An important update regarding retail investment on Assetz Capital

15th December 2022

Over the last year we have finally seen sharp and substantial rises in bank interest rates after well over ten years of them languishing at near zero levels. This has led to the Access Accounts and our other products becoming less competitive than they were versus rates offered for some bank savings products. We recently raised the rates on the Access Accounts and initially saw healthy net inflows of capital. However, after continued bank interest rate rises, retail investors were withdrawing capital on a net weekly basis.

In our last e-mail, we said that we would consider ways to provide our investors with immediate access to the higher interest rates provided by our more recent lending activity. Whilst these more recently originated, higher interest rate loans (often 7% or more) are available today in the Manual Lending Account, we know that manually selecting loans for investment is not for everyone and have not seen high enough levels of demand for those loans.

We also looked at the potential for a new higher interest automated account, or an easy auto-invest process applied to the Manual Lending Account. We also polled our investors to add this feedback to our thinking on the retail investment part of our business. Unfortunately, we did not see substantial demand for a new higher interest rate account as a result of that poll. We also reviewed the wider market and saw that there were no substantial levels of net new investment taking place elsewhere in the peer-to-peer space.

As a result, we have reluctantly made the decision to close the retail platform and conduct a solvent run-off of the retail loan book. Assetz Capital will become a 100% institutionally funded lender from now onwards in order to continue achieving its aim of making finance accessible to borrowers and providing growing and valuable support to the house building and care industries. This is not much of a change in reality as around 80% of all lending has been institutionally funded since early 2020, since the commencement of the pandemic.

Alternatives to the solvent run off were considered, but were assessed to be potentially of much greater detriment to Lenders as outlined below: 

1. Enacting the Platform Wind Down Arrangements

(Link - https://www.assetzcapital.co.uk/wind-down-arrangements): 

We consider this would almost certainly have been of greater detriment to all investors and borrowers as, unlike solvent run off of the platform, whereby in-flight development loans would continue to be funded to completion, under a wind-down further funding would not be made to complete the funding of in-flight development loans, as detailed on the website the Wind-Down Plan web page. This, we believe could result in possibly significant losses being incurred by investors due to failed development projects.

2. Appointing Administrators to Perform an Insolvent Run Off

This would have required an insolvent situation and if that criteria was reached then it would likely be very determinant to the loan book and the interests of all Lenders. We would expect an Administrator's fees, costs and expenses of administering any insolvent run off would likely be much higher than the Lender Fee introduced, based on anecdotal evidence from other Peer to Peer platform loan book insolvent run off situations.

Also, the services provided by the current experience team at Assetz Capital, including the management of the loan book, loan recoveries and provision of the Investor Platform could be significantly impaired/reduced if this were to be performed by Administrators.

3. Offering the Loan Book for Sale to an Institutional Funder

Assetz Capital acts as agent – it does not own the loan units. Those loan parts are owned by, in some cases, many 1,000s of Lenders making individual “Micro-Loans” to Borrowers.  

There is also no guarantee that any institution would want to buy the loans on the platform and even if they did they would be highly unlikely to want to buy the loans at full value to Lenders’ loan holdings as that is typically the nature of loan book sales.  

Given the majority of the loan book was incepted while interest rates were lower, these loans are now less attractive to potential purchasers against the background of increased interest rates. As such the loan book would likely have to be heavily discounted in order to attract a purchaser at a suitable investment yield for them. 

So even if it were possible to do, which is doubtful, it could result in a reduction in capital holdings, which would likely be of far greater detriment to Lenders than the Lender Fee introduced in the solvent run off.  

That said, we will monitor the viability of this option going forward if the situation with the markets improves.

Unfortunately, it is not possible for us to continue to operate in the retail space when our offering is not sufficiently attractive, in this sudden high interest rate environment, to attract sufficient investment to allow us to continue to originate loans for the retail platform economically. It is with regret that we have had to make the decision to perform a solvent run-off of the retail book and return cash to investors as quickly as is practical.

We believe that the solvent run off of the Lender Platform, financially supported by the introduction of the Lender Fee to compensate for lost new lending income, is the most viable way to achieve the best overall outcome for all Lenders.

We have notified the Financial Conduct Authority of our intentions. Please note that Assetz Capital will continue to be authorised and regulated by the Financial Conduct Authority during the run-off.

