A relatively new concept of investing in the marketplace, that may seem attractive to SMSF trustees as a strategy to grow their fund, is investing through peer to peer lending.
Peer to peer lending is where an investor, say the trustees of a SMSF, provides funds to an online lending platform. The funds invested are then used to provide loans to an individual or business. The lending platform sets up a managed investment scheme which means that they must hold an Australian Financial Services Licence (AFSL). Registered schemes will also have an Australian Registered Scheme Number (ARSN).
As a SMSF trustee, careful consideration must be given before entering into this kind of investment. The investment must also comply with a SMSF’s investment strategy and risk profile.
It is important that thorough checks are made to ensure that the lender has the right licences to permit selling their product and lending your funds. The platform must disclose these details even if you are able to access them all online. A Product Disclosure Statement (PDS) must also be provided as it contains essential information trustees must consider before making any investment decisions.
ASIC suggests that potential investors consider issues such as:
- the security of loans
- interest rates and how there are determined
- the choice of loans, repayments and conditions relating to a defaulting borrower
- issues that can arise if a platform fails
- fees payable to access the service
As the lending platform is not using their own money, there is significant more risk for SMSF trustees. It is your life savings that could potentially disappear if an investment scheme fails.
ASIC’s Money Smart website has published detailed information on peer to peer lending which can be found here.
You can also speak to us if you have any questions or concerns about peer to peer lending.