Multi P2P Platform IFISA

Kendall80

A story I missed. I've not seen it mentioned on here so apologies if i'm duplicating any other thread;


http://www.thisismoney.co.uk/money/diyinvesting/article-3499159/Put-peer-peer-products-one-tax-free-wrapper.html

colsten

Providers offering multi P2P platform ISAs without charging for it? YEAH RIGHT.

You won't just be allowed to join one unsecured tax free savings scheme. You'll be allowed to pay for using multiple ones of them at the same time.

I can see the streams of tears now.

Kendall80

The current thinking is that the IFISA will be P2P platform specific. This, to me is concerning. We could end up with savers/investors funneling money into their 6-12% IFISA maybe even shunning the stock market. Then that P2P platform goes bust.... with no FSCS compensation scheme - taking some, maybe all their money.


I currently only allocate a small % of my portfolio to P2P and without FSCS protection i'd be hesitant to increase further, even if the multi-platform IFISA were to be brought in.


Perhaps its possible that a bank may offer the IFISA but shelter it under its own FSCS 75k limit regardless of its P2P contents. Seems unlikely though.

bowlhead99

Kendall80 wrote: »

I currently only allocate a small % of my portfolio to P2P and without FSCS protection i'd be hesitant to increase further, even if the multi-platform IFISA were to be brought in.

I think a multi-platform solution would be the way to get real traction for P2P IFIAs from smart investors such as the ones that sometimes post here, as spreading your counterparty risk across multiple providers is an important thing to do if you want to invest meaningful amounts of money (and to some people, a years worth of ISA 'savings' of £1k-£20k is meaningful).

Of course, a lot of customers with a few thousand to save/invest do not bother to spread across multiple providers because they don't perceive there to be much of a risk with their eggs in one basket. Certainly all the P2P houses will pack their marketing with as much as possible about how reliable they are and how the bad debts fund easily covers all the bad debts etc; but never talk much about their own financial strength as a provider, because presumably the typical mass-market customer doesn't ask. It is all about 'diversify your loans between borrowers' not 'diversify your loans between us and another rival in the market'.

So, perhaps multi-provider IFISA is not so key to market growth because the mass market doesn't feel they need it. The mass market will probably grudgingly accept single-provider IFISA without too much fuss, in the same way that they accept single-provider current year cash ISAs but sometimes use their historic previous years' accounts to spread into different products from different banks.

Kendall80 wrote: »

Perhaps its possible that a bank may offer the IFISA but shelter it under its own FSCS 75k limit regardless of its P2P contents. Seems unlikely though.

There's no way a bank would extend its protection for £75k on deposit accounts to schemes which are designed for investors to lend money to borrowers, which is very different from simply depositing money in an account with a banking institution.

The £75k limit is so high because it helps savers around the country have faith in the banking system. In other words if they leave money in an account for safekeeping it will be there when they come back for it. Being able to trust the institution will still exist, and be able to honour its promise that the money will be there when you come back, is paramount.

By contrast, with P2P lending you are quite clearly not leaving something for safekeeping that needs to be there when you come back to avoid you becoming distraught, destitute and disillusioned with the banking system. You are actively choosing to NOT put something somewhere for safekeeping, but instead loaning it out to other individuals in the hope that they will pay you back, at enough of a high rate to cover up for the individuals who fail to pay you back.

This doesn't need 'protection' - it's 'buyer beware' territory and some intermediaries (p2p houses) will specialise in offering loans at 8-15% and some at 3-5%; they probably don't all want to cross-subsidise each other for industry compensation. Even if a bank wanted to say your P2P loans instigated via themselves would be 'sheltered by its own limit', it is not up to the bank. When the bank is bust, the other people in the industry who pay for the FSCS to exist will quite rightly only pay out for people who had made deposits and not investments.

As such, all the bank could do to offer you a £75k protected product would be to give you a guaranteed fixed or variable interest rate on your own deposit (covered by the scheme) and then go off and make its own investments to help it make money to pay you your interest.

