Secret Investor's 2017 in review - the beginning of the end of the 'Golden Age' of P2P lending?

History may regard 2017 as the beginning of the end for the golden era of Peer to Peer investments.

While there was some good news as nearly all platforms now offer IFISAs – and those that don't plan to introduce them early next year – there has been a reduction in returns at the safer sites.

These reductions occurred in the areas where the P2P industry begins to overlap with mainstream banks. The latter are gradually regaining their appetite for risk therefore P2P platforms have had to lower their interest rates to remain competitive to the detriment of investors' profits.

The sites operating at the highest risk/return end of the scale were unaffected however, for active investors operating in this sphere, the opportunities to diversify at the same time as choosing who receives their funds significantly reduced in September when FundingCircle, by far the largest P2P lender to SMEs, become an AutoBid-only operation.

This came at the end of a nightmare summer for many FundingCircle investors who had seen their defaults rising in number – often after only a few repayments had been made. Many were concerned that the platform's automatic credit checking processes, while facilitating the high throughput, do not weed out enough of the dodgier transactions.

The reason FundingCircle made AutoBid mandatory was to protect inexperienced investors from allocating too much of their capital to a single borrower as they aim to become more mainstream after the introduction of their IFISA on 30th November but for many existing customers who had joined the site when they were able to choose who they lent to and at what rate, this complete loss of control coupled with the increasing default rates meant they retreated from the platform.

One of their number was The Secret Investor who has gradually withdrawn most of his capital from here since the Autumn. Due to listing far more loans than any other site, he had by far his greatest allocation of P2P funds on FundingCircle and having taken them out it has been difficult to find enough borrowers on other platforms to spread his funds, and thus his risk, as thinly as he wishes.

New accounts were opened at ArchOver and a small number of loans received his capital at Crowd2Fund but much of his money left the P2P realm and headed over to stocks and shares.

This is ironic as at the start of the year, long before compulsory AutoBid and so many defaults dampened his enthusiasm, The Secret Investor was waiting very impatiently for FundingCircle to receive full authorization from the FCA to offer an IFISA. He couldn't understand why the first sites to be allowed to offer the tax-free wrapper were the smallest ones who offered the minimum number of loans, restricting diversification. Industry wisdom was that the newer, smaller P2P providers found it easier to adapt and comply to the FCA's requirements than the larger, more established ones.

With the end of the 2016/17 tax year approaching without any IFISAs being available on the larger sites he decided to invest tax-free in a high end London property development which was one of a few loans offered in the past 12 months by the CapitalRise platform. Up until that point, he had only invested £80 in any single borrower but, to make opening the IFISA worthwhile, he allocated a 4-figure sum which was something of a shock.

Shortly after the new tax year began in April, asset-backed P2P lenders FundingSecure launched their IFISA. At the time, this was The Secret Investor's favourite platform due to the reasonable levels of throughput, healthy rate of return (typically 13% pa) and low default rate although the latter has increased a little bringing into question the accuracy of many of the valuations that are provided particularly where there are unusual assets involved – losses have been incurred by The Secret Investor on loans secured against a boatyard and wind turbine.

The Secret Investor opened a FundingSecure IFISA and began transferring funds across as repayments came in from loans in his standard account furthermore, he also transferred in a Cash ISA. The sums involved were so big however that it was difficult to find enough borrowers on the site to distribute the funds in £75 chunks – his usual limit. By the end of the year he was making 4 figure investments into the loans he regarded as the safest with a view to selling them before they mature to avoid the chance of defaults. This strategy assumes buyers can be found and, so far, this has been the case most of the time although discounts have had to be offered.

This does seem to be a higher risk strategy than The Secret Investor has employed previously. The lack of loans outside of FundingCircle makes it difficult to diversify to adequate levels.

Another platform where getting capital working has been a problem is AssetzCapital. Here, those using the AutoBid accounts have seen funds unallocated for some time because recently most of the loans coming to the site have had returns lower than the target rate of the accounts due to the increasingly competitive nature of property-backed lending in late 2017 as the banks increased their involvement – FundingCircle withdrew from property lending during the course of the year.

Investors over at Zopa also had to face the prospect of less income when that site set lower targets for their AutoBid accounts due to an expected increase in defaults on consumer loans. Nonetheless, the platform remained popular with restrictions on new investors being brought in due to demand outstripping the number of borrowers, this was also the case at fellow lender to consumer borrowers – LendingWorks.

Scandal hit the third of the big 3 in the P2P personal borrowing sphere when it emerged that Ratesetter had allocated greater amounts to wholesale lenders than their own policies allow. After the dust had settled, those who persevered with the platform saw returns improve from the extremely low levels of the Summer.

Thus, it was quite a turbulent year for Peer to Peer investors. With banks increasing their appetite for risk and reversing the lending vacuum which P2P filled, there must be questions as to whether there are going to be enough borrowers available in the medium term to provide investors with a reasonable amount of safe loans that provide adequate diversification.