Saving with Ratesetter P2P 'low risk' says agency

14 July 2014, 18:18   By Julia Kukiewicz

SAVERS hoping to secure a higher interest rate on their cash by investing it with a peer to peer site will be heartened to hear that one of the UK's biggest P2P lenders has been given a low risk rating by a major agency.

peer to peer lending
Credit: Panchenko Vladimir/

FE became the first ratings agency to give a peer to peer site a risk ranking last week.

They gave Ratesetter a Risk Score of 1, a very low score which indicates that the rates of return the site is offering are only slightly more volatile than saving in cash.

Ratesetter's low risk score should act as reassurance to anyone who is looking for an alternative to a cash style investment fund.
Mika-John Southworth, FE Marketing Director

Interest rates on savings accounts are still hovering around 1 to 3%; P2P sites like Ratesetter and Zopa offer returns from 4 to 6%.

P2P: how risky?

The perception that lending out money through peer to peer is riskier than traditional savings is not unfounded.

Unlike savings with the big banks, money saved through P2P lenders isn't protected by the Financial Services Compensation Scheme (FSCS), which guarantees deposits of up to £85,000 for each banking licence.

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As of April this year, P2P websites have been regulated by the Financial Conduct Authority (FCA) but the regulator has in the past also expressed concern about the riskiness of the sector, especially since many of those signing up were inexperienced as investors.

The lenders have done their best to counter this charge by setting aside funds to ensure that lenders don't lose out if borrowers default.

Ratesetter, for example, have a £4 million Provision Fund, 150% more than their estimate of £2.2m of defaults, or 0.47% of loans. Similarly, Zopa holds a Safeguard Fund to cover savers against loss of capital or interest if a borrower goes into default.

Both also split their lenders' investments across a number of different loans, minimising each individual's exposure to risk.

Rating for risk

FE base their risk calculations on the amount of volatility investments show over at least 18 months, relative to the FTSE 100 index.

The index is rated as 100 in this hierarchy while cash is the lowest risk possible, zero.

With a rating of one, then, Ratesetter are only slightly more risky than saving in cash, according to FE's analysis.

According to the Investment Management Association, the average score for a flexible investment is 65. Most investments are ranked between one and 150 by FE.

It's worth noting here that this is a rating based on a limited amount of information. P2P is still a fairly new sector in which the big players at least have been lucky enough to suffer few serious shocks. That doesn't mean that they won't suffer shocks in the future.

Despite that, FE and other analysts say that a low risk score can act as encouragement for savers wary of going to P2P sites.

"Ratesetter's low risk score should act as reassurance to anyone who is looking for an alternative to a cash style investment fund," FE's Marketing Director, Mika-John Southworth says.

P2P savings, tax free

Independent verification that P2P savings are, at least at Ratesetter, not very risky, comes at a good time for the market.

Among the big changes for ISAs announced in the 2014 budget, including raising the amount that can be saved in cash to £15,000 and making it easier for money to be moved from cash to stocks and shares, was a commitment to creating P2P ISAs.

The Treasury will launch a consultation on how P2P investments can be make into tax free, ISA, investments this month.

It's estimated that these P2P savings accounts will be available for the first time next April.

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