We were originally founded to support retail access to fair returns over a period of relatively poor returns elsewhere. We have always operated on a “retail first” basis and have repeatedly said that we would always do that whilst investors wanted what we produced. With almost no demand today from retail investors for the products that we can offer in the face of higher interest rates and the wider economic conditions at present, we must move on in order to effectively support the continued growth of the small housebuilder and to give SME businesses access to capital in the form of property secured lending.

It has been really rewarding to have had our retail investors earn £170m+ gross interest over the last 10 years and we are glad to have played a part in helping people through that low-income period.

Our other business aims remain just as strong, even stronger given larger expected funding lines into 2023.

For our retail investors there will be many questions about what does this change mean for you?

In summary:

The platform will continue to operate for existing investors and you will be able to access information regarding your account and withdraw uninvested funds from your cash account in much the same way as you do at present.
We will continue to monitor and manage your loans, collect interest and return capital over time as loans redeem (subject to the other information provided in this message).
We will continue to pursue recoveries on your behalf on loans which require this, including any loans which fall into recoveries in the future, with the aim of achieving the best possible outcomes for lenders under the circumstances.
We remain committed to providing investors with an appropriate level of service throughout the run-off period.

However, please note that:

No new money should be deposited on the platform and any uninvested cash in your cash account should be withdrawn as quickly as possible – this cash is not interest-bearing and could be serving you better elsewhere.
Spare cash in any investment accounts will be moved out to your cash account automatically, subject to the detail below.
As loans are repaid or interest is received the cash will be moved to your cash account for withdrawal, subject to the detail on each investment account below and specifically the Access Accounts will continue to reinvest all loan redemptions and spare cash into the funding of ongoing development facilities for a period, as described below.
No new ISAs should be set up. Customers with an existing ISA should take care to preserve the tax status of their ISA by arranging a transfer out rather than withdrawing funds to their bank account as withdrawal may cause the loss of the ISA tax-free status.
All buy and sell orders on the Manual Lending Account have been deleted and no trading is now possible.
The Access Accounts have ceased to trade and a detailed explanation is below. The recently enabled withdrawal queue has been removed from the Access Accounts and all investors will receive pro-rata capital per loan redemption to their cash account once that process starts.
Capital will be returned to you as quickly as possible and interest will be provided in the usual way.
A lender fee will be charged again, to cover costs of the running off of the loan book without the benefit of any new lending income from retail funds.

Each investment account also has its own detailed explanation below and should be read in conjunction with the information above, and the FAQs published below.

Assetz Capital remains regulated and will continue to manage any complaints in the same way as it does at present. Our Complaints page may be found here.

Access Accounts

As advised on 28/11/2022, the Access Accounts are in Non-Normal Market Conditions as defined here.

We recently gated withdrawals from the Access Accounts in order to maintain capital levels for a period of time. Not doing so could have meant that existing loans within the accounts that had future funding commitments, such as development loans with monthly draw down requirements, may not have been in a position to be funded and that could have led to significant losses for lenders if in-flight developments were to fail. The accounts have to be able to service future funding requirements of investors’ existing development loans as a development can lose substantial value if funding ceases mid-development. This is something we must avoid as investors, as well as borrowers, may see material losses as a result. In order to avoid that situation, we took the difficult decision to cease withdrawals from the Access Accounts to ensure that all existing development loans will be fully funded to completion. These changes to withdrawals are envisaged and described in our terms and conditions and the published account operation rules.

We had been operating a queue system for withdrawals since we gated the accounts. Now that we have made the decision today to cease retail investment as a platform, withdrawal requests from the Access Accounts will no longer be processed and withdrawals will commence again automatically once all existing development loans are fully funded. We expect that process to commence in a number of months’ time and cannot provide more detailed guidance on timing today due to the nature of that lending. Withdrawals to your cash account will be automatic and pro-rata to your holding in each individual loan that redeems, once withdrawals commence again.

For those of you with holdings within the 30 Day Access Account and the 90 Day Access Account, notice is served as of today and once the notice period expires you will be invested within the Quick Access Account ready for automatic withdrawal. The target rate of the QAA will be 4% pa. We do not expect withdrawals to commence before these notice periods expire so everybody would be expected to be treated in the same way.

We expect Access Account investors will be able to withdraw capital from redemptions starting in approximately six months’ time based on present estimates and will keep investors informed. Interest will continue to be paid to your cash account monthly.

MLA and other Older Investment Accounts

No new loans will be provided within the manual lending account and so further investment will not be possible. The MLA marketplace will also cease to operate as of today meaning you cannot trade out of or into other loans. Instead, once loans redeem or repay capital partly or pay interest the cash will be transferred to your cash account for withdrawal.

