Tag: ISA

Bankers’ Conduct: Yet another reason why SMEs and savers are avoiding the Banks

Author
Angus Dent
Date

Potential misconduct by bankers has been included in the banks’ compulsory stress checks carried out by the European Banking Authority. Good news? Well, partly. Their hand has been forced by the stark reality that banks see litigation costs as a result of foul play by their employees as part and parcel of operating cost. This isn’t exactly a morsel, either; poor conduct accounts for 7.5% of the average bank’s operating cost, according to The Group of Thirty, an international body of financiers and academics charged with examining the consequences of private and public sector issues.

Holding back capital to account for misconduct is not the same as trying to stamp out misconduct. The rather feeble ruling lacks the teeth to punish the banks for continuing the attitude of short-termism that provided the stimulus for the financial crisis in 2008: bankers can still get away with borrowing short-term, lending long-term and apply the leverage by borrowing from each other. The bonus culture that was so vehemently criticised is still prevalent. Those who wished for prison sentences, confiscation of funds and other sanctions for the culprits of the financial crisis won’t be celebrating this new ruling. The cost of covering for this misconduct is likely to be keenly felt by ordinary savers and SMEs who find access to finance increasingly difficult to access.

The “conduct” ruling comes in light of the new stress tests that global financial regulators hope will force banks to hold sufficient capital in their reserves to absorb an economic downturn. The figure bandied around in the US press is a staggering $1.19 trillion of debt that can be written off when the banks fail. This will take away billions of pounds, dollars and euros, all of which could be lent out through directly matching lenders with borrowers. The fall guys? UK SMEs with restricted access to finance, and savers stuck with the miserable gruel of savings accounts and ISAs. The Solution? P2P Lending matches up lenders and borrowers, cuts out the banks and middle men and allows SMEs to benefit from the wisdom of a crowd. Ultimately it is a huge fillip for the global economy: surely the band of global regulators should spend less time trying to shore up a broken model that puts social cohesion and economic solidity at risk, and more time focussing on producing fully regulated P2P lending platforms.

The momentum is already shifting away from the banks: including the conduct of bankers in the stress tests is not the answer for the regulatory authorities. Investing in P2P will ultimately benefit SMEs, the lifeblood of any developed economy, and savers who can earn decent interest on their savings by matching directly with borrowers through secure, regulated platforms.

The Significance of the New “Innovative Finance ISA” for Investors

Author
Angus Dent
Date

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Amongst the clamour of the backlashers responding to George Osborne’s latest attempt to reduce the UK’s budget deficit, there was some welcome news for those investing in P2P Lending and for the P2P industry. The new Innovative Finance ISA will allow current and future investors to earn interest from P2P loans free of tax from April 2016.

Many see this as the government effectively rubber-stamping the legitimacy of the industry by offering conventional investors another reputable channel they can invest through. This will incentivise investors who may be put off by the risk involved in a Stocks and Shares ISA, but aim to earn more interest than they would receive from a cash ISA. Osborne hopes that thousands of new jobs will be created by helping SMEs to grow, which will subsequently help to haul down a budget deficit that he has already reduced from 10.2% of GDP to 5%.

Osborne ISA

Around 20 million adults in the UK have an ISA; if a fraction of those investors chose to invest their money in an Innovative Finance ISA it would create a huge supply of new lenders available to SMEs. However, the new law will be introduced after the start of the next tax year; it may take until 2017 for alternative finance platforms to on board the wave of new investors encouraged by the Innovative Finance ISA. Moreover, investors will need to be aware that they need to be proactive with their money. Alternative finance companies are unlikely to be able to pay interest on a lump sum as is done by banks handling a cash ISA. Instead, investors will need to gradually lend to a range of companies throughout the lifespan of the ISA. If not, the alternative finance industry will struggle to fund large one off interest payments when demand for borrowing is spread out over the entire year.

