Peer-to-peer lenders, which link savers to borrowers online, are celebrating a "watershed moment" after it was announced that they are to be fully regulated by the UK's new market regulator, the Financial Conduct Authority, in early 2014.
This mode of lending, pioneered by UK firms such as Funding Circle, RateSetter, and Zopa, matches borrowers with lenders to allow both to find better deals than those on offer from banks or alternative lenders.
P2P lending through these sites reached £250 million in the summer.
Though funds are not currently covered by the Financial Services Compensation Scheme (FSCS), the sites put loan applicants through a credit check and then divide savings across many borrowers to reduce the risk of exposure to any one defaulting member.
The thriving popularity of P2P lending is due in part to the difficulty in raising small cheap loans from banks (though rates are good for larger loans) and the extortionate rates charged by payday lenders.
That borrowers are able to find affordable rates is one of the reasons why defaults are relatively low.
However, it is also popular with savers, who are able to gather returns at much better rates than those offered by banks, without locking money away for years and with more security than investing in stocks and shares.
Frustrated lenders and crowdfunding providers had argued that rules tailored to traditional markets were curtailing the growth of the sector.
The introduction of "proportionate regulation" was also necessary for the credibility and development of the sector, said the Peer-to-Peer Finance Association.
Any FSCS guarantee that might be agreed as part of the regulation shift would encourage more people to put up the cash for lending. (Find out more about the Financial Services Compensation Scheme.)
Lenders described a "watershed moment" for the industry after the Government said they were to be fully regulated by the new Financial Conduct Authority from April 2014.
Are you a saver or borrower with peer-to-peer lenders? How have you found the experience? Could they lessen the influence of high-street banks? Let us know by leaving a comment below.
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