What it is
A platform originates loans — to consumers, to small businesses, or against property — and sells participations in them to individual lenders. You choose a target rate and a risk band; the platform handles origination, credit assessment, collections and recovery.
The pitch was straightforward: cut out the bank's margin and split it between borrower and lender. For a while it worked.
The lesson of the last cycle
UK P2P grew rapidly through the 2010s and then contracted sharply. Lendy failed in 2019 owing substantial sums against property loans. Funding Circle closed its retail lending business. FundingSecure went into administration. RateSetter's provision fund model was tested and the business was sold to Metro Bank, with retail lending wound down.
The common thread was not fraud in most cases. It was that credit models built during a benign period underestimated losses, that secondary markets which looked liquid stopped working exactly when people wanted out, and that provision funds — which many lenders treated as a guarantee — were discretionary and finite.
The FCA subsequently imposed stricter rules: appropriateness tests, a 10% limit on the proportion of investable assets a retail investor may put in, and clearer risk warnings.
The IFISA
Peer-to-peer lending can be held in an Innovative Finance ISA, making interest tax-free. The wrapper is genuinely useful; it does not reduce the credit risk by a penny, and the tax advantage should never be the reason for the allocation.
How you would actually trade it
Use only FCA-authorised platforms; check the Financial Services Register directly rather than trusting the website. Diversify across a large number of loan parts — the model only works statistically.
Assume you cannot exit early. Secondary markets exist on some platforms but depend on another lender wanting to buy, which is exactly what fails in a downturn.
Read how the platform handles arrears, what happens to your loans if the platform itself fails (there should be a wind-down plan and a back-up servicer), and whether any provision fund is contractual or discretionary.
What goes wrong
- No FSCS protection. This is the central point. If borrowers default, you lose money and no compensation scheme applies.
- Platform failure risk is separate from borrower risk and has been the bigger source of losses historically.
- Illiquidity. Exit depends on finding a buyer or waiting for the loan to repay.
- Advertised rates are gross. Returns after defaults have often been far below headline figures.
- Property development lending concentrates risk in a single volatile sector with long recovery timelines.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.