Funding Circle moving the goalposts

masonic

cautious1 wrote: »

Masonic suggested insisting on selling under the old terms but I don't see how this would work. Investors buying from those selling on the new Ts&Cs would be buying with a 1.25% discount, so why would any new investor buy on the old Ts&Cs?

Nobody mentioned a 1.25% discount. All that was mentioned was a 1.25% transaction charge. So which is it?

If all FC is doing is mandating all new loan parts for sale will be at a 1.25% discount, but they aren't taking any fee for the service, then what is fair and reasonable is to give investors the option to leave their loan parts for sale at par at the back of the queue, and perhaps someone will buy them up if there are no parts for sale at discount. That's just how markets work.

If your loan parts are currently for sale under the old terms, and you cancel them because they are at the back of the queue, I don't think you'll get anywhere with the FOS.

If FC is making a charge of 1.25% to sellers, then it is entirely reasonable for this charge to be waived for loan parts already on sale, as stated above.

AnotherJoe

cautious1 wrote: »

2. stop selling and investing (withdraw funds as investments pay back, on an unknown timescale)

Isn't the timescale of the loan known? Not used P2P so apologies if that's very naive but I understood when you made a loan on P2P it was for X amount for Y duration?

masonic

AnotherJoe wrote: »

Isn't the timescale of the loan known? Not used P2P so apologies if that's very naive but I understood when you made a loan on P2P it was for X amount for Y duration?

The timescale is only known if the loan repays on schedule. If the borrower is unable or unwilling to make the required payments, there is usually a lot of forbearance, after which loans may be restructured or formally defaulted, which can cause money to be trapped for several years longer than anticipated (that's if it is ever repaid).

I have a loan with a maturity date of July 2016 that is still being pursued.

cautious1

Masonic, here's the response from FC (I assume that others will have received something similar):
_______
I understand you are most dissatisfied with the unilateral change as you feel this is unfair, and that we should have taken into account existing investors, and more specifically the transfer payment of 1.25%.

It is important to note that the ability and time taken to sell loan parts on the secondary market is not, and has never been, guaranteed. As you know, the balance between sellers and buyers has continued to shift in recent months, with the time it takes to process sale requests increasing as a result. This would have continued under the current system, so there is no guarantee that investors who have already been waiting in the queue wouldn’t have continued to do so for a significant period of time. We want all investors to be able to benefit from the liquidity available at the time. This is why we have introduced these changes which will allow all investors selling—including those who were previously in the queue—to be able to begin accessing some of their funds more quickly.

Both the previous and current T&Cs do not outline how the secondary market selling process works. This is typical of T&Cs generally, which usually do not specify the details of product operation. Our T&Cs, like many others, permit us to make general product and service changes without your consent:

16.1. We may make changes to these Investor Terms and Conditions from time to time without your consent for any of the following reasons: [...] to make changes to the products or services we offer or provide to you, to introduce new products or services or to withdraw products or services we no longer offer; [...]

It is important to note that the ability to sell loan parts on the secondary market is not, and has never been, guaranteed (see clause 10.6 below). Furthermore, the current T&Cs state that sale requests that are not successful within 120 days will be delisted from the secondary market:

10.6. There is no guarantee that your Loan Parts will be transferred, nor any assurance as to how long it may take to do so. If a transfer has not been successful within 120 days after you make your request, we will delist the Loan Parts from the secondary market of the Funding Circle Platform. We will notify you if the transfer is not successful and you will continue to be the Investor in respect of the unsold Loan Parts.

We paused this delisting process while we conducted our secondary market review. However, the existence of this clause (which will be replaced under the new sale process) is one of the reasons why we have concluded that the changes are fair to Investors. Under the existing T&Cs and the existing sale process, all loans currently on the secondary market past 120 days (which is less than the minimum time it currently takes to reach the top of the queue) can be delisted. We do not believe that this course of action would be in the best interests of our investors.

If you object to the new T&Cs and do not wish to participate under the new secondary market sale process, you should remove their loan parts currently listed for sale (if any) and may notify us that you wish to close your investor account. If you continue to use the secondary market functionality on the Funding Circle Platform after 2nd December, you will be deemed to have accepted and agreed to be bound by the new T&Cs that govern the new secondary market sale process and transfer payment. By objecting to the changes and removing loan parts from the secondary market, you will remain the investor for all your loan parts and will continue to receive repayments for those loan parts.

The 1.25% transfer payment is not a fee that Funding Circle receives. It is a payment made to the buyers of the loan parts being sold on the secondary market.

