Falling rates

Obviously, it would be ideal if the recovery amount was enough to cover all the capital, interest arrears, and recovery fees.  Where that isn't the case, however, is there an AC policy stating how the recovery would be divided among the various claimants?  It probably would be better to have this set out in advance rather than arguing about who gets what on a case by case basis.

For instance, I presume that fees to outside advisors/lawyers/accountants/administrators would be the first to be paid.  But I expect that AC have their own recovery costs that would be billed if the recovery were sufficient, but might be subject to reduction if the recovery were to be insufficient.  Or do AC expect to bill the full amount no matter what level of recovery is achieved?  I can see an argument that the AC fees should rank after lenders' capital, but perhaps on a par with accrued interest.  Or perhaps it should be ahead of or behind accrued interest.

Unless AC's recently defaulted loan turns into an amicable settlement -- which seems like a flying pig scenario at the moment -- the question of priority of payouts is going to have to be addressed.  Perhaps not right now, but likely at the end of the recovery process which could be over a year from now.  It might be useful if the recovery priorities were known in advance, so perhaps andrewholgate or someone else from AC would care to comment.

Thanks for the response, andrewholgate.  If I'm reading Section 11.9 of the AC Terms & Conditions correctly, it would appear that the specified order of payment is...

1. Costs of enforcement of the security
   
2. Outstanding fees (incl. to AC and agents/brokers/introducers)
   
3. Accrued interest
4. Outstanding capital

So introducers, etc., are paid their fees even if the loan turns out to be a failure. 

I find the order of the last two items curious, as it causes an interesting tax situation.  For instance, if after paying A & B the remaining money is just enough to return the lenders' capital, but 20p in the £ of interest has accrued (at the default rate), then lenders will receive 100p per £ of their investment back -- but it will be designated as 20p of interest and 80p of capital.  So they'll have a capital loss of 20% of their investment -- which they'll probably receive no tax relief for -- and they'll have to report interest income of 20% of their investment -- which they'll have to pay income tax on.  Ouch!

I will take up with our legal team.

Thanks to andrewholgate for looking into this.

As for Ton ⓉⓞⓃ's reference to Zopa, I hope I did learn a bit from my investing there.  For the record, I still do have a significant investment there, but I have so little control over it that I haven't been following it as closely as I used to.

As for the interest/capital split of any recoveries, we'll see what the AC legal team come up with.  The issue has gone away now at Zopa since the introduction of their Safeguard Fund but, IIRC, at one time they also used to designate partial payments by late/defaulting borrowers as partly/mostly/all interest even when it was pretty apparent that lenders were not going to get all their capital back.  The result, a capital loss that saved no tax plus interest income that incurred tax, also was unsatisfactory but, again IIRC, that was blamed on their advisors' interpretation of tax law.

So AC's advisors may say that's the way it has to be.  Then again, it may be another case where the 'experts' disagree, such as regarding the taxability of Cashback payments where one P2P platform says they're taxable and another says they're not, or the deductibility of lenders' fees where one P2P platform says they're deductible and another says they're not.

Which is in pleasant contrast to FC :-

e.g. NF G**** IT C********* (83): "Our enforcement officers ... will be taking 15% of all receipts, and so we anticipate a 15% write-off on this loan. "

That sounds like the fees for recovery being passed on to the lender, to me

"Fees are simple at Funding Circle:

    1% annual servicing fee on all lending: you only pay this as a business makes a repayment. And if they don?t make a repayment, you don't pay a fee.

    0.25% sale fee: payable if you sell any of your loan parts to other investors."

Oh yes, and under "it's not fees, but it'll cost ya" ...

"11.6 You agree that FCAF shall be entitled to be repaid and reimbursed out of the proceeds of any recovery against a finance asset and that you will pay all reasonable costs incurred by FCAF in recovery and realising those assets. You will only be responsible for payment of such costs incurred by FCAF out of the proceeds of any recovery and to the extent that such costs cannot otherwise be recovered by FCAF from the relevant borrower. "

Naturally, when you see "Oh No! Not More Bailiffs!" and similar on TV, there is always this doorstep argument about "How did me owing £200 end up at £800+ ?" ... "Well, our fees and stuff get added on top", which does seem to be the fair way round these things

The spread of individual outcomes appears to have been far wider on FC and so for those earning perhaps 15%+ on an XIRR basis (post fees, post loan losses, pre-tax) it still has its attractions in spite of the extra grunt work required and known anxieties.