P2P Lending in the United Kingdom

March 29th, 2020
8 minutes read

The UK Market for Peer-to-Peer Lending

The United Kingdom is, by far, the largest P2P lending market in the European region taking up a market share of astonishing 72.5%. The same is true when it comes to the overall category of crowdfunding (market share of 67.7%) that covers both debt-based crowdfunding, equity-based crowdfunding, reward-based crowdfunding, and donation-based crowdfunding. In a worldwide perspective, the UK is surpassed only by the two dominating forces in peer-to-peer investing, China and the USA.

Best Peer-to-Peer Lending Platforms in the United Kingdom

Here, you will find a list of the best peer-to-peer lending platforms in the United Kingdom. When choosing the best peer-to-peer lending sites in a country we consider a variety of factors that you can find in the Methodology below.

Alternative Finance in the United Kingdom

The most updated statistics on peer-to-peer lending in the United Kingdom you will find here on P2P Market Data as we update our data every month immediately after we receive the data from the platforms. The funding volume for the UK market can be found here (both P2P lending and equity crowdfunding).

Another source of data collection that can be useful to use is the Cambridge Centre for Alternative Finance (CCAF). The centre has produced rapports on the online alternative financing in the UK since 2013 recording the market development and identifying emerging trends. The latest rapport was published in 2018 using survey data collected between May 2018 and September 2018 from 75 platforms capturing an estimated 95% of the market. In addition, web-scraping methods were used to add two more platforms, thus increasing the research sample size to 77 UK platforms.

The total UK market volume for alternative finance in 2017 was £6.15 billion up from £4.51 billion in 2016, which corresponds to a growth rate of 36.3%. In the figure below, you can see the total UK market development in funding volume from alternative finance from 2014-2017. In the remaining years, the yearly growth rate was 44.7% in 2016 and 84.7% in 2015.

Alternative Finance growth statistics in the UK from 2014 to 2017

In comparison, next on the list in the European region is France with a total funding volume of €0.66 billion, Germany with €0.60 billion, and the Netherlands with €0.28 billion. On the other hand, there is a long way up to the United States with a funding volume of $42.8 billion and China with €358.28 billion (however, please note that the Chinese crowdfunding is notoriously known for fraud, why the data is very insecure).

Statistics About P2P Lending in the UK

The CCAF-report includes many different types of crowdfunding and alternative finance but for our purpose, we will focus on the numbers reported on P2P consumer lending, P2P business lending, and P2P property lending, which are the three peer-to-peer lending business models identified by the CCAF in the UK market.

The total alternative finance volume in 2017 was split between nine different business models of which the three P2P lending models accounted for the majority of the market. This is illustrated below.

Graph of the alternative finance statistics in the UK by Business Model

Here, P2P business lending accounted for just over £2 billion (33.2% of the market), P2P consumer lending for £1.4 billion (22.8% of the market), and P2P property lending for £1.22 billion (19.8% of the market). Thus, when looking at the market for alternative finance in the UK we see a very clear dominance of peer-to-peer lending, which has been true ever since data collection on the UK market started. What is interesting though is that we see a large difference in the growth rate of each P2P lending model.

Below, you will find a figure showing how P2P lending has developed in the UK from 2011-2017.

Peer-to-Peer Lending development in the UK from 2011 to 2017

In the period 2011-2017, P2P lending in the UK has had an average annual growth rate of 103.2%. In 2017, the year-on-year growth rate was down to 31.3% and was largely carried by P2P business lending that had the highest growth rate of the three P2P lending models, growing 33.2% from £1.23 billion in 2016 to £2.04 billion in 2017. In the same period, P2P consumer lending experienced a growth rate of 22.8% from £1.17 billion to £1.40 billion, while the growth rate of P2P property lending was slowed to only 6.2% from £1.15 billion to £1.22 billion.

Next on the list in the European region when it comes to peer-to-peer lending are France and Germany with a total funding volume of €410. 7 million and €396.7 million, respectively.

Taxation on Peer-to-Peer Lending in the UK

In the United Kingdom, you are taxed the same way on interest earned from P2P loans as for any other type of interest received, and interest from peer-to-peer lending can be paid both with and without a tax deduction.

Because interest earned through peer-to-peer lending is usually considered as income, it is possible for basic rate taxpayers to earn up to £1,000 of tax-free interest income. This means that any basic rate taxpayer would have to reach considerable investment volumes before they are taxed of their income from P2P lending. If you are a higher rate taxpayer, the tax-free interest you are allowed to earn is reduced to £500, whereas additional-rate taxpayers are not allowed to earn any tax-free interest. Remember, the personal tax-free allowance includes interest earned from both peer-to-peer loans and saving accounts. For interest earnings that exceed your tax-free allowance, you will pay income tax according to your normal tax rate, which is 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers.