It is also not a mandatory payment. It is only triggered if you wish to exit your investment before the maturity date of the loans you hold by selling them to other investors on the secondary market. If you do not wish to pay the transfer payment you can still access your funds by turning off lending and allowing monthly repayments to accrue from the businesses you lend to. By switching lending off, investors will receive approximately 3 - 5% of their outstanding portfolio after the first month and approximately 30 - 40% after the first 12 months.

When making changes to our investor product, we consider the interests of all those who use our platform. This includes those currently looking to sell loans, those who may do so in the future, and the investors who buy the loan parts. As a result we considered several factors when making our decision. These include the payments, discounts and fees applied by other platforms; but also how implementing a transfer payment impacts both the buyer and seller of loan parts on the secondary market. We think that this transfer payment considers these interests fairly and brings Funding Circle in line with the wider market.

We are confident that these changes to our product are fair, are in the best interests of the vast majority of investors, and will provide an improved overall service as all investors selling loan parts will begin to receive some funds back faster and more regularly.

We have carefully considered the legal and regulatory issues that arise when making changes of this nature. In support of the argument that these changes are fair, we considered:

the contractual basis for the change, the fact that our current terms and conditions for investors clearly contemplate Funding Circle making these kind of changes, and the fact that we have fairly exercised our rights under the contract;
we have made this change for valid reasons and for the overall benefit of investors;
we have communicated the changes clearly and given fair notice of the changes.
There are several additional factors which support these arguments, specifically:

the fact that secondary market sales are not guaranteed, and have never been guaranteed by Funding Circle;
the current T&Cs do not detail how the secondary market works, or how loans are priced on sale; and
the current T&Cs currently allow us to delist loans waiting 120 days to sell.
At Funding Circle we have always been clear that lending to businesses is an investment, and that the ability to access your funds before the end of the loan term is not guaranteed.

While the secondary market provides an option for those investors who wish to access their funds early, we have always taken care to explain that the time to sell is dependent on demand from other investors. This has been included in literature including our website pages, investor guide and terms and conditions. In addition, it is clearly stated as a risk in our Key Features and Risks document, which has been made available to investors as part of the sign-up process since 2017.

In regards to how often these loan cycles will be, as the selling tool has just been implemented we do not have these statistics of how of how frequent the cycles will be and the amount sold within each cycle. This is still solely dependant on the liquidity on the secondary market and the supply and demand. We feel that you should have visibility to this on your account and start seeing more regular activity and have more of a regular access to funds, however this is not guaranteed.

Based on the reasons outlined above, we are unable to uphold your complaint.
__________________

masonic

cautious1 wrote: »

Masonic, here's the response from FC (I assume that others will have received something similar):

Well it seems they've been saved by clause 10.6 of the old T&C. While I would maintain that investors should have the right to their loan parts remaining in the sales queue without the discount being applied to them (with priority of course being given to those selling the same loans at a discount), the 120 day rule means in effect there is almost no chance of them being sold before being de-listed. I think the FOS would reach this conclusion and therefore be unable to uphold a complaint that the outcome would have been different if investors continued to be bound by the old T&Cs and had their loan parts remain on sale for the rest of that 120 day window (if those 120 days hadn't already expired).

AnotherJoe

masonic wrote: »

The timescale is only known if the loan repays on schedule. If the borrower is unable or unwilling to make the required payments, there is usually a lot of forbearance, after which loans may be restructured or formally defaulted, which can cause money to be trapped for several years longer than anticipated (that's if it is ever repaid).

I have a loan with a maturity date of July 2016 that is still being pursued.

OK ...... so, taking that as an example, why would someone else buy this specific loan off you? Wouldn't you have been stuck with it anyway in the old system ?

masonic

AnotherJoe wrote: »

OK ...... so, taking that as an example, why would someone else buy this specific loan off you? Wouldn't you have been stuck with it anyway in the old system ?

Perhaps my previous answer to your question "Isn't the timescale of the loan known?" wasn't clear enough. P2P loans with a different current status will have differing potential for sale, but the only way to know for sure when a loan will repay is after it has done so, or all recovery efforts have been exhausted in the case of a defaulted loan.

There are P2P loans that are currently performing but might default in the future

• Timescale: unknown (because of the possibility of future default)
• Can be sold on secondary market

There are P2P loans that are non-performing and in forbearance

• Timescale: unknown
• Might be sold on secondary market if you are lucky

There are P2P loans that have already been defaulted.

• Timescale: unknown
• Can't be sold on secondary market

Investors will tend to hold loans in each of these categories once they've been investing for long enough. Only some of them can be listed on the secondary market. If a loan is currently listed for sale on the SM, then I'd assume it has not been formally defaulted. If and when it is, it would generally be removed from the secondary market.

