Well-Managed Platform Lending: Risk And Yield Versus ‘Illiquid Speculation’

A recent article in the redoubtable FT Adviser looks at the Financial Conduct Authority’s (FCA) rules on “speculative illiquid assets”. We welcome the advent of the rules, as we do the media analysis of them.

But it’s very, very important to distinguish between these investments (known in many cases as “mini-bonds”) and platform lending.

  • Last summer, we offered two blogs on why well-managed platform lending really works.
  • Part one is here.
  • Part two is here. As you will see, a well managed platform-lending offering is very different form a speculative illiquid asset.

We offer an extended excerpt from the FT Adviser piece below.

The FCA recently announced the introduction of temporary product intervention measures in connection with the promotion of speculative mini-bonds to retail investors.

The new rules took effect for a temporary 12 month period, effective on 1 January 2020.

These rules significantly restrict the sale of certain mini-bonds described by the regulator as ‘speculative illiquid securities’, to retail investors.

 The FCA has highlighted the dangers of less sophisticated investors, and investors less capable of bearing the risk of total loss of their investment, being drawn to these products by promotions.

The FCA noted that these types of products appeared within the top results of online searches for ‘high investment returns’ or similar phrases. 

The regulator is concerned that investors may be attracted to the lucrative returns offered, but that such promotions down-play the key risks and imply that these products are ‘safer’ than they are in practice.

Although legally structured as a bond with fixed returns, or occasionally as preference shares, the risks associated with speculative illiquid securities are seen by the FCA to be similar to unauthorised collective investment schemes.

Historical Performance And IFISA Process Guide

  • Money&Co. lenders have achieved an average return of more than 8 per cent gross (before we deduct our one per cent fee). 

That figure is the result of over £19 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.

  • Money&Co. has been lending for over 5 years and has only had one bad debt so far, representing a bad debt rate of 0.03 per cent per annum.

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:

  • Step 1: Register as a lender. Go to the login page, and go through the process that the law requires us to effect. This means we have to do basic checks on you to comply with money-laundering and other security requirements.
  • Step 2: Put money into your account. This is best done by electronic transfer. We can also process paper cheques drawn in favour of Denmark Square Limited, the parent company of Money&Co.
  • Step 3: Buy loans in the loan market. Once you’ve put cash in your account it will sit there – and it won’t earn interest until you’ve bought a piece of a loan. It’s this final step that requires lenders and IFISA investors to be pro-active. Just choose some loans – all loans on the Money&Co. site can be held in an IFISA – and your money will start earning tax-free interest.

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.



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Disclaimer: Money&Co.™ is the trading name of Denmark Square Limited, Company Number 08561817, registered in England & Wales, authorised and regulated by the Financial Conduct Authority (FCA). The company is identified on the Financial Services Register under Reference Number 727325. The registered office is 58 Glentham Road, Barnes, London, SW13 9JJ where the register of Directors may be inspected. Denmark Square Limited (ISA manager reference number Z1932) manages the Money&Co. Innovative Finance ISA.