In this third instalment of our review of alternative lending, we look at the Financial Conduct Authority’s view of the sector.
There’s been a greater focus on the sector following the failure of peer-to-peer (P2P) platforms such as Lendy. Lendy’s failure was linked – completely unfairly – with a number of problems experienced by investors in unregulated investments, notably minibonds. The best-known of these failures the London & Capital Finance debacle. It’s in the light of these problems that the FCA decided to propose a limit on investor exposure to alternative loan assets.
The essence of the FCA’s proposal is this: Investors should not commit more than 10 per cent of their portfolio to platform lending (aka P2P). The move comes amid a broader drive towards greater transparency in reporting defaults and bad debts in platforms’ loan books, more scrupulous risk management requirements and clarity on dealing with wind-downs in the event of a platform failure.
As far as the alternative lending sector is concerned, the 10 per cent limit is actually good news. Consider the figures:
The larger question, though, is whether there’s an implicit asset-management decision here – by limiting P2P exposure, isn’t the FCA at the same time both accepting P2P as a valid asset class and setting up an asset allocation model, with P2P as the sexy 10 per cent of the cash exposure?
The argument for this seems pretty persuasive: think of the brouhaha as Neil Woodford’s income vehicle fell out of favour with intermediary/introducer, Hargreaves Lansdown. By deeming the fund not fit for purpose, the necessary implication is that the fund was previously actively deemed suitable for investors. This is, in everything but name, advice.
Yesterday, we were talking about the need for acceptance of platform lending as an asset class. The FCA move could be considered a first step down that path.
New Loans Latest
Project Rhapsody is now 74 per cent funded. The loan offer has an A risk rating, and provides a fixed-rate return of 8 per cent over five years.
Fuller detail is excerpted from the borrower’s offering on site below. The whole pitch – vetted according to our credit committee’s best efforts, though we cannot warrant the accuracy of the statements – is available to logged in users.
Historical Performance And IFISA Process Guide
That figure is the result of over £18 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.
So here’s our guide to the process:
The ISA allowance for 2019/20 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.
Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.