When investing in P2P lending as a UK resident it is also possible to make use of the so-called Innovative Finance Individual Savings Account (IFISA). This makes it possible to keep your peer-to-peer loans in an Individual Savings Account (ISA) where all interest and capital gains are tax-free.

To learn more about how P2P lending is taxed in the UK and how to claim a tax relief, the UK tax authority, HM Revenue & Customs, has made a guide with the purpose of explaining just that.

P2P Lending Regulation in the United Kingdom

Peer-to-peer lending platforms in the UK is regulated by the Financial Conduct Authority (FCA) under the Financial Services and Markets Act 2000.

Below, you will find an overview of some of the most important aspects of the regulatory framework for lending-based crowdfunding in the UK. These highlights can also be found in the impact assessment accompanying a proposal for a regulative framework on crowd and P2P finance presented by the European Union in March 2018.

  • Bespoke Regime: Yes
  • Scope of lenders and borrowers: Consumer-to-Consumer; Business-to-Consumer; Consumer-to-Business; Business-to-Business if the borrower is a sole trader or a partnership consisting of two or three persons or an unincorporated body of persons and the loan amount does not exceed £25,000.
  • Entry into force: 1 April 2014
  • Authorisation: Authorisation by FCA. Platforms may also need other permissions, depending upon the activities they undertake
  • Money handling: Where firms are responsible for client money, they are subject to rules in the FCA Client Assets Sourcebook (CASS), especially the client money rules (CASS 7), which ensure adequate protection of client money.
  • Minimum capital requirements: €50,000 or a percentage of loaned funds – whichever is higher
  • Type of loans: All types of loans, including secured and unsecured loans, loans to businesses and loans to consumers.
  • Business continuity requirements: Continuity arrangements need to be in place so existing loans can be administered even in the event of a firm running a platform failing.
  • KYC rules (suitability or appropriateness; AML checks): 
    • As of 6 April 2016: firms providing personal recommendations to invest in P2P agreements will be providing a regulated activity).
    • No appropriateness test for lending-based crowdfunding
    • Platforms must establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the firm including it managers, employees and appointed representatives (or where applicable, tied agents) with its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime.
  • Size of loans: No maximum.
  • Maximum investable amounts: No maximum.
  • Disclosure to investors by borrower:
    • Where creditor does not lend in the course of business and borrowers are consumers: platform must provide adequate pre-contractual explanation to the borrower. In addition, all communications by the platform must meet FCA requirements to be clear, fair and not misleading.
    • Where the creditor lends in the course of business the full protections required by the Credit Consumer Act and FCA rules apply.
  • Information requirements & risk warnings by platforms 
    • Information on the platform and its services, including: contact details, a statement that the firm is authorised, details of what performance reports the client can expect, and the firm’s conflicts of interest policy.
    • General description of the nature and risks of a product, in sufficient detail, so the client can take investment decisions on an informed basis.
    • Platform must send a statement at least once a year of the investments and client money held by the firm for the client.
  • Due Diligence:
    • No obligation on what due diligence procedures must be followed.
    • Platforms must disclose the nature of their service and appropriate information about it. Disclose sufficient information about the nature of service so investors understand what due diligence is undertaken and the need to conduct additional due diligence of their own before investing.
  • Conflict of interest: Platforms to identify possible conflicts of interest that may entail a material risk of damage to the interests, to keep a record of these possible conflicts and take all reasonable steps to avoid the conflict leading to loss for clients. Where the risk cannot be managed, it should be disclosed to clients.
  • Professional requirements: Platforms to have appropriate resources employ people who are competent, fit and proper for their role, and to have a suitable business model. The employees controlling the business must have honesty, integrity and good reputation. They must be financially sound and have appropriate competence and capability for their role.
Methodology

At P2PMarketData we are dedicated to providing an unbiased overview of the Peer-to-Peer Lending market and platforms. Among other, in our mission to bring more transparency to the market for online lending we track over 70 platforms funding volumes.

When choosing the best platforms in a country we have considered a variety of factors such as:

  • Number of investors
  • Minimum investment requirement
  • Historical annual returns
  • Diversification opportunities
  • Reinvestment opportunities
  • Educational and informational offerings
  • Platform fees
  • Total capital invested
  • Features (such as secondary market and automatic investing)
  • General transparency (the difficulty of finding who the owners are, how they make money on the platform (fees), terms & conditions and more)
  • Management team

We also look into the company’s online reputation (for example customer reviews, news, complaints, average monthly searches and social media).