The UK (and the EU which drove the increase to €100k / £75k limit) wants to make sure depositary accounts are safe, and they have done that, but they are not going to extend that protection to things where people give up safety to chase a return. The government is happy to allow people to use 'innovative finance' options to chase a return with a certain level of tax exemption, just as they allow people to invest into S&S and funds. And the FCA have started to regulate the conduct of P2P players. But this doesn't mean they will make it risk free up to £75k, which would be implausible.

So £75k FSCS on P2P, to me, doesn't "seem unlikely" it seems impossible.

Feasibly the £50k which FSCS offers towards provider default may one day be offered for p2p providers. But as the providers are just middlemen, like stockbrokers, having a compensation scheme for their failure doesn't fix your problem that someone out there (the end borrower) owes you money and may not pay up - especially in the circumstances where the middleman they borrowed from went bust.

masonic

Kendall80 wrote: »

I currently only allocate a small % of my portfolio to P2P and without FSCS protection i'd be hesitant to increase further, even if the multi-platform IFISA were to be brought in.

Perhaps its possible that a bank may offer the IFISA but shelter it under its own FSCS 75k limit regardless of its P2P contents. Seems unlikely though.

If you have a trading account or S&S ISA, then your uninvested cash is protected up to the £75k limit, but I've never held more than a couple of hundred pounds there for more than a few days, so it seems a pretty irrelevant protection.

It is, of course, possible that uninvested cash in an umbrella account would be subject to same £75k FSCS protection (and ultimately the individual P2P firms may join the scheme - again for uninvested cash held on their platform), but it would be unwise to hold a lot of uninvested cash within the Iffy ISA because you are unlikely to receive any interest. If these Iffy ISAs allow flexible withdrawals to be made, then that would be the answer for uninvested cash, otherwise, if a platform did not have enough loan flow to keep my ISA money fully invested, I'd probably transfer the ISA to one that did.

masonic

Also, it's worth pointing out that there won't be a very large number of providers to choose from initially anyway: http://p2pindependentforum.com/thread/4717/hybrid-prefunding-model?page=4&scrollTo=101085

bowlhead99

masonic wrote: »

otherwise, if a platform did not have enough loan flow to keep my ISA money fully invested, I'd probably transfer the ISA to one that did.

The problem with this is that a platform might appear to have decent loan flow but over time its profile of lending opportunities might worsen. You'd then potentially be stuck in the situation that you have decent paying loans with the provider, but also a bunch of uninvested cash, and you only really want to move the cash bit and not the remaining invested portfolio (potentially taking a hit for selling the loan as a secondary), so don't want to shift the whole ISA.

I suppose though that once it stops being 'current year money' you can then move the cash element offsite via transfer to another platform. Waiting for the first year is up is not too bad if your loans are long-term because you won't have had lots of cash come back to you yet when you're in year one of a five year term. But for shorter-term loans it's more likely that you have this portion of undeployed cash sitting around that you don't really wantto redeploy

masonic

bowlhead99 wrote: »

The problem with this is that a platform might appear to have decent loan flow but over time its profile of lending opportunities might worsen. You'd then potentially be stuck in the situation that you have decent paying loans with the provider, but also a bunch of uninvested cash, and you only really want to move the cash bit and not the remaining invested portfolio (potentially taking a hit for selling the loan as a secondary), so don't want to shift the whole ISA.

I suppose though that once it stops being 'current year money' you can then move the cash element offsite via transfer to another platform. Waiting for the first year is up is not too bad if your loans are long-term because you won't have had lots of cash come back to you yet when you're in year one of a five year term. But for shorter-term loans it's more likely that you have this portion of undeployed cash sitting around that you don't really want.

This is a concern and I've already struck out a couple of the platforms I use from consideration for Iffy ISA because of inconsistent loan flow. Fortunately, the vast majority of my loans are non-amortising and a good proportion are either longer than 6 months in duration or a rolling facility that is unlikely to be paid off in the short term.

