RateSetter for sophisticated investor qualification

Common sense answer (i.e. not official RateSetter) is that you are not making investments. You are lending, and although we informally call our lenders investors, they are not. In my opinion.

But it's an interesting question, I've asked our regulatory experts. Hopefully post an answer here.

Kevin.

Thanks, I did think it was quite interesting in part because I suspect that a couple of £5 loans isn't quite what Parliament and the regulator had in mind.

At least one of the SIPP providers that allows investment in RateSetter from their SIPP - SIPPclub - is explicit in accepting lending based investments as a qualifying factor, though I'm not certain that they are actually seeking to satisfy the sophisticated investor regulatory requirement. But I think they also have a "non-trivial" rider to that, for obvious reasons, and their £200k minimum in pension holdings is also non-trivial, being way above the average UK pension pot size.

I don't actually think that the answer to this question is one that should be uniform across all P2P lending activities. There's a pretty significant difference between RateSettter or Zopa where there is no material loan-specific lender decision-making* and many other platforms where the lender does need to make an explicit choice to invest or not in a specific offer. For example, there are these loans that I'm involved in personally:

1. A loan of £30,000 to a single firm as part of a beta offering from an existing platform, which has not matured into a non-beta product and may never do so.

2. A loan of £75,000 to a single firm with less than a year of history via an SPV that provides management services for the borrower as part of the package. On a second platform.

Each of those clearly has significant and concentrated risk exposure compared to the RateSetter offering as well as the lender making a specific judgement about the borrower.

For me as an individual unless the FCA proceeds with a plan to change pension rules I'll be certifiable as a HNW investor in a couple of years. Maybe even if they do change the rules, though that'll probably take longer, while I mentally curse the FCA for changing the rules after I've already made the investment decision to use the pension product knowing that the money would be available and count at the time of the investment decision. Got to "love" regulatory and legislative risk...

*Both RateSetter and Zopa are today effectively managed funds using a regulatory loophole and actively work to make it impossible for an investor to choose to buy or even sell an individual loan investment, just like a managed fund, much as spread betting uses gambling law as a CGT loophole. A world away from the make your own decisions part of P2P.

Interesting, but if you lent money to a company would you say that you had made an investment in that company?

(Doesn't matter to me as I have two equity investments bought on Seedrs.)

BLUF:  No, lending through RateSetter will not qualify you as a sophisticated investor.


There are no restrictions on investing through RateSetter (despite it actually being classified as an investment) as there is in investments through equity based crowd platforms (i.e. HNW/Sophisticated/Restricted % of assets invested).


The FCA regulations recognise the very different risk profiles of debt vs equity. However to note that the FCA does have specific rules to protect investors in debt peer to peer (including marketing and risk information) in addition to protection of borrowers. A large part of the FCA authorisation process has been focused on this.


But does being a lender with RateSetter make you sophisticated, so that you can be classified as sophisticated for equity investment. Does the act of lending to businesses through RateSetter inadvertently qualify you as sophisticated. The answer was no, because the lender makes no active decision to lend to businesses, as opposed to retail. And the FCA sees lending (i.e. debt, despite the "investment" classification) very differently to investing (equity). This has been made very clear in the FCA authorisation process.


So unfortunately RateSetter does not provide an easy back door to this qualification, based on FCA feedback during the RateSetter authorisation process.


Kevin.

Yea agree.. What about 'unsophisticated investor '

'please click this button if you are an unsophisticated investor where you will be directed to the deposit funds page, please trust us and just answer Yes to all questions'   

From the Seedrs FAQ page...

'Are Seedrs investments safe?'

'No........in most cases money will not be returned to investors.'

That's a pretty stark warning, but clearly truthful. P2P lending is a different platform of course but I do agree that the FAQs are often over-positive and could possibly go back towards the Seedrs example.  Now that we have non-safeguarded options such as Zopa Plus this is particularly pertinent.  I was trying to remember how I got through the Seedrs vetting process as I am neither high-worth nor sophisticated.  What I would say is that Seedrs adds a bit of 'edge' to crowdfunding that ordinary P2P doesn't have.  This makes it more of a gamble, but also more interesting.  The two platforms complement each other and give me hours of entertainment by visiting the sites and forums.

Nowhere in any of the FAQs I've seen, except for Seedrs, is a certain recommended % mentioned as a % of total assets to be invested - a shame, I think.

The sophisticated investor qualifying rules are about ability to analyse a business and make an investment decision. The high net worth rules are about having sufficient income or assets to be able to afford to lose some money.

Since RateSetter denies investors any ability to make any loan-specific decisions once they have decided to use the platform it doesn't seem unreasonable to have investing through RateSetter not be qualifying, since it can't provide experience in that area. Zopa does provide an ability to choose to do lending to businesses but still denies any ability to choose which businesses. So my view is that Zopa would also not be an appropriate route to qualifying, because the decision-making objective can't be met there.

It wouldn't be a good idea generally to block lending-based investing from qualifying, though, since one aspect of sophistication is choosing how to invest and recognising differences in risk profile is one of the aspects of that. Choosing lending-based rather than equity-based investing would actually be a potential indication of sophistication.