of highly trained financial analysts with far superior access to information that set up the product in the first place. … Continue Reading

Do you know where your money goes?

Do you know what your bank does with the savings you entrust to it? Have you ever even wondered?

Recent research shows that 30% of bank customers admit having no idea what their bank is doing with their money. Amazingly, one in three customers believe their bank would simply add occasional interest to their savings or just lock the money away in a vault. Only four in 10 of us are aware that our money may be lent out to a range of companies and organisations, and just 45 per cent of us recognise it may be used to fund banks’ investments elsewhere.

How banks put your money to work

Money does not stay still, it is passed around the global system, being lent and invested. This activity seems a far cry from handing over hard-earned cash at a local bank branch for safe-keeping.  But the fact is that, once out of your hands, your money enters a system which is far from transparent. High Street banks’ lending and investment decisions could see your savings helping to fund businesses and organisations you do not approve of – for example, tobacco firms, arms manufacturers, undemocratic regimes, businesses with appalling records on pollution. The list goes on… … Continue Reading

Sharing the risk gives savers a share of the profits

“Jill-T” wants to borrow enough to be able to afford a 2^nd hand car; nothing fancy, she says, just a couple of grand for a robust little runner will suffice to take her to work and back (and one that won’t fail to start on dark freezing mornings).

Getting her hands on the cash, though, has proved a real struggle.

The banks have so far shunned her on account of missing a couple of credit card payments in the past 18 months.

Ditto the building society who frowned upon her request for extra cash after finding her credit record was ‘not sparkling enough’. … Continue Reading

Searching for a better return?

Rates of return available to savers today are generally dismal.  So many advisers are promoting ‘structured products’.  These use modern financial innovation, based on derivative securities, to enhance the returns from fixed interest products or to reduce the risks associated with equity investments.

The usual structure of these investments is that the issuer puts most of your money in a fixed interest investment and uses the balance – after paying commissions and costs – to buy an option or series of options from an investment bank.  In effect, you are making a bet with the balance of your funds on what happens to stock markets.  You could just do that yourself anyway.  Find a secure home for most of your savings and take some risk with the rest.  If you are tempted by one of these structured products you should ask yourself that question and review that alternative.

There are two kinds of risk in structured products.  The first is the risk that the issuer can’t pay.  Deposits up to £50,000 – soon to be increased – are secured by the Financial Services Compensation Scheme if the issuer fails.  But structured products may not be. … Continue Reading

Using the value of your home to support your retirement

Equity release – the facility to raise cash by taking out a lifetime mortgage against the equity in your home – generates much debate.

Is it a necessary evil to be used as a last resort or a respectable way of topping up one’s retirement income?

Much of the media has been unrelentingly hostile to equity release, arguing that it is an expensive, complex product which rips off the elderly, who may not understand its implications for inheritance or its interaction with state benefits.

These are all valid arguments. Equity release is expensive and the most you are likely to be able to raise is 50% of the value of your property. … Continue Reading

How annuities are funded and why the current rates are so low

Most people will buy an annuity when they come to retire but how do they work and why are annuity rates currently so poor?

An annuity is like a mortgage in reverse. An insurance company assessing the risk of underwriting an  annuity for a 65 year old man, will assume he will live for around another 18 years to 83 age (the average life expectancy for a male in normal health).

Billy Burrows of William Burrows Annuities says: “Once an insurer has decided on your likely life expectancy, it will then calculate how much capital and interest it needs to provide the annuity, with the yield being based on a long-dated bond.”

Annuity rates are influenced by four factors: life expectancy, the yield (or return) an insurance company can obtain by investing the annuity money in gilts and corporate bonds, the insurer’s internal operating expenses and the cost of meeting EU reserving requirements, known as Solvency II. … Continue Reading

The new Junior ISA – will your child’s money simply be a hostage to inflation?

Giving young people a good start in life is important; so the new Junior ISA which gives parents, relatives and family friends a chance to put some money aside for a child is a welcome prospect.

The Junior ISA is designed to replace the Child Trust Fund (CTF), the eligibility for which ends in January 2011. However unlike the CTF the Government will not be contributing any cash towards the fund.

Announced yesterday by Mark Hoban, the Financial Secretary to the Treasury, the full details have not been published yet but the Government plans for the accounts to be in operation by autumn next year.

… Continue Reading

Shareholders fight back

I do policy work for the United Kingdom Shareholders Association. UKSA is a member organisation dedicated to promoting and protecting the interests of private shareholders. It was born out of the Great Utility Pay Scandal of the nineties. Do you remember when public utilities were privatised and the executive directors immediately attempted to get their pay multiplied “to match the competition”? And Cedric the Pig was paraded outside the AGM of British Gas (Chairman: Cedric Brown)? Well, that passion and indignation was the foundation of UKSA. … Continue Reading