Insight into FCA requirements

October 27th, 2016

Yesterday I received an email from a peer-to-peer lending platform concerning some changes to their lending model.  The platform states that these changes have been requested by the FCA in order to make their lending model compliant with the relevant legislation under Article 36H of the Regulated Activities Order 2014.

Some of the notable points are below:

  • Any security for loans will be taken through a trustee company who will hold security on trust for lenders.
  • In the event of a default by a borrower the platform will enforce any security, although lenders will no longer vote on such matters.
  • The platform will issue a Loan Facility Agreement to the borrower.  This agreement is written so that when the auction fills up the loan is novated (transferred) to the individual lenders for their loan parts.

The platform stated that their legal team had advised that it was against Article 36H to give lenders voting rights when the borrower has defaulted.  A few peer-to-peer platforms currently give lenders a vote, weighted on their loan amount, for further action when a borrower has defaulted.  Could this change disenfranchise more hands-on lenders?

A number of platforms, such as Wellesley & Co, fund the loans directly, then sell loan parts to lenders through their peer-to-peer platform, rather than the lenders funding the loan directly.  It will be interesting to see how these platforms adapt to the FCA requirements, or if they will be treated as a collective investment scheme.

Funding Empire suspends loans until FCA approval

October 27th, 2016
Funding Empire

Funding Empire has advised lenders that they will not be issuing any new loans until they have received full authorisation from the FCA which is expected in January 2017. Funding Empire have also been sold back to the founding team, who should a majority stake holding to Paratus AMC Limited in July 2015.

Should lenders be concerned with either development? At this stage lenders should not overly be concerned. It is likely there is a question mark over FCA authorisation otherwise the platform would not have suspended lending back in September, however companies are required to provision for running down the business in a controlled manner. The takeover of Funding Empire when new loans are not being issued possibly indicates that Paratus AMC Limited did not see a way forward to realise Funding Empire's value in its current form.

Here is the email sent to lenders yesterday evening:

Further to our last communication on 22/09/16, this is to let you know that we have now completed a management buyout, and that the founding team have acquired all shares held by Paratus AMC Limited and are once again the sole owners of Tally Marketplace Lending Limited (Tally), the company which operates the ‘Funding Empire’ platform.

Please rest assured that this will not at all impact the service you receive as a lender on the ‘Funding Empire’ platform and we will continue to service your current loans as we have always done. However, we will not be issuing any new loans until we know the outcome of our FCA application which is expected in January 2017. This is an internal decision that was made by the management team.

If you have any questions about this, please email me and I will endeavour to reply to your questions where possible.

Rebuildingsociety marketplace changes

October 24th, 2016
ReBuildingSociety are offering borrowers a 5% discount in return for additional security.

We've been working hard to bring you good quality borrowing applications for you to consider. Currently businesses that are eligible to borrow through, must have at least two years history, an average turnover of £50,000 a quarter and offer at least a personal guarantee as security. The average final rate paid by borrowers on our loan book is over 20% APR*, this rate is paid usually regardless of the security offered in support of the loan.

We've listened and as lenders you want better security and borrowers tell us they want lower rates.  So we're excited to launch 'loan discounts for security' e.g. A loan with a 1st charge over a property with a great LTV will receive a discount of up to 5% on their starting auction rate.

This incentivises borrowers to  put up any security they may have and hopefully gives lenders a better choice of loans.

 These marketplace changes are explained in detail on the blog.

The borrower can offer a wide variety of security to support their loan. We’ve assigned a nominal value to the different types of security, making some security ‘more valuable’ than others. For example a 1st charge on a property will be deemed a more valuable form of security than a company debenture, and as such they will be rewarded with a lower starting interest rate.

The more security added, the more the starting rate will be reduced* as the security added works in a cumulative way linked to the loan to value ratio.

The starting maximum rate will never be modified lower than 5% of the standard maximum rates, which are currently as follows:

  • A+ = Max rate 11%
  • A= Max rate 14%
  • B= Max rate 17%
  • C= Max rate 20%

Therefore a C rated loan will never have a maximum starting rate of less than 15%.

The security we can accept from a borrower is ranked in priority below.

  • 1st Charge Commercial Property
  • 1st Charge Non Residential Property
  • 2nd Charge Commercial Property
  • 2nd Charge Non Residential Property
  • 1st Charge Residential Property
  • Fixed Asset Debenture
  • 2nd Charge Residential Property
  • All Assets Fixed and Floating Debenture
  • Corporate Guarantee
  • Personal Guarantee Insurance

Therefore, depending on the LTV on the security, a 1st legal charge taken on a commercial property in support of a loan will be ranked higher than a loan with an All Assets Debenture and may be achieve a lower maximum loan rate. Similarly, based on the above a loan secured on a 1st charge non residential property with an exceptional LTV will not achieve a better rate than a loan secured on a 1st commercial charge that also has an exceptional LTV, unless the former is accompanied by additional security.