We expect MLA investors will be able to withdraw capital from this month onwards. Interest will be received from day to day as it does at present.

Lender Fees

Lender Fee Update 16th June 2023

The ceasing of new retail lending meant a significant drop in our income and meant that we had overheads that were larger than was supported by ongoing income. Since we closed the platform to new investment on the 15th of December 2022 we have achieved a substantial reduction in the costs associated with that part of our business in order to keep the lender fee to the lowest possible level. We are fully committed to keeping the lender fee as low as possible, as well as reducing the fee down to a notional or zero level as soon as is possible and work continues to further reduce our costs from the current reduced level.

As we confirmed in May, the cost reductions have taken longer to implement than wished for and these higher costs mean that the Lender Fee plan needs to also be adapted to ensure that we can cover the costs (such as notice periods and redundancy payments) of the retail business reduction and facilitate a smooth loan book run-off process over the coming years.

We have reduced the team size in the past to reflect the much-reduced operational size of the business following the closing to new Retail loan investment. There is now a further reduction of the team size presently underway. This is both possible and necessary as the business is now focusing on origination of much larger loans and that has substantial efficiencies, but also means we no longer have a business need for such a large team that was built up over many years and much of the new activity is unregulated business too. We have also now reduced the size of the board of directors and also implemented voluntary pay reductions for the board to further contribute to these savings.

The plan we had outlined in the last update was as follows:

Through to the end of December 2023 - 2.9% pa of performing loans
January 2024 onward to approximately the end of 2027 - 0.9% pa of performing loans

(This equates to an average fee level of 2.90% for the first 12 months and a 5-year average fee of 1.3% pa)

Having considered the short term costs remaining, but also the potential for growing lending through institutions to make a substantial impact on group resources over coming years, we now propose the following amendment:

For the period of June-September 2023 – 6.25% pa of performing loans
October 2023 to December 2024 - 0.9% pa of performing loans
Post December 2024 no fee expected

(This equates to an average fee level of 3.52% for the first 12 months and a now much lower 5-year average fee of 0.88% pa)

We know that this is not good for the short-term fee cost, but it allows us to deal with the final cost reductions quickly, build important financial strength for the business to carry out long term servicing of the loan book and also reduces the overall average fee for the expected 5 year term of the loan book. It also, very importantly, improves the stability of the Retail Platform to deliver solid loan management services and recovery services for everyone’s continuing investment performance.

Previous Lender Fee Update 17th May 2023

The ceasing of new retail lending means a significant drop in our income for the retail part of the business. Since we closed the platform to new investment on the 15th of December 2022 we have achieved a reduction in the costs associated with that part of our business in order to keep the lender fee to the lowest possible level and that work continues.

Unfortunately, the cost reductions have taken longer to implement than wished for and these extended higher costs mean that the Lender Fee plan needs to also be adapted to ensure we can cover costs of the retail business reduction and facilitate a smooth run-off process over the coming years. We are fully committed to keeping the lender fee as low as possible, but this does mean the average fee over 5 years goes from 1.15% pa to 1.3% pa. We will continue to press down on costs as much as possible to help keep the lender fee as low as possible too.

The following Lender Fees were estimated to be applied to cover the anticipated costs of adjusting the business to a run-off footing, then managing the loan book through run off and returning capital to investors.

Through to end of June 2023 - 2.9% pa of performing loans
July to December 2023 - 1.4% pa of performing loans
January 2024 onward - 0.9% pa of performing loans

(This equates to an average fee level of 2.15% for the first 12 months and a 5 year effective fee of 1.15% pa)

This is now estimated to be as follows:

Through to the end of December 2023 - 2.9% pa of performing loans
January 2024 onward - 0.9% pa of performing loans

(This equates to an average fee level of 2.90% for the first 12 months and a 5-year effective fee of 1.3% pa)

These are estimated fees and are subject to review over time.

Please note, however that due to timing discrepancies from some borrowers on their precise repayment dates there as been a lower effective fee actually collected to date. The fee actually paid in the last two months has been around 2.4% not the 2.9% theoretical fee. The Access Accounts have also paid just below target rates at around 3.9%, in April 2023.

Other Matters

As a direct result of ceasing new investment across the platform (in any account), the following changes will be made:

The online Q&A on individual loans will cease (but the support desk will continue as well as regular portfolio updates)
Detailed and high frequency lender updates on individual loans and detailed stage drawdown credit reports on individual loans will cease. Less frequent and briefer event driven loan updates will be provided.
The circumstances in which a lender vote is issued will be reduced
Capital value calculations will cease as loan trading has ceased

Other simplifications may follow in due course in order to reasonably control costs which might otherwise have to be passed on as part of a lender fee.

