First ISA Eligible Retail Bond Based on Peer-to-Peer Lending
This year 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 three years 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.
‘peer-to-peer or ‘lend-to-save’ companies have shaken up the financial services industry ‘
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.
Whilst 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 – normally seeks a loan for between six months and two years.
In order to spread the risk of default, money from a 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 peer-to-peer industry is now regulated by the Financial Conduct Authority’
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 on what is known as a ‘pari-passu’ basis – 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 Mr Bond 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 of 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.