Why HMRC is right on peer to peer lending (and Polonius got what he deserved)

Dan Hyde writes in the Telegraph that HMRC are considering allowing peer group lending as a legitimate investment for an ISA.

Peer Group lending is the Betfair of debt. You lend your money through a portal such as ZOPA who categorise the level of risk on offer (and the commensurate reward). I mention ZOPA as it’s the one I’m familiar with but -as you can see from the picture- there are lots of alternatives. They’re all doing much the same.

You bet semi- blind, as you bet on horses unless you get your information from the horse’s mouth (like Dr Doolittle).

As an investment it is hard to justify; you are putting your trust in someone you don’t know to collect the interest from others you don’t know and you are hoping your money comes back to you- again relying on someone you don’t know to manage that.

As an act of charitable giving, it’s hard to justify, you aren’t giving anything, other than a slightly better deal to customers than they get from Wonga.

So peer to peer lending is a shadowy activity that sits half way between conventional bond investment and charitable giving – offers a relatively high reward 7% without really generating a return on investment to get excited about.

It’s the sort of thing you do if you don’t have an IFA and do have some spare cash and are a little bonkers.

And giving these guys a tax-break it is about as close as the Treasury will get to embracing the “Big Society” .If this is George Osbourne putting his money where David Cameron’s mouth is, I’m for it. Infact I do it and I’d recommend it to you , so long as we know the risks you are taking.

Let me explain what I mean by that with two stories- one about a friend who invested and lost – is not bitter as he knew the risk and understands where it went wrong- most of all he knew that he could smile if everything went wrong.

He lost a lot of money for me (nothing for him) by investing in Britannia Building Society PIBS, a slightly more grown-up version of what ZOPA does.

His point to me was that had he not considered how he would feel if he lost all his money, he wouldn’t have purchased the Permanent Income Bearing Shares and now that he looks like losing all the capital invested, he is going to grin and bear it. He took an each way bet- heads he won, tails he’d given to a worthy cause.

The reason he invested in the Britannia was that he felt the (then) building society was going to make good use of his money, which it didn’t being in a peer group that included other useless organisations such as Northern Rock and Bradford and Bingley which totally lost their marbles in the previous decade.

He, like me, reckoned that the mutual movement was fundamentally right. He still does, though he’s no time for the incompetence that brought it down. He reminded me we shouldn’t get confused ; a good idea can be badly executed and still be a good idea.

I had to explain to my 10 year old son, how his Bradford and Bingley Shares were worthless, he was extremely upset and blamed me for not selling them- I guess that when something goes wrong at one of these peer to peer lenders, as something went wrong with some PIBS and with the equity of some banks, a lot of people are going to get very angry.

5 years later we talked about this this summer, he’d just about calmed down enough to start working out risk/reward equations; he still blamed me for not seeing the crash coming but he’d worked out that he could live without the money (thanks to the alternative bank of Mum and Dad).

We just about got as far as understanding that a badly executed good idea is still a good idea!

As a society, we have ways of patching up and restoring the equilibrium. We’re pretty good at this because of the high levels of Governance that prevail throughout our financial system, our regulatory system and the system of local and national government which deals with crisis before they become unmanageable.

Not so the state of Kentucky in the USA which is my Exhibit B. The State took large amounts of money from its staff and told them it would pay their pension and health bills later. Instead of investing teh money, it used it to pay the States bills ,keeping taxes down. Unlike what happened in the UK finanancial Services sector, this was not spotted, not righted and the fraud is still going on today.

Watch this video if you dare

You’ll discover what can happen if you do not take the tough choices and take a blind eye to debt. Kentucky Pensions are deep frying! The main scheme is 28% funded and has received only half the recommended contributions from the state in the past ten years. It has been pillaged by the Financial Services and its officers appear to have been at least complicit in the mismanagement of the funds.

The money which has been lent by the members of the scheme will not be repaid to those members as pensioners. When the money runs out (in about 3 years) there will be no pensions. My mate who is speaking estimates that a cheque is needed from Washington of between 50 and 60 billion dollars- to plug the deficits. Another badly executed good idea though it’s hard to understand that when your pension’s under threat.

