P2P vs Regulator

My guess is that the FCA is trying to protect itself. It can see that in the next downturn, if not sooner, several platforms will fold, leaving investors with substantial losses. The holier than thou media and MP select committees will scream how can that be these were FCA regulated companies. There will be stories about someone who put all his savings into one platform that he thought was safe because it was FCA regulated and now he has lost the lot.

My guess is that they want the Treasury to clarify that FC and others are intended to be included.

I think that the only real difference for retail buyers is the tax treatment. Most of the examples about capital gains tax assume that these are simple loans, and I think that if HMRC agreed with FCA on this then some of the tax assumptions might be wrong. (I am not a tax expert get your own advice blah, blah...) Of course we wouldn't have to worry about this inside an ISA.

Edit: Interesting story BTW! (and crossed with previous post)

A critical difference is the law and its effects. Under the most recent proposals I've seen both the ability to include a P2P loan within the Alternative finance ISA and the ability to deduct default losses from interest require that the loan be a 36H agreement, which in essence means that it is a loan contract directly between borrower and lender. This is why I've been asking platforms whether loans in general or particular sets of loans are 36H or not: it's a key issue for investors based on currently known plans.

So if you are correct about the FCA position they are in effect saying that the law has to be changed to allow things that are not 36H but which are P2P to be included in those things and treated a P2P. For example, old SavingStream is obviously not 36H and hence couldn't be included in the Atlernative Finance ISA or have bad debts set against losses but they say that their new agreements are going to be 36H complaint according to their legal advisers.

There are also investment risk differences between the various approaches. A 36H agreement has that direct between borrower and lender property so any security is included within that relationship and is to some extent independent of platform bankruptcy or other failure. Some of the other structures could be exposed to risk in that area, though trust-based solutions have been used and some in the round actually offer better protection than individual loan agreements.

My view is that the law should be changed to reflect the reality of what is broadly considered to be P2P today, with 36H adjusted as required to include it.

The FCA may also have circumvention concerns. P2P as started in the UK by Zopa exploited a regulatory loophole: consumer to consumer lending was not regulated so they could start a brand new financial product without regulatory hassle. Some of the "P2P" structures Iv'e seen where the platform does the lending and then consumers lend to the platform appear to be outrageously false claims to be peer to peer becaue there is a complete absence of any peer relationship between the ultimate borrower and ultimate lender. Instead they are really lending by the platform in the middle to the ultimate borrower with the lenders lending to the platform.

Yet I do not think that these platforms are best treated as bonds or collective investments either.

A catch is drafting suitable legal definitions so that what is regarded as P2P is allowed but not used as a bond or collective investment circumvention tool for things that really should be covered under those categories. For example:

1. a P2P platform will typically have lots of borrowers and lenders and be responsible for the collection of peyments without reselling the loan off the platform. Bonds can typically be freely resold and the bond issuer is normally the ultimate borrower not a man in the middle platform. So rules could be refted to use this difference in behaviour based on things like loan volumes and off-platform resellability.

2. A P2P platform will typically have specified ultimate borrowers for each loan that cannot be arbitrarily changed at the whim of the platform. A collective investment will nromally have th manager given broad fredom to use their judgement to change the underlyign investments at any time or to change benchmarks used. A bit of a challenge might be the collectiosn of pawned items used by MoneyThing but that's the nature of the borrower's business and rapidly turning over inventory of security, not an arbitrary decision by the platform to change what the money is invested in.

3. P2P typically has fixed loan terms with possibly some margin for the borrower in case of contingencies and rescheduling and debt collection facilities. This is very difference from the arbitrary buy and sell decisions of a collective investment scheme.

4. Special Purpose Vehicle structures like those used at times by Ablrate may be a challenge but the key aspect to notice are the fixed ultimate borrower, not the lender-protecting legal structure in the middle. That ultimate borrower cannot be changed by the SPV or Ablrate.

So yes, there are real and substantial possible protection and value differences between being 36H or not but refusing to regulate is not the solution, changing the law to allow regulation of actual P2P is.

I think that is the point.

Article 36 as currently drafted ought to exclude every platform we know of. There is not one platform I know of where the investors on site are actually lending to a borrower directly. There is no charge/loan agreement in their name that is merely 'arranged' by an agent. The agent is the lender of record and the investors are beneficiaries.

Is Wellesley P2P? You select a term and rate - and have no control over to whom, in what proportions, or what security your money is loaned or what action is taken on defaults. The same for RS, Z and many others. How can any of this possibly be Article 36. How is this different to what wisealpha do (for example) - or how is it different to buying a 5 year bond which is apparently 'investing' and not 'lending'.

 

Assetz is categorically structured so that every loan is an Article 36H compliant loan.  It's the only form of lending we do and we have a full time compliance officer with decades of experience monitoring everything we do to make sure that is the case.  There is a direct relationship at all times between lender and borrower.

I would agree that some other platforms are pushing the boundaries of the definition and may well fall under CIS or other regulations.  AC is not one of them.

Chris - do AC currently have full or interim permissions?

you say AC is categorically A36. So is very loan agreement showing all investors names that may change daily? do investors have ANY SAY in how they manage their OWN LOAN? oh ... then I can say that you are NOT A36 

do you think there should be different treatment of 5 year P2P 'product' offered by RS/Z/W/LW/AC and say a 5 year 'note' issued by wisealpha - all of which are supported by underlying loans?

Chris - I am definitely NOT suggesting AC are doing anything wrong and I certainly don't think you are. 

The part in bold - is this for real? Has it ever happened?

If I have £5,000 invested in GEIA (for example) are you saying I would have the right to take over my part of any loan that may be in default? How on earth would that work in practice if you have 500 other investors in the loan? Also, if £20 of my money is withdrawn and replaced by Investor #501, is the loan agreement amended? I am sure that what actually happens is the loan agreement is between borrower and AC - and AC hold it in trust for all investors and have the right to take the action they consider appropriate for all investors?