This page includes all of the initial information and will be updated over time during the run-off.

If you have any questions please contact our Investor Team via Live Chat or email enquiries@assetzcapital.co.uk

FAQs

Questions on Retail Loan Investments in the Run Off Period:

(Last updated 22nd March 2023)

What does Run Off mean?

Run Off means that the retail loan investment book will no longer have new loan investments added to it. Instead, the loan book will pay interest and capital back to investors over time, until there are no loans left to repay.

When did the Run Off of Retail Investments Start?

The retail investment platform part of Assetz Capital entered run-off on the 15th of December 2022. The accounts closed to new investment and the secondary marketplace for trading loan holdings was closed. This was done to simplify operations, allow focus on servicing the loan book and collecting in the capital and interest and to help lower the costs of running off the loan book. Continuing trading in loans would have added a very substantial cost and complexity to running off the loan book.

Why did Retail Investments enter Run Off?

Please refer to our blog post above about our withdrawal from retail peer-to-peer investment market.

Will new investment be allowed on the platform?

The platform closed to new business on the 15/12/2022. No new investment is now allowed.

Will the way I get paid interest change?

The way interest is paid is not changing. If you are an Access Account investor you will continue to receive an interest payment on the 1st of each month that aims to pay the target rate of interest. The target rate of interest will be paid if there are sufficient funds available after the deduction of the Lender Fee – you can read more about the lender fee in FAQ entry.

How does the Lender Fee work?

If you are invested in the Manual Lending Account or one of our past closed investment accounts then you will receive interest as usual on a day-to-day basis as each borrower interest payment is made, and after the Lender Fee is deducted.

What happened to the Access Account withdrawal queue?

Whilst we were reviewing the restarting of retail investment in due course, we enabled the withdrawal queue to allow people to choose to exit the Access Accounts by selling their loan investments to another investor. Now that a decision has been made to exit the retail investment market permanently, and secondary market trading has ceased, the queue has been removed in preparation for the pro-rata return of capital from loans that repay in the future to each investor who has investment in the Access Accounts.

When and how can I access my money in the Access Accounts?

Once future funding commitments have been fulfilled on a proportion of existing loans in the Access Accounts, each investor in the accounts will begin to receive pro-rata distributions of redemption payments made by borrowers on loans and this will be paid into their cash accounts. We estimate that distribution will commence at the earliest July, but this is subject to review. If you would like more information about why we need to keep a cash reserve, please refer to the section below.

Why do you need to keep a cash reserve in the Access Accounts if no new lending is happening?

The accounts are closed to new business, but there are some existing development loans that every Access Accounts investor is invested in whereby further advances have been committed to so that the project can complete. To minimise the risk to investors with these types of loans we release the funds only when needed for the next phase of development, and only after confirming that such funding is appropriate.

It is in the interest of both investors and borrowers that these projects are funded to completion, as the value of a partially completed project is likely to be lower than amount spent to get it to that stage. If we were to cease to fund a partially drawn loan, then it is likely that any recovered funds would be lower than those invested in the project. Instead, we will recycle redemptions within the Access Accounts to complete that funding and hold appropriate cash balances until this is known to be completed.

Once future funding commitments can be fully satisfied by the cash buffer, excess funds from principal repayments on loans will be distributed to all investors on a pro-rata basis and the Access Accounts will start to reduce in size.

Will Access Account target interest rates change?

Notice is served on each of the 30 Day Access Account and 90 Day access Account from the 15th December 2022 so that lenders join the Quick Access Account in preparation for when funds are ready to be withdrawn once that process commences.

The Access Account target interest rates will change in the following way:

From 1st January 2023 the target rate of the Quick Access Account will be 4% pa.
F rom 1st February 2023, 30 Day Access Account holders will be merged into the Quick Access Account.
From 1st April 2023, 90 Day Access Account holders will be merged into the Quick Access Account.

Please note that these remain target rates and actual interest rates earned may differ.

When will retail investment accounts fully close?

Accounts will remain open until all the loans contained within them have been repaid or all recovery actions have been completed.

How will the provision fund operate during the run off?

It is intended that the Provision Funds continue to operate in accordance with the published PF policy during the run-off. You can learn more about how the provision funds work here

Why did Assetz Capital close the Retail Aftermarket?

