What happens to suspended loans in GBBA

I have had correspondence with AC on this too. They advise that the GBBA is not a 'Black Box' account because you can see what your holdings are. I am not happy with this, to us lenders it is in effect a 'Black Box' because working out your holdings via an extract to Excel is a tedious process and pointless anyway as you can do nothing to influence them. Even if you strongly object to a loan on say ethical grounds you are stuck with it.

If you decide to liquidate your GBBA someone needs to buy your loans from you. Thus you are stuck holding any defaulted or suspended loans, just the same as if you held them in your MLIA. The PF will not cover anything until actual losses are declared, that could be many months or even years after trading is suspended.

Crucial to the viability of the GBBA is its ability to automatically create a balanced portfolio of loans for you. I have reservations about that. Some time ago I added £2k to my GBBA and it all went into a single loan. As it happens it was just about to repay so people were selling early. However if sellers were acting on some bad news but trading had not yet been suspended then you could be very unlucky, getting a large holding of a defaulted loan shortly after moving money in.

Thus the GBBA is very different to say RS, where if real losses occur they are shared equally amongst all lenders in that market. That is a proper 'Black Box'

The loan in question will have interest covered by the PF.

I refer to a post from Chris Representative of Assetz
from Dec 2, 2015



"The philosophy of the platform is that the investment accounts are black box investment machines, and you should not be basing your investment decisions on what the system is doing for you if you use those accounts. Those accounts are protected by a provision fund and also look at the overall diversification of that fund and all lenders within the account when making investment decisions, on top of the published criteria."

As requested here is my correspondence with AC on this subject, me in black, AC in blue:

Ist Reply:

I understand that the GBBA is a 'black box' investment, i.e. I play no role in selecting what I am investing in,

Black box is not the right term to use. Whilst it is correct that you do not have control over the loans you are invested in and the exposure levels you achieve the account does produce a transaction report and you can see the loans you exposed to. The GBBA is a mandated account and will invest your money into loans which meet the loan selection criteria.] and that it is covered by a provision fund i.e. any losses are covered [As well as asset security per individual loan the account is covered by a provision fund. Our provision fund is designed to protect against losses, not defaults. A defaulted loan on our platform will not necessarily produce a loss. This is due to our policy of taking tangible asset security for every loan. Confusing defaults with losses seems to be quite common and we think it may be down to some platforms in the industry using the term default when they actually mean loss and vice versa. Our provision fund has an aim to cover 5% of the loans held within an automated investment account. These accounts have so far suffered no losses at all (0%) and the provision fund has not yet had to be called upon. The provision fund size represents several times the expected loss on each automated investment account.

However what happens to my GBBA investments when the bad times come, loans default, the PF runs out of money and real losses occur. It seems to me that as we have played no part in selecting the investments, losses should be pooled and shared equally amongst all GBBA holders in proportion to their holding. Is this what will happen?

We say that the provision fund is discretionary. The term discretionary is meant to imply that the fund may not have to be used, as there may be other means of recovering funds via the asset security taken. It also allows for example, if circumstances meant that it was reasonable to do so, for the fund to be used to cover missing interest payments in addition to actual losses experienced. A provision fund may also need to be discretionary for it to avoid being classed as insurance but the directors of the provision fund company have every intention of utilising the fund wherever required and possible. As the cash in the provision fund builds up over time, based on the interest margin that can be set aside from loans eligible for the Investment Accounts covered by the provision fund, and in extreme cases could be diminished by use. Hence the disclosure that the amount may be less than or equal to the percentage of Provision Fund cover specified for each individual investment. If recovery action were to exhaust the security taken, the provision fund be diminished then your loan holding(s) would be affected proportionally.

2nd reply

You claim that the GBBA is not "black box" because we can see a list of the transactions. This seems rather dubious as there is no way that I can get a consolidated report of all my holdings in my GBBA without a great deal of effort in Excel.

Typically the term “black box” in this context describes an account or investment where there is zero visibility of the underlying assets. We assume this is what you mean but please advise if this is not the case.At present, lenders are able to download an Excel spreadsheet which allows for the manipulation and filtering of all the transactions, allowing lenders to review the large number of transactions associated with this account. We appreciate that this might take some time and effort but it definitely allows for the provision of a “consolidated report”. In the longer term we plan to implement a simpler “Show me my current holdings” button for each of our investment accounts within the Dashboard but I must note that this is not a top-priority item at present for our IT development team so I cannot provide any time frame for its delivery.

Also why would I do this as there is nothing that I can do to influence things anyway. Or is there?

Based on feedback from other lenders it is clear that people do this for a number of reasons including reviewing the loan holdings in the account and their diversification. This would seem to be in line with what you are attempting to do from the point of view of checking that the account is investing in loans which you personally feel comfortable with. As you note quite correctly though, there is no facility for an individual lender to alter the makeup of loans within an investment account or to change the mandate parameters the account operates within.

Say instance I hold loan X, but I object to this on ethical grounds, and I hold loan Y, but I know one of the Directors and I have reason to believe that he is a Grade A con artist. If I wrote to you asking for loans X and Y to be removed from my GBBA would you do this? I presume not.

