Weekly Roundup, 27th December 2021

Weekly Roundup 211227

We begin today’s Weekly Roundup with robo advisers.

Wealthsimple

Robo-adviser Wealthsimple, which has 2M clients and £8.8 bn of AUM globally, is quitting the UK after four and a half years to focus on its home market in Canada, where it was founded in 2014.

Wealthsimple said in an email message:

After careful consideration, we’ve decided to no longer provide investment services in the UK. As a result, we will be transferring all eligible accounts to Moneyfarm.

16K UK clients and £272M of AUM – just 3% of the global total – will be transferred to rival robo Moneyfarm (which has 68,000 UK clients with £2 bn in assets).

  • UK staff will lose their jobs after the migration.

Robos Investec and Moola have previously shut up shop and Nutmeg was bought by JP Morgan.

  • Scalable Capital also withdrew from the UK’s saturated market.

Caroline Murphree, European CEO of Wealthsimple said:

As we shift our focus to our Canadian business for the time being, finding a partner for our UK clients that shared our belief in making investing affordable and accessible was our top priority. It’s been a privilege to serve our UK clients, and we’re confident that their investments will continue to be in good hands with Moneyfarm.

Giovanni Dapra, CEO of Moneyfarm said:

This is exciting news for us and clear evidence of our commitment to the UK market. We have a lot in common with Wealthsimple UK as both firms provide a simple, cost-effective and transparent service. We are confident that customers who migrate will find our service the best on the market and an ideal solution for them.

Moneyfarm charges upwards of 0.35% pa, and around 0.9% on £50K.

  • Wealthsimple charged 0.7% pa below £100K and 0.5% above (plus fund fees).

Transfers will be in cash (since Moneyfarm runs its own portfolios), but SIPP and ISA status will be reserved.


Robos have been a terrible disappointment, offering simple portfolios that a DIY investor can easily replicate at a lower cost.

Zopa

Zopa, the OG of P2P lending in the UK, has announced that it is pulling out of retail investing.

  • The news was announced by CEO Jaidev Janardan in a blog post:

We deliberated several options for how to close the P2P side of our business in a way that delivers the best outcome for our customers. After careful consideration, we have decided that the best way forward is the sale of all retail investor portfolios at full value.

This will lock in the interest earned by investors so far and ensure the timely return of their money. To make this as smooth as possible, Zopa Bank will be buying the P2P loan portfolio and P2P customers will receive their investment balances back by the end of January.

In an interview with AltFI, he said:

We just don’t see a way of actually commercially viable continuing to offer this product while giving the right returns to investors. It was a very difficult decision for us. It’s a business that we’re proud of, in fact, we invented it, we were the first ever!

We are very proud of the performance of the business in terms of what we have delivered to investors – which has averaged 5 per cent annually – through two  different economic crises, the financial recession, as well as the pandemic.

Zopa has 60K investor accounts – including some IF-ISAs – which will be closed by 31st January 2022.

  • Accounts will be locked until Zopa repurchases the loans and repays investors, a process that started in December and end in January.
See also:  Weekly Roundup, 30th July 2019

ISAs can be transferred out once they have been converted to cash.

  • Borrowers should be unaffected in the short term, and the interest paid to lenders won’t be affected either (at least until the loan is bought back and the interest ends).

Zopa had been closed to new investors for a while, and reinvestment of payments on existing loans has been taking more than two months, so this move is not entirely unexpected.

  • Ratesetter closed its investor accounts earlier this year.

I was one of the original lenders to Zopa, back in 2005.

  • I really liked the idea of P2P lending at first, but the rates were always trending down along with the credit quality of the borrowers.

I sold out during the 2008 crash – expecting problems that actually didn’t turn up right away – and closed my account several years later.

Zopa blames the damage done to customer trust in P2P investments “by a small number of businesses [eg. Lendy] whose approach led to material losses for retail investors” for the decision.

  • It also cites changing regulation which has raised operational costs.

But to me, there were two fatal flaws in the original idea:

  1. With interest rates constantly declining, the rewards on offer weren’t worth the risk of lending to strangers.1
  2. There wasn’t a deep enough pool of lenders or quality borrowers, so when the P2P startups wanted to scale up, they had to look for institutional funding and corporate borrowers.

Zopa itself is well on the way to turning itself into just another bank (with savings accounts and credit cards as well as utility switching.