AnotherJoe

masonic wrote: »

Perhaps my previous answer to your question "Isn't the timescale of the loan known?" wasn't clear enough. P2P loans with a different current status will have differing potential for sale, but the only way to know for sure when a loan will repay is after it has done so, or all recovery efforts have been exhausted in the case of a defaulted loan.

There are P2P loans that are currently performing but might default in the future

• Timescale: unknown (because of the possibility of future default)
• Can be sold on secondary market

There are P2P loans that are non-performing and in forbearance

• Timescale: unknown
• Might be sold on secondary market if you are lucky

There are P2P loans that have already been defaulted.

• Timescale: unknown
• Can't be sold on secondary market

Investors will tend to hold loans in each of these categories once they've been investing for long enough. Only some of them can be listed on the secondary market. If a loan is currently listed for sale on the SM, then I'd assume it has not been formally defaulted. If and when it is, it would generally be removed from the secondary market.

Fair enough but taking your three categories in order,
Currentiy performing - you do have an end date on those and you can sell them on (if anyone's buying, a risk you always had)
Non performing - surely no one will buy those?
Defaulted - obviously no one will buy.

So, is the issue as simple, as that FC has gone into a vicious spiral of terminal decline with insufficient new purchasers? Ina way it's not that different to a Ponzi scheme except it only needs the same number of new as old rather than ever increasing number of new.

Possibly non hypothetical question - if the number of new purchasers falls to zero or close, is there sufficient income to allow it to gracefully close over time with staff to manage systems, chase bad debts, call in collateral etc?

masonic

AnotherJoe wrote: »

Fair enough but taking your three categories in order,
Currentiy performing - you do have an end date on those and you can sell them on (if anyone's buying, a risk you always had)

I'm not sure what your point is here. This thread is about FC introducing a change which means all loan parts sold on the secondary market must be sold at a 1.25% discount to face value. So sellers will incur an automatic 1.25% capital loss upon sale, which they did not have to incur under the old terms (where loans were bought and sold at par). Of course, that's only material if the loans can be sold, but if they are listed on the secondary market it is at least possible for them to be sold in theory. So the difference is just the capital loss mandated by the new terms.

Non performing - surely no one will buy those?

You'd be surprised. I escaped SavingStream (now Lendy and in administration) unscathed in part because people were willing to buy my non-performing loan parts. Elsewhere I have both bought and sold non-performing loan parts - in some cases I knew the loan was non-performing, in other cases I did not. Some platforms have deliberately obfuscated the repayment history of the borrower, one even modifying its T&Cs in order to be able to do so. If there is a reason a loan is not performing and an expectation repayments will be brought back up to date, it is not necessarily a no-go area.

Defaulted - obviously no one will buy.

So, is the issue as simple, as that FC has gone into a vicious spiral of terminal decline with insufficient new purchasers? Ina way it's not that different to a Ponzi scheme except it only needs the same number of new as old rather than ever increasing number of new.

All I know is that the secondary market wasn't sufficiently liquid when loans were being traded at par. I have no knowledge of new loan origination and that's what brings in FC's money - it doesn't make anything from secondary market trades.

Possibly non hypothetical question - if the number of new purchasers falls to zero or close, is there sufficient income to allow it to gracefully close over time with staff to manage systems, chase bad debts, call in collateral etc?

I can't comment on FC specifically, but in general, platforms make their money charging fees to write new loans, and by taking a slice of the interest repayments. If purchasers on the primary market decline to a low level, and the performing loan book dwindles, then there are a couple of possible outcomes, both now precedented:
- FundingSecure and Lendy model: Platform makes a few desperate attempts to draw in more cash with new products and incentives, then gets forced into administration by the FCA (Lendy) or calls in administrators when that fails (FundingSecure). The so-called 'living will' arrangements are then thrown out the window as the Insolvency Act takes over.
- MoneyThing model: Platform makes a few desperate attempts to draw in more cash with new products and incentives, then realises this won't work and therefore cuts its overheads and puts its 'living will' arrangements into action. We don't yet know if this will avoid an insolvency, but the plan seems to be a graceful wind-down.

max...

Masonic and Cautious1 - thanks very much for your valuable input to this topic.

I have had a standard 'we acknowledge your complaint and promise etc, etc' reply but nothing like the explanation quoted from FC. In a very waffling way they sure seem determined to cover all their bases.

As posted above I fear the FOS will be of no help so we remain tied to FC and at their mercy.

Such is the risk of P2P.

All I can do now is sit and wait and draw out whatever small amount appears daily in the account.