Published by Clive Waller on 05 July 2019 in Opinion

P2P – advisers and the FCA

Most advisers will agree that diversification is the bedrock of good investment strategy – always has been. However, whilst that is true, I will say something that will make some react with scorn: “It really is different now.”

Well, I’m sorry if you don’t like it, but there it is.

In days of yore, indeed for most of my long working life, investors used bonds as a counter to equity, the defensive bit, and cash as a reserve for short-term needs or taking advantage of a correction. Remember Markowitz? What has changed? You know the answer. Short bonds provide the retail investor with a nil or even negative return whilst long bonds look expensive with only one way to go. Moreover, a lack of liquidity in the market makes many serious players very nervous.

Why is it different? QE is one reason; regulation forcing banks and insurers to hold bonds for regulatory rather than investment reasons is another. Moreover, the market is far better priced today than at any previous time due to instant communications. When I started in the City “Hong Kong” Tony made a living arbitraging between Honkers and the UK. He wouldn’t have a job today. At the end of the last century, LTCM tried to make a fortune arbitraging tiny discrepancies, then went bust and damn near took Wall Street with it!

Today, stocks and bonds move together.

Following the 2007/8 crash, interests rates have been rock bottom –typically 0.1% or even as low as 0.01% on deposits.

So, sorry guys, it is different now.

Now, on a totally different, planet …….

Up until 15/20 years ago, retail investment and saving was dominated by life insurers. I know only too well. My last proper job was as a life co sales director. Do I know where the bodies are buried? Of course, I buried many of them myself!

There were the flexidowment and flexipension policies, the G-Plan (really), the ZIP (Zurich Investment Plan) and hundreds more. The vast majority of longer term, real asset, investment was in products wrapped in marketing tosh and oozing with hidden charges (do you remember capital and accumulation units). Then along came Ian Taylor – from an office in “Ackney (Hackney to the posher reader).

Integrafin was the obscure Aussie tech business behind Transact. As a result of the wrap platform, life cos became almost irrelevant in retail investment. Their surviving businesses are platforms – where they are imitating Transact more and more, at a colossal multiple of the build cost – and asset managers. Most of the players of 20 years ago no longer transact life business. In short, Transact not only changed our world; it changed virtually every investors’ world – much for the better.

Now, here’s the point!

Would today’s regulator, allow an obscure Aussie tech business to hold the savings of the UK’s retail investors as well as millions of pensioners. The answer must be, no bloody way!

So, let me go back to the beginning of this rant. As an investor, I want a near cash alternative to bonds. Peer-to-peer appear to offer me that, albeit with higher risk. P2P is genuinely innovative, using banking algorithms to match lender with borrower, whilst cutting out the huge cost of the banks’ infrastructure (and wage bill). I lend to the bank unwillingly at 0.1%, they will lend it back via a credit card at circa 25%! My P2Ps offer me around 3.5% to 4.5% today and charge the borrower a good rate.

ZOPA has been trading since 2005. It sailed through the 2007/8 crash when regulated banks either went bust or, arguably, should have. No billions of our money was required to bail out ZOPA, unlike the ‘too big to fail’ high street banks (yes, the same ones who flogged you PPI under the regulator’s nose).

I invested a few grand in ZOPA and Funding Circle for 5 years before investing my full ISA allowance for the last 2 years – going some way to balancing my portfolio which is still equity biased by historic measures.

As with all new disruptive products, there are successes and failures – we have seen this with platforms and robos recently. The regulator wants a risk free world, but prefers equities to cash. This is impossible and naïve. They seem to regulate through the rear view mirror. Albeit inevitable, bailing out bust banks was a betrayal of the market. Investor protection is the same. The FSCS is another betrayal.  They all enable bad businesses to trade because someone else (usually you and me) is providing a guarantee and paying the bill. I know it suits us as investors as well, but I trust you get my point. The worst outcome is the handicap such protection gives new products that don’t have it i.e. P2P. This pretty much precludes advisers recommending them.

Progress depends on old models fading and (some) new models replacing them. In the 70s and 80s, much investor money went into firms such as Henderson, Framlington, Jupiter and so on. These new fangled unit trust outfits didn’t offer protection or, in most cases, any track record. They sold because they offered lower cost diversification and administrative ease, unlike the stockbrokers they replaced. That’s how progress works.

Regulation has prevented 99% (a guess) of advisers even considering P2P. Now, the regulator has thrown a hand grenade into the market. This was utterly irresponsible behavior. There are much better ways of searching out weak players, which are much better than creating doubt and lack of confidence in strong ones.

Now explain this to me. I will be limited to investing 10% of my portfolio in P2P (unlike Bitcoin, where I can throw away the lot), unless I get a sign off from a regulated adviser (who is probably less informed than me on the relevant issues here). How on earth does the regulator, or anyone else for that matter, know how big my portfolio is? Do we now have a Stasi or KGB equivalent I don’t know about? Moreover, if I the market falls 25% (not unusual) and my portfolio drops proportionately, do I have to sell my P2P holdings to maintain the 10% figure?

I should add that I can get round this by proving I’m rich (sic) or professional, but I only know this because I have read the FCA paper.

PS 19/14 is lengthy and, for me unclear. Perhaps readers understand it better than I!

Am I cross? You wanna believe, I’m bloody fuming!

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