December CPD Newsbrief — Investment principles and risk
Can ISAs accommodate peer-to-peer lending?
The Treasury has issued a consultation paper on including peer-to-peer loans asqualifying ISA investments.
Largely lost in all the pension changes announced in this year’s Budget were several proposedtweaks to ISAs, which were to be re-christened as NISAs with effect from 1 July. The increasedcontribution limit and greater cash flexibility are now available, but bringing peer-to-peer (P2P)loans into the NISA framework has moved at a much slower pace.
In October the Treasury issued an open consultation on the subject, which helped to explainthe apparent delay. Curiously the document never uses the term NISA. What the consultationdoes show is that bringing in P2P lending is not just a simple case of adding it to the cash ISAcategory.
The problems start with the definition of a P2P loan. The Treasury takes the easy and logicaloption of building on the FCA definition that a P2P lender is a firm (aka platform) which is“operating an electronic system … to facilitate persons … becoming the lender and borrowerunder an …agreement.” That definition triggers several points:
- The loan is between two parties and is not in any way a deposit with the P2P provider.Thus the £85,000 Financial Services Compensation Scheme protection which applies tocash ISAs does not cover P2P ISA investments. The Treasury says this rules out includingP2P loans in the cash component of an ISA. Some P2P platforms offer insurance againstborrower default, but this does not affect this issue.
- The loan is normally legally and beneficially owned by the investor/lender, who enters intoa loan agreement directly with the borrower. The P2P firm operating the platform is not aparty to the agreement, merely a facilitator of it. Here lies another problem, because thecurrent ISA rules require that all non-cash assets held within ISAs are managed by the ISAmanager. This means that the ISA manager must have title to the assets, although it can bevia a nominee or jointly with the investor. As the consultation paper dryly remarks, “It is notyet clear to what extent existing ISA managers will wish to become involved in offering toacquire peer-to-peer loans on behalf of [or jointly with] ISA investors.” The Treasury suggeststhat the solution could be to structure the P2P loan so that the investor is beneficial owner,but the ISA manager (or their nominee) has legal ownership.
- Current ISA rules require that when an investor requests a full non-cash ISA transfer toanother ISA manager, the transfer must be completed within 30 days. If the receiving ISAmanager is unable or unwilling to hold the existing assets, or the investor has requested aswitch from a stocks and shares ISA to a cash ISA, the assets may need to be liquidatedand the resultant cash transferred. While some P2P operators do facilitate a secondarymarket, there is usually no market maker, so a sale/liquidation may not be possible withinthe 30-day timescale.
The Treasury’s preferred solution is to have P2P lending as a third ISA component,which seems a useful approach.
All change in Japan?
Early on 31 October, Japan’s behemoth Government Pension Investment Fund revealeda newly found, and seemingly voracious, appetite for risk.
The ¥127 trillion ($1.1 trillion) fund will expand its equity holdings from 24% to 50% at theexpense of government bonds and raise its stock of foreign assets by around 15%.
AA few hours later the Bank of Japan announced that it would be adding a further ¥10−20 trillionto its asset purchase programme, bringing the total to ¥80 trillion each year. Furthermore, itwill roll the scope of the programme into longer-term government bonds and increase its haulof ETFs and REITs.
On 18 November, Japan’s Prime Minister, Shinzo Abe, unexpectedly announced a snapelection mid-way through his four-year term. What caused this sudden turn?
When Shinzo Abe came to power he committed to raising VAT to 10%. He was to do socautiously, scheduling a stepped increase over two years. Today, it seems that caution waswell placed − a few months from the first rise (from 5% to 8%), a great deal of the optimismevident in 2013 has dissipated. Core inflation stands at 1%, consumer spending has collapsedand real wages are still in decline.
The second step in tax was not scheduled until next year but it was due to be ratified byparliament in the next few weeks. Given the prominent role played by tax changes in the‘three arrows’ economic strategy, a failure to implement it in full would have almost certainlyundermined what little confidence remained.
With little choice but to postpone further tax reforms, Mr Abe will put together a newpackage and seek a mandate from the people of Japan.
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