arbster
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Post by arbster on Nov 26, 2015 5:58:15 GMT
It feels like it's time for a poll about the functioning of the FS SM, and the poll results might inform other platforms who are working on their own SMs.
The key issues appear to be whether premiums are helpful in a fixed rate market, and the tax implications of buying out rolled-up interest at the point of sale.
For the avoidance of doubt, in the poll where I refer to "paying interest to seller at term" I'm referring to an approach where FS retain all interest from the loan until term and apportion it to investors based on the term for which they held the loan part (including time on the market). For an SM aimed at enabling people to get access to capital quickly, the delayed payment of interest should only be a relatively minor inconvenience. For those using it for diversification purposes they have successfully passed on the risk to capital from the point of sale, while still retaining some risk to the accrued interest if the loan defaults. I realise this is a slightly more complicated solution, but appears to be fairer to less astute investors, less open to gaming, and safer from legal/regulatory challenge in the future.
What did I miss?
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ablender
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Post by ablender on Nov 26, 2015 7:29:30 GMT
I would prefer if the seller is paid the interest due at point of sale, but as interest not as part of the value of the sale. The reason is that if you are selling you want to be out of it at least for that part you are selling. Computers and programmers should be able to handle this.
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arbster
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Post by arbster on Nov 26, 2015 8:00:12 GMT
I would prefer if the seller is paid the interest due at point of sale, but as interest not as part of the value of the sale. The reason is that if you are selling you want to be out of it at least for that part you are selling. Computers and programmers should be able to handle this. True, they should, but this leads to the potential tax avoidance issues that have been highlighted on the other thread. Also, as I said in my earlier post, even on a 6-month loan the interest is likely to be negligible unless you've held it for 4-5 months, in which case you won't have to wait long to be paid anyway. Holding interest until term feels like the fairest approach to me, regardless of the technical feasibility of other solutions.
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arbster
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Post by arbster on Nov 26, 2015 8:27:18 GMT
For the further avoidance of doubt, where I say "allow discounts only" I am also referring to preventing premia, so par is allowable.
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duck
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Post by duck on Nov 26, 2015 9:05:40 GMT
Clarity is my requirement .... and I'm not certain where to place a vote!
I regularly buy at a premium on ablrate and don't have a problem with that aftermarket (in fact I like it!) since an aer is openly displayed. But the one thing that is missing from that aftermarket is the purchase statement does not show the accrued interest 'bought'.
I know ablrateandy has said this will be added in the future .... and it will be much appreciated since I currently simply swallow the small amount of extra tax. An extra line in my spreadsheets is a small effort to get the numbers correct. (can you imagine trying to convince HMRC that you are voluntarily paying a little extra tax  .... their usual approach if you tell them this is that you are trying to hide a larger amount that you are not paying tax on!)
So yes to premiums if everything is clear and you can substantiate the figures ..... if not no premiums.
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ablender
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Post by ablender on Nov 26, 2015 10:28:07 GMT
I would prefer if the seller is paid the interest due at point of sale, but as interest not as part of the value of the sale. The reason is that if you are selling you want to be out of it at least for that part you are selling. Computers and programmers should be able to handle this. True, they should, but this leads to the potential tax avoidance issues that have been highlighted on the other thread. Also, as I said in my earlier post, even on a 6-month loan the interest is likely to be negligible unless you've held it for 4-5 months, in which case you won't have to wait long to be paid anyway. Holding interest until term feels like the fairest approach to me, regardless of the technical feasibility of other solutions. I might have presented my case wrongly but I did not mean the way it is at the minute. If the interest is paid to the seller as interest, then it surely have to be taxed. I cannot see the avoidance in this situation. In any case I agree that for most cases this should not be a major problem as the durations or amounts are probably small, unless you are selling huge amounts.
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arbster
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Post by arbster on Nov 26, 2015 10:45:36 GMT
With no votes at all for the first option, which is how it's currently implemented, it would be interesting to hear whether fundingsecure would even consider making a change to the operation of the SM. Personally, although I am under-invested in FS and had hoped to use the SM to increase my investment I would only consider using the SM to sell parts of existing investments, because it feels unduly skewed in favour of sellers at present. |
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mikes1531
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Post by mikes1531 on Nov 27, 2015 4:56:19 GMT
I would prefer if the seller is paid the interest due at point of sale, but as interest not as part of the value of the sale. The reason is that if you are selling you want to be out of it at least for that part you are selling. Computers and programmers should be able to handle this. While I accept this would be nice, I see a couple of problems... - Where does the money come from to pay the interest? The borrower hasn't paid it yet, so it seems unreasonable for the seller to be paid for something that hasn't been received yet.