I will be looking for the ability to move loans in and out of the ISA (i.e. through a secondary market). This will be critical in the beginning as I am essentially fully invested in a number of platforms and won't be looking to invest any additional money. It will also be very useful in the situation you describe, where I may wish to move the ISA elsewhere, and would therefore need to liquidate and repurchase anything I want to keep outside of the ISA.

bowlhead99

masonic wrote: »

It will also be very useful in the situation you describe, where I may wish to move the ISA elsewhere, and would therefore need to liquidate and repurchase anything I want to keep outside of the ISA.

I wonder what they would have in terms of anti-abuse provisions in that situation when selling and repurchasing outside the ISA? Call it a "thought experiment" rather than a "scheme"...

For example Bowlhead99 holds an ISA which contains £5000 cash and a £10,000 performing loan with a 10% yield, valued on the secondary market at £10,500 (implying ~5% yield to maturity)

Bowlhead99 puts the loan up for sale at £11,000 with a zero yield to maturity. Unsurprisingly no bidders. Until that is, he or his "friend" Bowlhead89 with an unwrapped account comes along and snaps up the deal. The platform takes a nominal cut for matchmaking and Bowlhead99 gets the cash. He has increased the size of his ISA wrapper to ~£16000 from £15500. Meanwhile his buddy has overpaid a bit for the unwrapped loan, but the excess has increased the size of the wrapper by a useful percentage, and that enlarged pile of cash will now compound up for years and be potentially very valuable, for the sake of a small facilitation fee from the provider of the secondary market.

Presumably this is frowned upon, but I imagine it's feasible that once ISAs exist as separate trading entities on the platform, Mr John Doe could be allowed to have two separate accounts, legitimately. So, to what extent would trading be prohibited between them, or perhaps between he and his wife or sister Mrs or Ms Jane Doe...

Perhaps trading with yourself is already covered by provider T&C or general HMRC anti-avoidance rules, but not sure about the position if trading with friends or family. Using a platform that allows you to set your own bid and offer prices one would imagine you could set the price wide enough away from reality that other customers would be discouraged from taking if off your hands?

masonic

bowlhead99 wrote: »

Bowlhead99 puts the loan up for sale at £11,000 with a zero yield to maturity. Unsurprisingly no bidders. Until that is, he or his "friend" Bowlhead89 with an unwrapped account comes along and snaps up the deal. The platform takes a nominal cut for matchmaking and Bowlhead99 gets the cash. He has increased the size of his ISA wrapper to ~£16000 from £15500. Meanwhile his buddy has overpaid a bit for the unwrapped loan, but the excess has increased the size of the wrapper by a useful percentage, and that enlarged pile of cash will now compound up for years and be potentially very valuable, for the sake of a small facilitation fee from the provider of the secondary market.

Presumably this is frowned upon, but I imagine it's feasible that once ISAs exist as separate trading entities on the platform, Mr John Doe could be allowed to have two separate accounts, legitimately. So, to what extent would trading be prohibited between them, or perhaps between he and his wife or sister Mrs or Ms Jane Doe...

Perhaps trading with yourself is already covered by provider T&C or general HMRC anti-avoidance rules, but not sure about the position if trading with friends or family. Using a platform that allows you to set your own bid and offer prices one would imagine you could set the price wide enough away from reality that other customers would be discouraged from taking if off your hands?

This has been discussed a bit on one of the P2P forums and the thinking was that a sale that occurred at a price that was significantly disconnected from the typical market price could land one in hot water. I can't remember the exact details of a post by one of the P2P operators, but the gist was that they had some responsibility for looking out for this sort of behaviour.

At the moment, secondary markets of the various platforms vary significantly. Some do not allow trading at premiums/discounts at all, while others allow sales at discounts but not premiums.

edinburgher

@bowlhead99 -

The thought experiment is an interesting one, it would be interesting to see a sort of 'bed and ISA' for P2P, but I am not sure about the legality of such an arrangement. At least by making it an accepted practice, transparency would be assured for HMG.