The complex nomenclature that differentiates debt and equity lending has been taken into account with the “Innovative Finance” umbrella term; it successfully covers the various alternative finance spheres as well as allowing any investors in future niche P2P lending spin-offs to reap the benefits of a tax free ISA. We will endeavour to decode some more of the complex terminology used in the world of alternative finance in another blog.

The Case for Diversification across the Crowdfunding Risk-Reward Spectrum

Author
Angus Dent
Date

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Ten years on from the creation of the world’s first peer-to-peer lending platform, the alternative finance sector’s stupendous rate of growth has rendered it unrecognisable. This has been a decade in which cumulative funding by UK platforms has risen from under £50,000 to almost £3.4 billion, driven by a proliferation in the number of platforms in existence as well as in the scope of their models and products.

The factors that have catalysed the development of alternative finance and allowed the sector to shake off its “cottage industry” credentials are manifold and too broad to discuss in this particular post. Symptomatic of its increasing importance, though, is the level of interest with which national authorities have begun to approach it; the FCA stepped in with a raft of legislation in April 2014 to begin the process of regulating the sector, whilst the government continues to postulate the benefits of including P2P lending within the ISA framework. Both of these activities serve to validate the growth that has taken place and to further legitimise alternative finance as a new investable asset class.

Indeed, it is hoped that such high-level involvement will encourage those who have been watching the space’s growth from afar, such as the IFA community, who have so far trodden a cautious line, to begin to engage more readily with the sector for the benefit of themselves and their clients. Underpinning the reticence that can still be found in some quarters, though, is the question of how alternative finance should be approached as an asset class and included within an investment portfolio. After all, the growth that has taken place has engendered much greater complexity, with the numerous products now on offer carrying different rates of risk and return.

In my opinion, the answer is to look for diversification. Diversification is a central tenet of Modern Portfolio Theory and its benefits have been frequently extolled since the 1950s. In recent years, however, the concept has come under some scrutiny. Active fund managers who heavily diversify their funds are often lambasted as “closet-indexers” – those whose funds simply replicate the performance of their benchmarks, but at a greater cost to the consumer due to their hefty fees. As cheap passive investment vehicles such as ETFs become more common, it is argued that this approach is unsustainable and active managers should maintain a smaller, “conviction based” portfolio to achieve outperformance. Yet whilst the world’s foremost investor, Warren Buffet, conforms to this viewpoint, casting over-diversification by professionals as mere “protection against ignorance,” he acknowledges that the concept retains its relevance for those without his powers of prescience, namely individual investors. And with the majority of investors gaining exposure to alternative finance without professionally managed vehicles, diversification remains important.

Strategies for achieving diversification are potentially numerous, and could include spreading investments across different platforms, geographies, products and risk-grades. A well-constructed portfolio that adopts such strategies should grant good exposure to this exciting sector, whilst simultaneously mitigating the risk to the investor. For example, an investor might look to higher grade business loans, higher grade consumer loans, and loans secured against property as the low-risk bedrock of their portfolio. The next risk band might contain medium-grade business loans as well as loans facilitated by foreign platforms, which whilst achieving geographic distribution could also bring in the risk of currency fluctuation. Finally, the highest risk section of such a portfolio would likely be composed of equity crowdfunding propositions, which carry the greatest potential rewards of all but also a significant risk of failure.

Whilst lowering risk for the non-professional investor is perhaps the most obvious benefit of diversifying a portfolio in this way, it also serves to allocate investors’ capital in a way that is equitable and consistent with the aims of a sector that developed to bolster investment to individuals and undercapitalised businesses. With reference to businesses specifically, it has been estimated that there will be a funding shortfall for SMEs of £84-191 billion between 2012 and 2016 as traditional sources of finance remain stifled. Spreading investment across the spectrum of opportunities, investing in the debt and equity of diverse businesses at different phases in their growth cycles, which are united by their need for a cash injection, spreads the benefits of this new mode of funding. It is best for investor security, and best for the economy.