When deciding on which P2P platform to invest in, Mr Sheehan says it is important to look at the financial performance of the platform.
"You also need to look at its lending history - how long it has been running, what does its early loan book look like?"
A good place to start is the P2P Finance Association, found at p2pfa.org.uk, which has eight members, all of whom have committed to signing up to the organisation's operating principles. This includes managing their business with technical and professional competence.
Mr Sheehan says: "Being a member means they will publish loan data, and do it in a prescribed format. They will often publish their default rates and loan payment rates."
Not every platform is a member of this organisation, so it is a factor to look out for.
The website for the UK Crowdfunding Association is ukcfa.org.uk, where members are also required to adhere to a code of conduct.
Layer of security
Another pointer is whether the platform has a provision fund; this helps cover lenders if their borrower defaults.
Mr Sheehan says: “The platforms build the provision fund into the pricing. If they say you will get 4 per cent, you’ll pay 4 per cent, and will be charging the borrower more, and that will be put into the provision fund.
“It’s a good thing, as it can provide an extra layer of security.”
However, Dr Davis found that not every investor was happy about this. He says: “The more sophisticated investor resents it hugely, because they don’t think they would make the mistake [of investing in a borrower that defaults].”
Many investors gather information about platforms from online forums or industry events, says Dr Davis: “There’s a huge number of these platforms where the level of security or transparency isn’t what it could be.”
For example, one investor wanted to invest in a wind farm due to a personal commitment to renewable energy.
Dr Davis says: “They thought they were investing in a wind farm but they were investing in a securitised debt product that had already paid for the wind farm, and they were paying off the loan.”
P2P loans can be put into an Isa, as can debt-based crowdfunding investments, but not equity investments. Many platform operators offer an Isa, but they have to be registered with HM Revenue & Customs.
Many Sipp and Ssas operators will allow crowdfunding bonds and debentures, as well as equity investments, but generally not P2P loans.
melanie.tringham@ft.com
