By Kylie MacLellan
LONDON (Reuters) - An online service that enables savers to earn interest by loaning money to other members of the public is introducing a back-up fund to reimburse loans made from Tuesday onwards if borrowers default.
Peer-to-peer lending is one of several alternative sources of finance that have grown up as banks ration credit in response to tougher capital rules and the economic slowdown. The sector's rapid growth has prompted regulators to look at how best to ensure that individuals are aware of the risks and protected.
Zopa, through which 300 million pounds ($465 million) has been lent since it was launched in 2005, said its safeguard measure would reimburse lenders' money on new loans, including interest, if a borrower defaulted.
The site has a default rate of less than 1 percent, but co-founder and chief executive Giles Andrews said the change had been driven by feedback from the site's users.
"Our users were asking if we could make it even safer. We have eight years of track record and the best performing personal loan book in the UK, but there is still a lingering question and, as we become more mainstream, that security issue becomes more important," he told Reuters.
The Zopa Safeguard, a fund held in trust by a not-for-profit organization, will be financed with part of the fee paid by borrowers to use the site.
If defaults exceed the total in the fund, lenders could still have to take a loss on their money. But Zopa said it could accurately predict the level of default and would monitor the fund daily to check it contained adequate funds to repay lenders, with an additional buffer.
Peer-to-peer lenders will be regulated by the Financial Conduct Authority from April next year, and it is now consulting with sites such as Zopa on how the rules will work.
"They were keen to understand firstly how we explain the risks involved and, secondly, what we do to mitigate that risk," said Andrews.
Some lenders had also said they did not understand or want to have to choose between different grades of credit on the site, so Zopa is also launching a tracker product through which depositors will invest in a basket of loans across credit markets.
Savers can earn around 5 percent annually after charges for lending money through Zopa for up to 5 years, compared with around 2-3 percent for fixed-term savings held at banks.
Zopa, through which the government has said it plans to lend 10 million pounds to sole trader businesses, saw a 197 percent increase in the number of savers using the site in the first quarter of this year, compared to the same period in 2012.
(Editing by Kevin Liffey)