Zopa in the current climate

jamesd

Blah99 wrote: »

Zopa are a company facilitating regulated financial transactions. ... It's hardly different to Paypal, which is similarly consumer-to-consumer financial transactions and is covered by the FSA.

Zopa's UK head has written that it is the view of the FSA that the FSA is currently not permitted to regulate Zopa and that it would take a change to the law to get Zopa's activities included in those that it regulates. At the moment, consumer lending is regulated by the OFT and that's who Zopa has a license from. There's nothing wrong here: Zopa is properly licensed by the correct regulator for what it's doing under current law.

Blah99 wrote: »

I still think the "markets" section is only marginally better than the "listings". You're still taking direct exposure to unsecured debt.

You're entirely correct that lending via Zopa is taking direct exposure to unsecured debt of consumers.

Blah99 wrote: »

let's take a hypothetical situation where the owners/operators of Zopa simply do a runner with the cash

The cash is held in client accounts with RBS and RBS is obliged to protect it. Still, might be some way to extract the money.

Blah99 wrote: »

alternatively go bust. In that case you'll have thousands of creditors who have no way to retrieve their money from their debtors. The debtors also have no incentive to pay, and the whole thing collapses.

Zopa has an arrangement with their debt collection company to take over if this happens. The debt collection company will take over operating the payments system. I suppose borrowers could default while a debt collection company is already administering their payments but that's a pretty short route to the debt collection part of the business...

Do also remember that these are loan contracts and the lenders are fully entitled to seek CCJs and enforcement against any borrower who doesn't pay up. Though there is a system in place at the moment where lenders can sell the debt to the debt collection agency if they don't want to handle it individually and most lenders have apparently chosen to use that system.

Blah99 wrote: »

Your last sentence is the important one. A Zopa lender could lose 100% of their money. You're risking 100% of your capital, in an unregulated company, making unsecured loans, for a 9% return (I'm taking 9% from other posts in this thread). That is a massive, massive overshoot of the risk/return equation.

It's not really 100%. If it's identity fraud, Zopa is responsible. If it's other fraud then the minimum the debt collection company will pay is 10%, plus a share of any other recovered money. So you need to form a view of how many people will get past the screening process and how far along they will be in repaying their loans when they default. So far that's in the half percent range for defaults for every reason including things like death. It could change - and will - but so far the evidence we have suggests that the actual loss that's reasonably likely is far below 100%.

Blah99 wrote: »

I predict the economic situation to worsen significantly during 2009. Distressed consumers will not care where their loan has come from when they can't afford to service it and put food on the table - thinking otherwise is romantic hope & idealism.

I certainly hope that if the choice is repaying or food on the table, borrowers will choose to cut back on non-essential spending, come to some payment arrangement and put food on the table. Or use debt assistance charities. Whatever is necessary for they and their family to survive if they are unfortunate.

Blah99 wrote: »

I totally disagree. Putting money into big-bank savings accounts (meeting the FSCS limit etc etc etc) is absolutely safe.

So far I've had four different regulated deposit takers that I've used need bailouts and have received two payments from the FSCS. What was that about safe? If you believe the UK line, Iceland refused to honour its guarantee and I'd have lost all of the money I had with Icesave if the UK and then other European governments hadn't stepped in to force them to pay. The others were Alliance & Leicester, Natwest via RBS and Bradford and Bingley.

Now, those were UK regulated institutions. What about those who have lost money in offshore places like the Channel Islands or the Isle of Man?

You're definitely right that domestic savings accounts are comparatively safe, though. So long as the government sticks to its current line the most that you can expect to lose is a few months of interest. And with interest rates heading to zero, that's gradually becoming no loss at all. Well, except inflation.

Blah99 wrote: »

Putting money into equities is safe as long as you know what you are doing. The same with bonds.

You really should look at those here who were speculating with Northern Rock shares and who lost most of their money. Or those who have seen both shares and bonds drop in value over the last year. It's a risk that you seem familiar with and comfortable taking but it's definitely a substantial risk. Of course I also use shares and bonds.

Blah99 wrote: »

Zopa is a lending mechanism that the investor has no control over

Lenders in the markets can choose which risk band of consumers they lend to, with each band having approximately twice the estimated default rate of the previous one. Lenders can choose term and in Listings can choose who they want to lend to. Lenders can also choose when to lend (or borrow) to pick favourable market timing opportunities.

Blah99 wrote: »

represents a massive risk for a mediocre return.

My initial rate after Zopa's fee and bad debt allowances for new loans was 13% between August and November this year. Add another couple of percent to that if you think that the default rates will remain low. That's entirely respectable for the level of risk involved.

Blah99 wrote: »

I'd choose penny shares over Zopa to start with, and Zopa would have to offer 15%+ returns before it would begin to look attractive to me (as a high risk investment).

Got it in one. That's part of why I started lending there: those rates were available. They aren't at the moment but it's a market and supply and demand fluctuates.

The borrowers who are paying those rates are generally those refinancing credit card or overdraft borrowing. It's not uncommon to see people writing about getting rid of rates in the 25-40%+ range. At the moment the rates are quite competitive for fully flexible loans to ordinary borrowers, though, so it's not just those who are getting cheaper debt who can benefit. Any prospective borrowers should definitely shop around and look at the borrowing articles here first, though, then go for whatever deal is best for them.