  • The bank will take on the P2P borrowers’ loans.

Zopa gained its banking licence 18 months ago and remains unprofitable after 16 years of trading.

FSCS protection

The FCA has published a discussion paper on removing elements of the Financial Services Compensation Scheme, so as to reduce its financial impact.

  • Payouts are expected to reach £373M in 2022/23.

One suggestion is excluding investment advice, which would make IFAs even less attractive (unless they used their current levies to fund an independent scheme).

  • Small firms would be most affected, and investors might prefer to use safer banks and insurance firms.

A second idea was to exclude “high-risk” investment products, perhaps those which require self-certification as a high net worth or sophisticated investor.

  • Crypto would also be excluded, along with “unlisted securities” (which might mean EIS/SEIS, but perhaps not VCTs).
  • It might also prove tricky to define the boundaries around products.

A third suggestion was to exclude high net worth individuals entirely.

Laughably, the FCA logic is that:

A high-net-worth individual might be expected to have the means to absorb losses or take their own private action against a failed firm.

And:

A sophisticated individual would likely have a greater understanding of the risks that they were undertaking.

Obviously, I’m not a fan of these potential changes – I’d like to see more products opened up to retail rather than have the insurance scheme removed – but we’ll have to wait and see.

  • The consultation closes in March 2022.
See also:  Weekly Roundup, 1st May 2018
Crypto

The Economist reported that lobbying by crypto firms is going ballistic.

  • The regulatory environment in the US is changing, and companies want to influence where the rules end up.

Reams of regulations are potentially in play. One set involves stopping crypto assets from being used to launder money. A second area, overseen by lawmakers,
concerns the taxation of crypto investments. A third set of rules involves financial regulation: protecting consumers from fraud, reducing systemic risk and ensuring fair competition.  

Taxation options include treating crypto as property (subject to capital gains) or as currency (which could lead to no tax, or possibly to taxation of unrealised gains).

  • In the US, consumer protection revolves around whether crypto assets are securities (lots of disclosure and paperwork) or commodities (where the focus is on avoiding market manipulation). Stablecoins are likely to be an area of particular interest.

The Economist has some concerns:

Crypto-capitalists’ visions for regulation are unlikely to materialise in their entirety. But the risk is that they lead to puny rules.


A second article used the rise of stablecoins to look back at private money in history.

Together the dozens of stablecoins in existence, which include Dai, Tether and USD coin, have a market capitalisation of close to $150bn. As they have exploded in value, their similarity to banks has begun to exercise regulators.

They are vulnerable to collapse.

Like banks, they in effect take deposits and promise immediate redemption; if many holders want to withdraw their money at the same time, and the issuer holds risky assets, then the digital coins could be in danger of collapsing.

The US didn’t have a national currency until 1863, and until then, banks issued their own notes backed by silver and gold.

Dollars issued by unfamiliar banks a long way from home traded at a discount, due to the lack of information about the financial health of their issuers. For the issuing bank, having notes circulate far away was an advantage, since the holders were very unlikely to turn up to redeem them.

The temptation was for banks to issue notes without backing. The comparison with Tether is obvious:

Tether, the largest single stablecoin issuer, with $74bn in tokens in circulation, was fined $41m by the Commodity Futures Trading Commission in October for misrepresenting itself as fully backed by assets between 2016 and 2019. 

The difference today is that nobody needs to hold stablecoins – government-backed money is readily available.

  • There’s also the example of Scotland, whose private money system worked well from 1716 to 1844.

In contrast, America’s federal structure hindered the expansion of trusted institutions.

The Economist wants more regulation of today’s stablecoins:

America’s President’s Working Group on Financial Markets recommended treating stablecoin issuers like deposit-taking institutions. Such regulation would offer them a prize: accounts at the Federal Reserve, which would allow them to settle payments directly, rather than piggybacking on commercial banks.


I have no quick links today.

  • Until next time.
  1. Zopa claims an average rate over the 16 years of 5% pa, which sounds decent, but from memory, I was getting less than that from top-quality lenders way back in 2008 []

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.

You may also like...

1 Response

  1. Al Cam says:

    Re: FSCS Protection discussion paper – words fail me!

Leave a Reply

Your email address will not be published. Required fields are marked *

Weekly Roundup, 27th December 2021

by Mike Rawson time to read: 5 min