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SteveT:  I haven't worked out how you could sell the same £500 more than once. 

pom:  Whether or not there are a lot burned fingers depends on te tax position of the buyers.  If they're non-taxpayers, then they'll be getting exactly the return that's shown on the SM listing pages.  Basic-rate taxpayers won't do that well, but they might not be losing money.  And there's clearly an opportunity for higher-rate taxpayers to buy parts, hold them for a while, and then sell them on to people paying lower rates of tax.  If the parts are sold at par or below, then all the investors should be happy, with the only loser being HMRC. 

I agree with those who have suggested that FS should have done what other platforms have done and make notes of who held a part how long and apportion the interest among them when it is received at the repayment/renewal of the loan.  IMHO that would have avoided the odd tax effect the current system has and that would have been fairer for all concerned -- including HMRC.  That system is, however, a lot more challenging technically, and perhaps FS don't have access to the IT skills necessary to adopt such a scheme.

As such, while I think FS made a mistake implementing the SM the way they have, I don't see it as a significant risk to the platform's survival, so I see no need to abandon the platform myself as long as I can continue to be able to participate in new loans.  Which, I might add, has been difficult of late, though the past few days has been an improvement over that.

fundingsecure:  Is the new restriction on the SM still working?

Last night, when the new rules went into effect, the number of parts dropped significantly when the parts showing returns of less than 4% were removed from the SM.  I think that left about 160 parts showing returns of 4+%.  At that point, it looked like everything was working as announced.

Today, however, sub-4% return parts have reappeared on the SM.  I don't know where they came from.  When I tested the system by trying to offer a short-dated part at a 1% premium the system told me that the return would have been 3.77% and I couldn't offer it on those terms because the return was less than 4%.

So why are there 50 parts being offered right now on the SM showing sub-4% returns?

mikes1531 Well it's not pure flipping but I added a £500 float when the SM went live. Since then I've sold about £1500 of 13% parts at 2%, bought about £1500 of new PM parts at a mix of 12% and 13% and I still have a £500 float!

I see that the sub-4% parts have disappeared from the SM again.

Let's hope they stay away this time!

PS.  This indicates to me that FS read and react to forum postings even if they don't actually post a response.

Quoting from yesterday's email from FS regarding the tax situation:

"This can be thought of as similar to the position where you buy shares from someone and a dividend is payable shortly afterwards. You receive all the dividend and (if appropriate) any liability for tax."


Whilst the analogy holds to a certain extent, the more I think about this the more I realise there is an important difference. When a share is bought cum dividend, the amount of the dividend has already been declared, and is virtually guaranteed to be paid on the appointed date.  However a FS loan bought at a price to reflect the notionally accrued interest carries no guarantee that any interest will be paid, let alone the notional amount. 

Since there's always a possibility that a borrower will default and the security cannot be sold for enough to return investors' capital, there's no way FS can guarantee parts bought on the SM won't cause losses for investors.  What they accomplished by stopping sales of parts where the return was shown as negative was to stop the sales of parts where the buyer was guaranteed to make a loss.  This week's change means they have stopped the sale of parts where the buyer was guaranteed to make no more than a 4% return before tax. 

I haven't a clue why 4% was chosen, but if it was an attempt to compensate for the tax situation there might be a better solution, and that would be to ask potential buyers to state what tax rate they pay -- nil, 20%, 40%, 45% -- and for SS to work that into the return calculation so that it takes account of the extra tax the buyer will owe on the portion of interest they receive that they paid for in advance.  There is a chance that FS couldn't do that because of the rules regarding exactly what they can and cannot say about taxes before it starting to look like they're giving tax advice.  And there's a chance that such a system would be too difficult for FS to implement and explain, and for investors to understand without be bombarding FS with questions -- which FS might have difficulty answering or be prevented from answering by the 'advice' rules.

IMHO, FS created a bit of a monster when they adopted the current structure of the SM.

And yet nobody actually is forcing buyers to buy.  They're choosing to do it of their own free will.  So it could be argued that there's no unfairness involved.

Of course, if they don't understand what they're doing...