Crowdfunding And Peer-To-Peer For SIPP And SSAS
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Crowdfunding platforms can offer cash and SIPP savers a genuine opportunity to significantly improve returns, but beware of some misleading information
Crowdfunding Platforms Face Scrutiny From The Financial Conduct Authority (FCA)
FCA Issues Warning To Crowdfunders
As Crowdproperty and UK Bond Network are added to our list of crowdfunding and peer-to-peer platforms that accept SIPP money, the Financial Conduct Authority (FCA) details concerns about certain practices.
Since crowdfunding platforms became ‘light touch’ regulated in April 2014, the FCA, which has been watching intently as the crowdfunding market grows massively in popularity, has just published its latest summary.
The Crowdfunding Platforms Report Is A ‘Must Read’
Reports published by the Financial Conduct Authority aren’t normally that riveting. But if you’ve ever invested in crowdfunding or peer-to-peer, or you’re thinking about it, this 12 page summary is a must read. It’s clearly presented, with lots of information and insights into this growing and often profitable area of loan-based and investment-based crowdfunding.
In 2014, £1.74 billion was invested in alternative finance. The vast majority of it, totalling £1.3 billion, was committed to loan-based investment, or peer-to-peer lending as it’s often called. It’s become a popular way for savers to earn a higher interest rate on their cash, and increasingly, their SIPP fund.
There are now more than 50 crowdfunding websites operating in the UK, but the FCA's latest report on crowdfunding platforms warns investors to be careful before using them.
Business lending and investing tends to produce the higher returns than lending to individuals. It’s also the favoured option for SIPP money, being much easier to comply with HMRC’s pension rules. So with that in mind, here are five things to consider before lending or investing your cash or SIPP money on business-focused crowdfunding platforms.
5 Things To Consider With Crowdfunding Platforms
1. Carry Out Thorough Due Diligence On The Business
Relying on the platform for business information is just the starting point. You should go online to research whatever you can about the business and the key people who control it. As you’re effectively backing these people to deliver their projections, dig deep and find out all you can about them.
In its report, the FCA highlights some worrying cases where crowdfunding platforms are deleting negative comments from some forums. It could leave you exposed to an increased risk of backing the wrong businesses.
2. Understand The Advantages And The Disadvantages
The FCA has noted an alarming trend across a number of crowdfunding platforms where the benefits of investing are disproportionately emphasised compared with the relevant risks.
Of course we all want to earn a higher return than the paltry rates on offer from bank and building society deposit accounts. But in many cases, the higher returns potentially available from crowdfunding platforms aren’t being properly balanced against the fact that business lending and investment can and does go wrong, putting at risk both your income and your capital. These risks aren’t a feature of deposit accounts that are covered by the Financial Services Compensation Scheme, protecting the first £85,000 per authorised bank or building society. There's no such protection on crowdfunding platforms.
3. You Need To Compare Like With Like
The FCA is not happy that some crowdfunding platforms compare the low interest rates on offer from deposit accounts with the much higher rates that have been historically earned from loan-based crowdfunding.
Leaving aside the fact that past performance is no guide to future performance, it’s simply wrong to put the two together, for they are very different beasts, with a very different risk profile. It’s a case of the risk/reward ratio: the higher the reward you hope to achieve, it’s accepted wisdom you generally have to expose your money to a higher degree of risk.
4. Your Shares May Not Be The Same As Others
The FCA has identified that in some investment-based crowdfunding, your shareholding could be diluted if the company issues a load of new shares for its biggest backers. These are typically venture capitalists that specialise in investing in start-up businesses, and often want a big slice of the action in return for their money.
As with all forms of investment, you need to read the smallprint in detail. For otherwise, your small shareholding could end up becoming even smaller. And if this happens, arguably, you’ll only have yourself to blame if you don’t receive as much profit as you were expecting, even if the business ultimately sells out for a fortune.
5. Mini-Bonds Are Risky And Can’t Be Sold Easily
Some crowdfunding investments are set up as Mini-Bonds. The company borrowing the money pays an interest rate, usually twice a year, returning the capital in full at the end of the agreed term. They follow the same rules as Retail Bonds listed on a London Stock Exchange with one vital difference. Retail Bonds can be traded on a secondary market, but Mini-Bonds cannot.
If you need your money back in a hurry, you could face a problem. That said, some crowdfunding platforms have created secondary markets and this is likely to become more formalised across the sector in the next few years.
A Final Word On Crowdfunding Platforms
Christopher Woolard, the FCA’s director of strategy and competition, in commenting on the extraordinary growth in crowdfunding and peer-to-peer lending, said: “Our aim, with the rules we put in place in April, is to ensure that the growth we’re seeing comes with appropriate investor protection in place.”
The big problem, however, is that the FCA doesn’t plan to carry out a full review of the crowdfunding market and regulatory framework until 2016. So if you’re not careful, that’s plenty of time for you to suffer significant financial loses.
That’s no excuse not to consider this area. For thousands of us are making consistent returns of 10 per cent or more, lending and investing our hard earned money to businesses on crowdfunding platforms.
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Crowdfunding And Peer-To-Peer Risk Warning
When a platform has been assessed and approved by a SIPP or SSAS operator, this does not imply that any loan or investment opportunity is endorsed in any way. A SIPP or SSAS operator's due diligence review is limited to ensuring the processes and procedures of the platform are in line with both FCA and HMRC principles. It's entirely your responsibility for carrying out your own due diligence on any loan or investment opportunity before agreeing to lend or invest your pension money on a platform. As a SIPP or SSAS operator will continually review platforms from a regulatory perspective, it's possible for a platform to become 'unapproved' if something changes.
With peer-to-peer lending, your capital is at risk if you lend to individuals and businesses. You may lose some or all of the capital lent if the borrower defaults and is unable to meet its liabilities. Historic loan default rates are not necessarily indicative of future default rates. In addition, lending is an illiquid investment, which means you may not be able to access the capital you lend for the duration of the loan period, even if the platform offers a secondary market. Investing in any business involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Crowdfunding is generally targeted at investors who are sufficiently sophisticated to understand the risks and make their own investment decisions, based on their knowledge, experience and financial capacity. Neither crowdfunding nor peer-to-peer lending is covered by the Financial Services Compensation Scheme. The tax treatment of your investment is dependent on your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of crowdfunding investment or peer-to-peer lending, you should consult a suitably qualified independent financial adviser.