Zopa reduce rates again

October 24th, 2016

We reported back in September that following the Bank of England reduction in the base rate that Zopa would be dropping their rates by 0.2%.  Zopa have subsequently announed that they are reducing lending rates again by 0.2%.

Here is the full email sent to lenders:

Since September, we've seen the borrowing market become significantly more competitive, with at least 6 mainstream prime lenders further lowering their headline rates.

Zopa has always believed in a prudent approach to risk. It's against our principles to lower our criteria to attract riskier borrowers.

As a result, we've taken the decision to reduce our lending rates next week. From October 28th, we'll be targeting the following rates for lender portfolios:

  • 3.1% in Access
  • 3.9% in Classic
  • 6.3% in Plus

If you want to amend your lending settings, it's easy to do so at any time via My Zopa.

If you have any questions or concerns, please get in touch.

Crowdstacker Innovative Finance ISA

October 21st, 2016

Crowdstacker is one of the few peer-to-peer companies which has received full FCA authorisation, and as such is able to offer an Innovative Finance ISA.  They have published some data which suggests that 90% of customers opening an IF ISA are new to the platform.

Here is the full press release:

THE new Innovative Finance ISA (IFISA) is attracting large numbers of new investors to Peer to Peer investing, and potentially opening up access to billions of pounds of financing for UK SMEs, it is revealed today.

The data is taken from a six-month summary of investment information issued by one of the few Peer to Peer (P2P) platforms authorised to offer an IFISA, since it was introduced in April 2016.

It shows that for every ten IFISA investments made, nine come from investors who have not invested with the platform before.  The average amount invested using the IFISA is £7,700.  And just under one in five (18%) have chosen to realise the full tax benefits for their P2P investments by using their full annual allowance of £15,240 in the IFISA. 

“2015-16 Government data shows that £80 billion was invested via other types of ISA, typically in cash accounts or stocks and shares.  But the popularity of the IFISA suggests that within a few years a sizeable portion of this could be providing a direct boost to the UK economy by being invested straight into growing UK SMEs,” comments Karteek Patel, CEO of Crowdstacker, the platform which has provided the IFISA data.

The data also reveals some other interesting patterns:

  • The IFISA appeals to all age groups ranging from investors in their 20s through to those in retirement
  • Investment levels using the IFISA have remained steady in each month since launch
  • Interestingly nearly one in ten (7%) people have taken the opportunity to move money from other types of ISA investment.

To date only a handful of platforms have the full FCA authorisation and HMRC license required to offer the IFISA.  But according to the regular Nesta report the alternative finance industry already creates £3.2 billion investment annually. 

“IFISA money was, for example, a big contributor to one of our current raises, for BurningNight; an exciting, innovative and already very successful business which operates bars in City centres in the North and West of Britain,” explains Karteek.   “All the money we raise for businesses comes from everyday investors and roughly half was invested by people using our Innovative Finance ISA, helping us hit £1 million within just a couple of weeks of launch.

“But as other platforms are able to offer the IFISA and awareness about it grows further, we expect to see the success of this investment wrapper grow even more.  It could be a great investment for consumers who have a variety of choice about how their money is invested depending on the investment structure used by each platform.”

Crowdstacker’s IFISA is structured in a similar way to a stocks and shares ISA.  Investors can deposit some or all of their £15,240 annual ISA allowance and then choose specific businesses featured on the platform to lend to.  As with a stocks and shares ISA, these investments can be reviewed in depth with a thorough explanation of each business, its financial track record, and market opportunities to sustain and grow financial health.

“The Crowdstacker proposition is about helping investors make informed choices. We aim to do this by taking a bespoke approach to due diligence, meaning we can use tried and tested methods of interrogating a business’s financial health, which includes standard credit-checking right up to management interviews and forensic reviews of accounts,” continues Karteek.

“Loans are then structured in a way that aims to offer a good level of security to lenders, for example first charge over easily accessible assets valued at multiple times more than the actual loan.  And offering an interest rate which is sustainable for the business in its current sector climate, and attractive to investors who are looking for higher returns than those offered by other types of investment,” concludes Karteek.

Risk warning

Lending to businesses can be rewarding, but it involves a number of risks. If you lend through Crowdstacker, please be aware that you may lose all of what you lend and that there is currently no active secondary market for the underlying loan to be transferred if you need access to the capital. You should not lend more than you are prepared to lose. For more information consult our full risk warning Money lent is not insured or covered by the Financial Services Compensation Scheme. 

Crowdstacker Ltd. is authorised and regulated by the Financial Conduct Authority (frn. 648742).

Please note all data used in this release has been sourced from Crowdstacker’s analysis of investment in its own IFISA.