Many would argue that the answer is to walk away from the entire financial system and heed the advice of an old man in Shakespeare’s Hamlet

Neither a borrower nor a lender be;

For loan oft loses both itself and friend,

And borrowing dulls the edge of husbandry

The words come from Shakespeare’s greatest bore-Polonius- spoken to his equally boring son Laertes.

In this country, not only do we tolerate money lending- we encourage it- we love credit unions which are allowed to operate outside the normal banking regulations – so at commercial advantage to the licensed deposit takers such as the banks. We are even thinking of legitimising peer to peer lending by allowing it through ISAs.

Most of us, from time to time, are in need of a cash injection, if only a short-term overdraft or a payday loan.

So extreme is this need that organisations like Wonga can justify extortionate interest rates simply by telling us what they are! (Telling someone you are going to stick a knife into your belly does not justify the act though I suspect it gives people the chance to run away!).

The question is not whether we have systems of finance that ensure cash for people, but how that system works- so that when it goes wrong we do not get “Kentucky Fried Pensions”.

ZOPA and WONGA stand at the poles of money-lending- ZOPA the politically acceptable and WONGA the darling of the unbridled capitalist.

To reduce dependency on WONGA, we need to support ZOPA, even if it has the potential to be a poorly executed good idea. So far it has worked and peer to peer lending is generally working well.

Polonius would have closed down ZOPA and he’d have cited Brittania PIBS and the Kentucky Fried Pension Scheme as reasons for doing so.

But I’m not having that- we have patched and mended through the little crisis’ and we’ve ridden the global storm of 2008. We haven’t buried our heads in the sand as those in Kentucky have these past twenty years.

We have a wonderfully diverse financial system, which for all its set backs, can still innovate and produce organisations like ZOPA. That HMRC are prepared to endorse them with our tax-money,is fine by me. Might get my chequebook out again and send them some Wonga.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in actuaries, advice gap, pensions, wonga, workplace pensions, zopa. Bookmark the permalink.

4 Responses to Why HMRC is right on peer to peer lending (and Polonius got what he deserved)

  1. Con Keating says:

    The question as I see it with peer to peer lending is whether it is trading or investment for the source of funds. I would also love to know what advantage you believe that credit unions have relative to banks. Like building societies they are member mutual organisations and have accounts which provide the capital that in the case of building societies was supplied as PIBs.In fact, one with which I am associated recently bailed out another which was failing with no depositors incurring any losses and no recourse to the deposit protection scheme.

    And this is from a reader who personally held and lost on equity, PIBs and sub debt in most recent failures from Northern Rock on – but I have no complaints as the risks were fairly described.

    • henry tapper says:

      You were very much in my mind when writing this.

      I answer your question as I see it (others may see peer to peer as trading). I see peer to peer as a means of providing funds to a portfolio of borrowers who I don’t know but who I trust are “good for my money” by the organiser. So I’m investing in the ZOPA business model and getting a return based on their performance.

      Again, I speak without much expertise but with gut feeling;- credit unions are to banking what beftair is to betting, a more effecient way of doing things that relies heavily on trust rather than regulation. (this isn’t fair on Betfair or credit unions which I believe are generally well regulated).

  2. georgeemsden says:

    a:hover { color: red; } a { text-decoration: none; color: #0088cc; } a.primaryactionlink:link, a.primaryactionlink:visited { background-color: #2585B2; color: #fff; } a.primaryactionlink:hover, a.primaryactionlink:active { background-color: #11729E; color: #fff; } /* @media only screen and (max-device-width: 480px) { .post { min-width: 700px; } } */ body { font-family: arial; font-size: 0.8em; } .post, .comment { background-color: white; line-height: 1.4em; } Henry Please give URL for the video TIA George

  3. ZOPA are to be applauded for their social awareness, and should be allowed to package their investment products in ways that consumers and financial professionals are familiar with.
    What sort of society would we be if we reserved tax friendly investments for a group of product / facilitator combos, many of whom have a track record of high charges and low ethics?

    Identify the companies that will operate with low charges and sensible (disclosed) ethics, and bring them within sensible regulations that will encourage (maybe insist) that they keep their moral values as their business model grows.

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