Social and crowd financing has been the big winner in the desert of low savings rates, and this year will see the sector take off.
The government is consulting on allowing peer-to-peer (P2P) lending to be eligible for tax relief, with the outcome likely to be a new 'debt Isa' alongside cash and stocks and shares Isas.
The sector is now growing at around £100million a month and more than £1.74billion has now been transacted on its online platforms, driven partly by growing loans to business. Pioneer Zopa brokered £250m of loans last year - after taking eight years to reach £400m.
Overall loan funding to consumers hit £547m in 2014 and investment crowdfunding raised £84m.
But earlier this month the Financial Conduct Authority, after a review of 25 investment-based websites, warned that most were "cherry-picking" what they disclose to investors and "downplayed" important information.
Risk warnings were being "diminished by claims that no capital had been lost" or were "less prominent than performance information," the regulator said, noting that as 62 per cent of users are retail investors.
With 26million cash Isas out there, split between 17m on variable rate and 9m on fixed rates, even a small percentage switching to the lower-risk P2P platforms would give a dramatic boost to the sector.
But the FCA is also concerned that even with the lending platforms, websites provided inadequate tax information, and implied that capital was more secure than it was by comparing themselves with banks.
Andrew Hagger, independent analyst at moneycomms.co.uk, says: "Examples of consumers losing money through P2P are quite rare up to now, however it's still early days for many platforms that have had the luxury of always operating against a stable economic backdrop. At present, some platforms provide very scant information in this area. Providers should look to give investors additional reassurance by highlighting the potential impact that a future economic downturn could have on returns and bad debt levels."
Funding Circle and FundingKnight have led the way on disclosure, with Zopa and Landbay - which boasts being lowest-risk because it secures its loans on mortgages - set to follow suit, Mr Hagger says.
But he adds: "It would be beneficial to the wider industry if all players dedicated as much effort and website space explaining the safety of funds and loss prevention measures as they currently do to promote the size of potential returns."
However the regulator was "encouraged" by the standards of the loan-based crowdfunding platforms in terms of money laundering protections and other backroom regulatory systems.
The sector now has its first dedicated comparison website nurturemoney.com. Of its 51 listed platforms, which mix low-risk lending with high-risk investing, 10 warn there is "no immediate return, long-term equity investment" while a further 11 give no information on returns. Five sites including Zopa, Ratesetter, Lending Works, and Money & Co, promise "6% and below".
Of the remainder, typical rates quoted are 6% to 14% depending on the type of assets, which range across loans to individuals and businesses, shares, bonds, property, and 'reward'. Minimum stakes start at £10 with many equity platforms starting at £1,000.
However anyone wanting to compare alternative finance with traditional accounts might prefer to consult moneysupermarket.com. Its listings begin with three options for short-term access to your cash, led by Landbay which offers 3.5%, a tracker rate set 3% above the base rate. Money can be withdrawn subject to the loan being reallocated to other lenders, said to typically take a few days, and as elsewhere in the sector there is no protection from the Financial Services Compensation Scheme. The minimum saving is £100. There is also Wellesley & Co, offering to return capital at 30 days notice 'subject to liquidity', paying 2.92% on a minimum £10 and boasting a £1.1m provision fund as a safety net. Ratesetter, which has the sector's largest provision fund at £6.7m, pays 2.5% variable on £10 upwards, with 30 days notice.
The next tranche of listings, on locking up your cash for six months up to three years, shows 13 options from seven different platforms,with rates ranging from 3% to 7%. Two of the providers, Quidcycle and Landbay, do not appear on the nurturemoney comparison site, which does include a raft of small unknown providers offering high-risk equity investment.
Lending Works has recently launched new rates offering lenders 5% on money lent for up to 3 years and 6% for up to 5 years, with the rates locked in until March 1.
Tim Blaxter, an experienced angel investor from Glasgow, supports crowdfunding but says he would need 10 investments in risky start-ups to be sure two would have a chance of making returns. "Fundamentally it is about spreading risk. You can be seduced by the idea of rolling out a burger bar franchise around the world, but actually the guys who are running it have never done anything like that before, and it's not easy to find that out."
He believes a key test is whether the entrepreneurs are prepared to offer investors 'A' rather than 'B' shares, putting them on an equal basis with the management.
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