You are correct, we would not be able to do this as each investment account is designed to operate largely automatically based on a mandate that an investor agrees to at the time of investing. There is no scope to “tweak” the mandate, Our Manual Loan Investment Account exists to allow lenders with more elaborate preferences to build their own loan portfolio according to their individual goals.

In which case the assertion that the GBBA is not 'black box' is pretty shaky, as I cannot see my consolidated holdings without a great deal of effort, and I have no motivation to do so as there is nothing that I can do about it anyway.

All lenders have the option to review the holdings in the account via the Excel spreadsheet mechanism, at any time and with full transparency, and the freedom to choose whether or not to continue to accept the level of risk and/or any ethical issues associated with loans held within the account. In the event that a lender can no longer reconcile these with their personal objectives, that lender can elect to withdraw from the account by liquidating their holdings and, once completed, they could choose to move the funds to the Manual Loan Investment Account where they can have complete control over the individual loans in which they wish to invest based on their chosen risk appetite and ethical parameters.

To all intents and purposes it is 'black box' to us lenders.

We believe that the ability to review the underlying assets at any time with full transparency prevents the account from being a true “black box”.

I would also like to understand what happens when a loan goes into default and trading is suspended for say 12 months, Then there is a 50% repayment of capital and a 50% loss. There is no repayment of capital or interest during the default period. Say I hold this loan in both my MLIA and my GBBA.

In my MLIA I think I know know what will happen. I have no payments of capital and interest for 12 months, then In will receive the 50% recovery as a single payment and 50% capital and 12 months accrued interest is written off. True?

True, based on the example you have provided.

So what will happen to my GBBA holding? Will I continue to receive normal capital repayments and interest at 7% paid for by the provision fund during the 12 month default period?

The recovery process followed for the loan and the outcome will be identical right up to the point where the Discretionary Provision Fund becomes relevant. The Discretionary Provision Fund is intended to mitigate any capital losses but can also be used to cover missed interest payments. However, as it is discretionary it is applied on a loan by loan basis whilst also taking into account a wider view of the resource available within the Discretionary Provision Fund balanced against any other potential commitments it may have.

If I decide to withdraw all my money from the GBBA during this period presumably I will be stuck with this loan as trading is suspended?

That is correct.

At the end of the 12 month period will I receive all my capital back, 50% loan repayment and 50% from the provision fund?

Subject to sufficient capacity being available in the Provision Fund to cover the loss sustained, then you should receive (based on your example) the 50% of your capital you would otherwise have lost had the Provision Fund not existed.

At that point can I finally exit the GBBA with all my capital and interest at 7% intact? That is how I would expect the GBBA to operate.

In the example you have used you would be able to exit the account with all of your capital and, subject to the discretion of the Provision Fund and its capacity at the time, you could also have received all of your accrued interest at 7%.

Then what happens if the PF is depleted half way through this 12 month period?

If at any time the Provision Fund is completely depleted and has no funds left in it at all then any protection it would otherwise have provided would cease.

Presumably I will stop receiving my 7% interest (if I was indeed getting it before).

In such a situation, that would be correct. The funding level of the Provision Fund is intended to prevent such a scenario but it remains a theoretical possibility. We do publish the level of the Provision Fund regularly so that lenders can form their own view of the level of coverage.

My GBBA holding then becomes identical to my MLIA holding in terms of what I get back and the losses I incur.

Correct, as in this example both accounts would effectively have no Provision Fund coverage.

The first of your questions is answered by gnasher in his post above but the potential with one loan is 20% of your total holding.
I run a GBBA account for my wife (below £10K just to see how it went) and keep a detailed spreadsheet so I know exactly how much she holds in each loan. As an 'early adopter' she had most of her money tied up in 3 loans (2 on 20% of total holding and one on 18.9%) so yes if you started at a similar time chances are that you have similar holdings.
Her account was also hit by the recent repayments especially since one of these was a 20% holding loan.

Of course in good times the money would be re-lent very quickly ...... but as it was the money sat in 'cash' since even the QAA was full.  This of course has had an effect on the overall return which shall we say is currently 'disappointing'.

I have not modelled in a defaulted loan but it can only have a negative effect on diversification and return. If one of the remain large % holdings was to have problems this would have a very large effect on the account.

For info, her account currently shows 72.55% held in loans with the remainder held in the QAA.  This is a big improvement over a week ago due to the addition of #295 & #282 which added 3.41% and 1.29% respectively. The account also shows 38 loans where the holding is below 0.5% with a lot of those well below 0.05% .... I've got used to seeing interest payments of 0.000000000000000.......... since I presume they drop below the 24th decimal point!

Gnasher thanks for posting.

AC does get hung up on the semantics of black box. Lets call it grey box and move on.

But the fact remains that GBBA and GEIA are meant to be buy and hold kind of accounts as you cannot do anything about what you own. Which makes the absence of automatic diversification all the more concerning. It's one thing to lose money because you explicitly selected a loan in MLIA. But to lose money and/or liquidity because the system put 20% in a loan will be especially frustrating (to put it mildly). 

I would make GBBA the core holding in my P2P investments. This lottery like approach to loan allocation is what puts me off.