Zopa tends to be particularly competitive for borrowers if the other options are things like the 20%+ that NatWest will charge you for a low value unsecured loan. For larger sizes banks and others start to have a greater chance, though getting fully flexible no penalty deals to compete with those via Zopa isn't that easy.

But Zopa is a market. Anything I write here now about competitiveness could be completely different two weeks from now. Or even tomorrow. (shrug) It's an option. Worth checking, then go with whatever looks best for either investing or borrowing based on circumstances at the time. And definitely shop around!

CoogarUK

Why use a few words when you can use a few hundred? It changes nothing though.

Just to take up a couple of jamesd's points:-

As far as regulation is concerned, we only have Zopa's own stance on this. Perhaps anyone who is unduly concerned about the issue should write to the FSA (or OFT) asking them for a wrtten response direct 'from the horses mouth'.

If a borrower goes bankrupt prior to Zopa's debt collection ageny agreeing to purchase the debt, lenders do indeed face a risk of losing 100% of their capital.

So, lenders beware of the potential for borrowers to choose the bankruptcy route, because depending on the timescale for this happening, Zopa's debt collector won't want to know! I am aware of at least one case where this has already happened.

Blah99

jamesd, interesting replies, thanks. I think we have polar opposite views on Zopa and neither will change, so I'll leave this thread alone for now

CoogarUK

sabretoothtigger wrote: »

'FSA said there was nothing to regulate as far as they were concerned.'

!!!!!!

They were too busy not regulating the banks properly at the time!

Paul_Herring

Blah99 wrote: »

I totally disagree. Putting money into big-bank savings accounts (meeting the FSCS limit etc etc etc) is absolutely safe.

You clearly didn't have any money in IceSave, where the true implications of the FSCS 'passport' scheme weren't realised by most until after the fact.

Most thought the FSCS would cover anything the passport scheme couldn't, (even if that ended up being £0.) In reality the FSCS only covered the excess over what the passport scheme _promised_ it would cover regardless of whether it did or not. If you had £16,000 or less in there you would have got nothing back. (The rest is history.)

And, yes, now that it is known about, anyone who pays any attention to the news won't touch FSCS passport schemed banks with a bargepole now.

easteregg_2

Paul_Herring wrote: »

You clearly didn't have any money in IceSave, where the true implications of the FSCS 'passport' scheme weren't realised by most until after the fact.

Most thought the FSCS would cover anything the passport scheme couldn't, (even if that ended up being £0.) In reality the FSCS only covered the excess over what the passport scheme _promised_ it would cover regardless of whether it did or not. If you had £16,000 or less in there you would have got nothing back. (The rest is history.)

And, yes, now that it is known about, anyone who pays any attention to the news won't touch FSCS passport schemed banks with a bargepole now.

I too had money in IceSave and Kaupthing Edge and I would go further to say people won't touch foreign owned banks (except for Santander) for savings. I view my Zopa investments as safer than those !

CoogarUK

As I understand it, no-one with deposits in Icesave stand to lose a penny, except those with deposits that lie offshore, i.e. IoM, Guernsey, etc.

A deposit in a foreign owned bank which is fully covered by the FSCS, i.e. ICICI, is 100% safe up to £50k, which is surely a whole lot better than Zopa's 'guarantee', which is Zero as they are unable to give one (not a categorical one anyway) as they are not a bank.

The only thing which makes a Zopa investment safer than a bank deposit is the fact that Zopa haven't gone bust yet!

amcluesent

>The only thing which makes a Zopa investment safer than a bank deposit is the fact that Zopa haven't gone bust yet!<

No sure why peeps get over-excited about Zopa. IMHO it's there for lenders who can make a judgement on their exposure to risk and, as with holding gold, is OK as part of your overall financial portfolio.

jamesd

Blah99 wrote: »

jamesd, interesting replies, thanks. I think we have polar opposite views on Zopa and neither will change, so I'll leave this thread alone for now

You should look at what I was writing about it last summer. Then I noticed that lenders were reporting rates that looked possibly interesting and I decided to see whether I could prove myself wrong. I did. Oops.

But at the moment rates to lenders are too low for me to do that, so for this week at least it's not doable. Next week, who knows.

jamesd

CoogarUK wrote: »

If a borrower goes bankrupt prior to Zopa's debt collection ageny agreeing to purchase the debt, lenders do indeed face a risk of losing 100% of their capital.

No, they don't. They stand the risk of losing 100% of the money lent to that specific borrower. Nobody sensible would suggest putting 100% of the money lent there into just one loan. They are in ten Pound units for several reasons and preventing that is one of them.

CoogarUK wrote: »

As I understand it, no-one with deposits in Icesave stand to lose a penny, except those with deposits that lie offshore, i.e. IoM, Guernsey, etc.

All Icesave depositors lost a couple of months of interest. For those in ISAs who put in the limit that's an irrecoverable permanent loss of some of the value of their ISA allowance because they can't just pay in what the interest would have been.

CoogarUK wrote: »

The only thing which makes a Zopa investment safer than a bank deposit is the fact that Zopa haven't gone bust yet!

Wrong. It's the fact that the money is not lent to Zopa but to other consumers. Zopa can't lose money it doesn't have: that with the consumers who borrowed it.