bonus rates

Just checked the FS SM help page and it states that, in that scenario, bonus interest would be paid at the original (higher) rate on the remaining lower balance. I can see how that gets loans filled faster but it could certainly distort the SM if abused

"Example:
Original purchase of £50,000 with base interest of 12% plus incentive bonus of 3%. £45,000 later sold on secondary market.
Original purchaser receives base interest of 12% plus incentive bonus of 3% on remaining £5,000
Secondary market purchaser receives base interest of 12% on £45,000"

Someone wanting to invest only £50k but with access to £100k could stick £100k into a loan initially, to qualify for the 16% rate rather than the 14% rate, and then look to sell the other £50k on the SM. On the £50k held to term this should net them an extra 2% or £500. If they list the £50k they want to get rid of on the SM at 0.5% discount, that will "cost" them £250 so, if it sells quickly, they are £250 ahead. If they hold it for a little while and then sell, they're earning £115 per week (12%) on the unwanted £50k at very low risk, which would cover the 0.5% discount within 2.5 weeks.

The risk of course is that several BHs try this "flipping" approach and end up having to discount their excess rather more than 0.5% in order to move it on. In the meantime, any small investor wanting to sell some of the same loan (bought at 12%) would be completely stuffed!

Are you sure?  In the past, when FS have added bonuses at a later date all bids above the specified level earned the bonuses without regard to whether they were placed before or after the bonuses were announced.  I would seek clarification from FS.

To restrict bonuses only to bids made after the bonuses were announced would result in everyone withholding their bids until after bonuses were announced, and ISTM that would cause a funding crisis for FS.

I expect this will happen, but I'm not sure it's a particularly negative type of flipping, since the investment is helping the loan get funded, and the investor is selling the extra parts for less than they paid for them.  Their 'bonus' for providing the service is the additional 2% interest that they'll earn on the £50k they are holding to term, and that might ultimately cost FS less than arranging an extra £50k of underwriting would have.

With the SM available, any time FS need to call on extra investors to fund a loan we should expect that some/many/most/all of the additional parts will be put up for sale as soon as the loan draws down.  That will mean anyone else trying to sell will face competition. 

The FS example cited by SteveT earlier seems to make it clear that once an investor qualifies for the bonus it will be applied to however much of the loan they are holding at maturity, no matter how small.  So a medium-sized investor could put £10k into Poole/Liverpool, sell off most before maturity, and still earn the extra 1% on the portion they keep to the end.  So there still is incentive for them to increase their investment to the threshold for the bonus.

The bonus does, however, provide no incentive at all to an investor who has adopted a strategy, suggested in other threads, of exiting from all loans before maturity via the SM in an effort to reduce default risk.  I haven't a clue how many FS investors are going to try this strategy but, if many do, I'd expect the discounts required to sell the parts on the SM will be significant.

No, can't hurt to ask. In my opinion though, they are absolutely sending out the wrong message by moving the goal posts at the last minute. Lesson learned.