In February, peer-to-peer lender Wellesley unveiled the first ever ISA compliant retail bond that invests in loans on its platform; it delivers 4%, tax free for a three year investment and 5.25% for five.
By offering returns that eclipse those achievable from
savings accounts, peer-to-peer or ‘lend-to-save’ companies have shaken up the
financial services industry and ISA eligibility will be a massive boon for the
sector.
Alternative
finance models will benefit greatly from tax-free acceptance and the Peer to
Peer Finance Association (P2PFA) is working on the detail of peer-to-peer ISA
eligibility.
However, Wellesley worked independently to deliver its
FCA-approved retail bond which, according to Graham Wellesley, allowed his
company to maintain competitive advantage. The bond is listed on the Irish
Stock Exchange whilst consultation continues.
When considering the likely conditions of including
peer-to-peer investment in an ISA, Wellesley noted that retail bonds were
already approved so set about creating a peer-to-peer bond in concert with
administrator EPM.
How Does it
Work?
Peer-to-peer lenders match lenders seeking a return on their
money with borrowers looking for a secured mortgage on property.
Wellesley sets the loan rate and the typical borrower –
usually a property investor or developer – seeks a loan for between six months
and two years.
In order to spread the risk of default, money from a single
lender, which attracts a fixed rate of return, is spread across a range of
borrowers.
The bond has a minimum subscription of £1,000 and is
available through a panel of brokers or directly via Wellesley with a minimum
investment of £10 but without tax free status.
Safe as Houses?
The peer-to-peer industry is now regulated by the Financial
Conduct Authority and there are strict checks on who money is lent to and how
much capital is set aside. Retail bonds are not covered by the Financial
Services Compensation Scheme.
Borrowers are credit checked by Wellesley to include their
property history and development plans although lenders do not know who they
are.
A legal charge is taken against the property, which means
that it can be sold if the borrower defaults and Wellesley also operates a
discretionary compensation fund that can extend to indemnifying holders of its
retail bond.
The bonds can only be traded as long as a buyer is
available.
If Wellesley were to go bust, bondholders and lenders are
treated equally – its loan book would be managed out and resulting funds
returned to both lenders and investors alike.
Wellesley is not a member of the P2PFA which was set up in
2011 by, inter alia, Funding Circle, Rate Setter and Zopa to require minimum
standards and reassure consumers that they are putting their money with a
reliable and self regulating business.
However, peer-to-peer is now under the remit of the
Financial Conduct Authority.
Wellesley was ahead of the pack although investors may wish
to see what products emerge once the P2PFA has concluded its work.
As with any investment it is wise to ensure that you are
comfortable with the nature of the product you are buying and the attendant risks.
Retail bonds and mini bonds have been popular with investors
in recent years, particularly with ISA eligibility although as Retail Bond
Expert warned back in June 2013 (Caveat
Emptor – Mr Bond Urges Caution When Purchasing 'Retail Bonds')
and the subsequent failure of the Secured Energy Bond having attracted £7.5
million reminds us that there is no such thing as a risk free investment.
Unlike ‘traditional’ retail bonds that are used to raise
finance to fund development, expansion or acquisition within the issuing
company, Wellesley is using the investment it attracts to add to the loans
available on its platform which may be considered to layer on additional risk.
Potential investors will need to weigh exposure to a
relatively new sector against the attraction of up to 5.25% annual returns.
One thing for sure is that peer-to-peer is a rapidly growing
sector and once the rules for ISA eligibility are decided there is sure to be
more activity – possibly in the form of retail bond launches.