- This transfers the default risk onto the buyer unreasonably. (And the current SM system is really no better.) The seller receives payment for accrued interest that might never be received. If the proceeds from a security sale are only enough to repay capital, the unfortunate buyer is out of pocket for the interest that had been accrued to the time of the sale. That seems rather unfair. What buyer would want to take that risk?
If, as now, the price paid by the buyer is inflated by accrued interest, ISTM that there's a huge incentive for people to sell loans after about four months. They get their capital back, avoiding default risk, and they get their accrued interest as well, also avoiding the default risk. And if I understand what fundingsecure secure said in the SM thread correctly, the seller also gets another bonus -- they don't have any interest income to pay tax on! It seems to make holding onto a loan until maturity a mug's game. Which would seem to be enough to kill the proper functioning of the SM.
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arbster
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Post by arbster on Nov 27, 2015 5:53:52 GMT
It seems to make holding onto a loan until maturity a mug's game If there are enough mugs out there then perhaps we should just keep quiet and reap the benefits? With the demise of variable rates and the associated the serial abuse of Autobiddies, we need an outlet for all our latent exploitative tendencies.
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duck
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Post by duck on Nov 27, 2015 6:15:59 GMT
Good points mikes1531 and no doubt those that like to try to game the system are already putting into place their 'cunning plans'.
What I see as mitigation is the addition yesterday of the 'effective rate' column. With that visible it is then up to the buyer to decide if they view the rate as acceptable taking into account the outlined risks. The same column should also ensure that attractive sale offers are made where the current lender really wants to sell as opposed to those that simply buy and flip or ditch at term approaches.
For many people having a fully diversified set of loans is a high priority, yes paying interest up front for something not received might appear to be high risk* but can this not (in some part) be balanced against diversifying a loan book?
*HMRC have already taken this approach, my tax bill includes payment in advance .....
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Steerpike
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Post by Steerpike on Nov 27, 2015 9:02:15 GMT
Now that the effective rate is displayed, with -ve rates in red, (most) investors will not make unprofitable purchases.
Perhaps there should be a minimum effective rate applied when listing a loan part (4%?).
That just leaves the tax issue.
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ablender
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Post by ablender on Nov 27, 2015 9:41:07 GMT
I would prefer if the seller is paid the interest due at point of sale, but as interest not as part of the value of the sale. The reason is that if you are selling you want to be out of it at least for that part you are selling. Computers and programmers should be able to handle this. While I accept this would be nice, I see a couple of problems... - Where does the money come from to pay the interest? The borrower hasn't paid it yet, so it seems unreasonable for the seller to be paid for something that hasn't been received yet.
- This transfers the default risk onto the buyer unreasonably. (And the current SM system is really no better.) The seller receives payment for accrued interest that might never be received. If the proceeds from a security sale are only enough to repay capital, the unfortunate buyer is out of pocket for the interest that had been accrued to the time of the sale. That seems rather unfair. What buyer would want to take that risk?
If, as now, the price paid by the buyer is inflated by accrued interest, ISTM that there's a huge incentive for people to sell loans after about four months. They get their capital back, avoiding default risk, and they get their accrued interest as well, also avoiding the default risk. And if I understand what fundingsecure secure said in the SM thread correctly, the seller also gets another bonus -- they don't have any interest income to pay tax on! It seems to make holding onto a loan until maturity a mug's game. Which would seem to be enough to kill the proper functioning of the SM.
I was thinking in terms of FS paying the accrued interest up to the point of sale. I thought that FS holds the interest for the duration of the loan, or is that on another platform?
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SteveT
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Post by SteveT on Nov 27, 2015 9:53:08 GMT
I was thinking in terms of FS paying the accrued interest up to the point of sale. I thought that FS holds the interest for the duration of the loan, or is that on another platform? No, FS do not retain interest from the sum advanced. Interest is paid on FS loans at the end of the loan, unless of course the borrower defaults.
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t
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Post by t on Dec 27, 2015 13:07:00 GMT
It seems to make holding onto a loan until maturity a mug's game If there are enough mugs out there then perhaps we should just keep quiet and reap the benefits? With the demise of variable rates and the associated the serial abuse of Autobiddies, we need an outlet for all our latent exploitative tendencies. Shooosh 
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littleoldlady
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Post by littleoldlady on Dec 27, 2015 14:42:17 GMT
It seems to make holding onto a loan until maturity a mug's game If there are enough mugs out there then perhaps we should just keep quiet and reap the benefits? With the demise of variable rates and the associated the serial abuse of Autobiddies, we need an outlet for all our latent exploitative tendencies. Or you could just mug little old ladies.
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.... their usual approach if you tell them this is that you are trying to hide a larger amount that you are not paying tax on!)
