Established systems have a habit of managing to absorb and assimilate innovative newcomers – how else, after all, would these systems end up becoming established? This familiar process is under way now as the world of alternative finance meets the world of government-approved tax wrappers for retail investments, namely Self-Invested Personal Pensions and ISAs.

Stephen Cave of Evolution SIPP says that his company is meeting three P2P platforms a week and already has arrangements in place with nine enabling investors to lend within a SIPP wrapper, thereby gaining the benefit of tax relief on their contributions and tax-free gains within the wrapper (over and above the new £1000 a year personal savings allowance from April 2016, which was announced in the Budget). This is already proving appealing to some: Kevin Caley, co-founder of Thincats, says that there is around £7m of SIPP money active on his platform (including his personal fund) mainly thanks to Thincats’ efforts from the beginning to find SIPP providers willing to partner with the platform.

From the investor’s perspective the appeal is obvious – the tax relief nicely cushions any realistic default risk on a reasonably diversified loan portfolio, while the seal of approval from an external, Financial Conduct Authority-regulated SIPP provider gives an additional level of comfort that the platform has robust processes and that due diligence is being carried out on borrowers to reasonable standards.  

However, as the panel discussion at the latest Alternative Finance Network seminar on April 15 made clear, in spite of this progress there is a long way to go before alternative investments such as these will be absorbed fully into the retail mainstream. Perhaps they never will be. That’s not to say they won’t become significant; just that change is likely to be gradual and the investors who will probably use these products may well remain a minority.

There are several reasons for thinking this:

·       P2P SIPPs are still the preserve of Sophisticated Investors and High Net Worth Individuals. To open a P2P SIPP, an investor first has to be judged sufficiently experienced by the firm that provides the SIPP account, such as Evolution, rather than by the P2P platform itself. SIPP providers are regulated by the FCA and are obliged to ensure that investors are able to gain access only to asset classes that are “appropriate” for their level of financial knowledge and experience. In practice, this means that most retail investors will not be considered sufficiently expert to open a SIPP and use it to invest in P2P loans. This may change over time as the P2P industry develops a longer performance record – SIPPs themselves used to be the preserve of wealthy, sophisticated investors but are now mass-market products. However, it will probably take a while. 

·       More broadly, the question of “suitability” is a hot topic at the moment – the FCA is currently scrutinising wealth management firms very hard on how they make sure that the investments they advise their clients to purchase are “suitable” for them. This makes it even less likely that these firms are going to start advising wealthy clients to put money into a relatively new and little-understood asset class such as P2P lending. Since a great deal of HNWI money is under the care of these professional “wealth managers”, this is likely to limit the potential flow of “advised funds” into P2P and related SIPPS, leaving them mainly as the preserve of wealthy and experienced DIY investors.

·       SIPPs that permit P2P investments allow their holders to invest across every platform that has been approved by that SIPP provider. In Evolution’s case that means an investor could place money on nine platforms (and counting) via a single SIPP account, giving plenty of opportunity for diversification across different types of P2P asset. The same probably won’t apply when P2P investing via an ISA eventually becomes possible – perhaps from April 2016. Instead, it looks as though individual platforms will themselves become ISA providers offering a new, third type of ISA devoted to P2P assets. Since investors will only be able to open one such ISA per tax year, this will restrict them to investing on just one platform via their ISA for that year, making it much harder achieve diversified exposure. Again, this looks very much like the sort of investment that will appeal to confident DIY investors but one that will involve more work and effort than most others will be happy to put in. How are they going to decide which of a number of platforms they are not already familiar with should be the recipient of their ISA money?

·       That brings us to the question of retail financial advisors. As Dan Kiernan, Research Director of Intelligent Partnership, explained at the AFN seminar, alternative investments such as P2P lending have gained very little traction among retail financial advisers, a crucial group that shape the decisions of millions of mass-market retail investors with relatively modest sums to invest. Without the advisors’ support, P2P will struggle to become part of the investment universe that these people occupy. Advisors are reluctant because, although they can clearly see the potential benefits of adding P2P investments to client portfolios, they are nervous about this young and relatively untried asset class and see huge potential downside for themselves if they recommend it and something goes wrong, with little upside if things go well. Some are also concerned that their professional indemnity insurance will not cover them for esoteric alternative investments such as P2P, leaving them uncomfortably exposed should problems arise.

·       On a practical level, advisers are generally unfamiliar with P2P platforms and asset classes, and are receiving approaches from individual platforms rather than an industry acting in concert through its professional bodies, which Kiernan argues is what’s required. Partly as a consequence, advisors lack tools to research the market broadly and – inevitably, given how young the industry is – they do not have access to the sort of long-run performance data that they are used to having for other potential investments.

If that all sounds unduly pessimistic, it shouldn’t. There are a lot of missing pieces to the jigsaw that will limit how quickly mainstream retail investment absorbs the P2P world. Indeed, the idea that P2P loans are about to vault into the middle of mass-market retail investing, even with the arrival of ISA eligibility, was never realistic and anyway would be unmanageable for an industry still in its infancy. Highly seasonal flows of hot retail money would be a disaster for platforms that need to source a steady and sufficient flow of quality lending opportunities. Equally, P2P lending is not saving. It’s far riskier than that and is therefore unlikely to be suitable for large numbers of people who are mostly sitting in cash, even though the returns are dreadful.

But that still leaves P2P platforms with a big market to aim for. There is a lot of money under the control of DIY investors – just look at the £46.3bn of mainly equity and bond fund holdings on Hargreaves Lansdown’s Vantage platform at the end of 2014, for example. There is plenty more growth to come from engaging with the growing minority of active DIY investors before the P2P industry needs to worry about the cash ISA-owning majority.