Bad Debt Relief to Broaden Lending Options?

The UK’s original peer-to-peer lending platform Zopa expects to reopen non-safeguard lending options.

When Chancellor George Osborne delivers the Autumn Statement tomorrow, he is expected to announce further detail on draft legislation that will allow individual peer-to-peer lenders to offset their losses against income tax. We first learnt that the Treasury was mulling over the move in last year’s Autumn Statement. The inclusion of bad debt relief for peer-to-peer investments in March’s Budget increased the likelihood of its implementation. The new legislation was slated to become effective from April 2016, and individuals were permitted to make a claim for relief on losses incurred from April 2015 onwards.

At the time of these developments, industry participants lauded HMT for its progressive stance towards the sector – suggesting that the relief would place peer-to-peer lending on a more even footing with traditional investment channels.

For consumer lending platform Zopa, bad debt relief changes the very dynamic of the marketplace. In 2013, Zopa for the first time required that all individuals lending through the platform be covered by the Safeguard Fund (which was introduced in 2013). Why? In order to circumvent the tax inefficiency that existed due to the lack of bad debt relief, by providing a net return to lenders. But the advent of bad debt relief for peer-to-peer investments is a game-changer. Jaidev Janardana, the platform’s recently appointed CEO, explained why:

“Many of our customers tell us they value the sense of comfort provided by our Safeguard fund. But Safeguard also shields lenders from this historic tax liability by providing them a net return. It’s therefore great to see the Chancellor overturning this outdated tax law on offsetting losses against interest earned, helping thousands of consumers keep more of their returns from their P2P loans."

“This change is a progressive step forward for the P2P industry. It will allow services like Zopa to offer a wider choice of lending options, such as re-introducing our proven and trusted non-safeguard lending option that operated in the first 8 years of lending (2005-2013) and delivered a positive return during the financial crisis. Many of our lenders tell us they would prefer to earn higher returns on loans without Safeguard, and with this tax change we look forward to being able to offer more choice to lenders so that our products better fit their individual needs and appetites. We have been working with our lenders to design and test new products that we expect to launch next year.”

The reintroduction of non-safeguard lending channels will likely be warmly welcomed by the more enthusiastic among peer-to-peer investors, many of whom have bemoaned the lack of autonomy that is currently offered by the major platforms.  

Those wishing to view the proposed technical criteria for peer-to-peer bad debt relief should read HM Revenue & Customs’ note, which was published in March this year. Mr. Osborne’s autumn statement may well include an update to this document.