The Secondary Marketplace (Aftermarket) for trading loan holdings was closed in order to simplify operations, allow focus on servicing the loan book and collecting in the capital and interest and to help lower the costs of running off the loan book. Continuing to facilitate trading in loans would have added a very substantial cost and complexity burden to the Run Off of the loan book. FCA requirements on pricing loans and credit review of loans, so as to allow them to remain tradable, would also have added to this cost and complexity burden.

Extra costs include but are not limited to… maintenance of aftermarket software systems, hardware required to support the operation of the platform and associated staffing costs.

The Primary basis of all investment on the platform was that Investors would potentially be funding loans for term. The Aftermarket was an extra, Secondary, offering never guaranteed to provide an early exit from loans even when in operation.

Questions on the Lender Fee:

(Last updated 16th June 2023)

What is the Lender Fee?

As at December 2022...

During this period of run off, we have taken the decision that we must now apply a Lender Fee, permitted in the Terms and Conditions of the platform. The rate that is to apply initially, and is expected to apply in the future is as follows:

Through to end of June 2023 - 2.9% pa of performing loans
July to December 2023 - 1.4% pa of performing loans
January 2024 onward - 0.9% pa of performing loans

(This equates to an average fee level of 2.15% for the first 12 months and a 5-year effective fee of 1.15% pa)

These are estimated fees and are subject to review over time.

This was updated in May 2023 and is now estimated to be as follows:

Through to the end of December 2023 - 2.9% pa of performing loans
January 2024 onward - 0.9% pa of performing loans

(This equates to an average fee level of 2.90% for the first 12 months and a 5-year effective fee of 1.3% pa)

These are estimated fees and are subject to review over time.

This has subsequently been updated in June 2023 and now estimated to be as follows:

For the period of June-September 2023 – 6.25% pa of performing loans
October 2023 to December 2024 - 0.9% pa of performing loans
Post December 2024 no fee expected

(This equates to an average fee level of 3.52% for the first 12 months and a now much lower 5-year average fee of 0.88% pa)

These are estimated fees and are subject to review over time.

Why do you need to charge a Lender Fee?

The ceasing of new retail lending means that we no longer have any loan origination income as a part of our income for the retail part of the business. In response to this, and to ensure that the loan book run off process and required team is properly funded, we will look to reduce overheads and simplify our processes to reasonably control costs. However, alongside that it is also necessary to charge a lender fee to ensure the run off of the retail investment loan book is funded to the appropriate service levels. Initially, costs of preparing for the run off are expected to be higher and that is why the fee is higher at the beginning but over time costs fall and the fee will fall as well. We will seek to minimise the fee whilst ensuring that the run off process is fully funded for the work required within a continuing regulatory environment, but also to seek the best outcome for investors. This can only be achieved with a strong and experienced team.

How does the Lender Fee work?

The lender fee will be calculated throughout each month based on your invested funds and the interest actually received on your loans. The lender fee will be deducted as a reduction to the actual interest that you receive. The fee applies to the loans that you hold that pay interest in the prior month. The fee applied will cover loans under management from the 15th of December 2022 and it will start to accrue from that point but will only be deducted from any interest payments that you receive from January 2023 onwards, at the earliest.

There is no lender fee applied to loans in default or recovery (as those loans would not be expected to be receiving interest from the borrower). There is also no fee applied to cash holdings.

Where a borrower misses a payment and you do not receive your interest payment that month, you will not pay fees on those loans in that month. Those fees will accrue along with your interest and only fall due to be paid once you receive your interest payment for that loan, provided there is a lender fee still in place in that month.

How will you take the fee?

For Access Accounts, lender fees are calculated on a daily basis over the course of a month and paid on the first of the following month. 

For investors in the Access Accounts, the fee will be taken from the Manual Lending Account rate of the loan and the amount left will be used to seek to pay the target interest rate firstly, and any excess would be used as usual to top up the Provision Fund. If the amount of interest left net of the fee is less than the target interest rate, then that lower rate will be paid. So it is possible over time that Access Account lenders may see a reduction in their actual interest rates paid versus target rates. 

For Manual Lending Account investors, any interest payments due to be paid to a lender whilst they have an outstanding fee balance from the first of each month would be used to pay the fee first, with remaining interest paid to the lender. This is also how other discontinued accounts will operate like the Property Secured Account etc.

If you’re investing across both standard and IFISA accounts they will be treated separately, therefore if you accrue a fee in your IFISA account, it won’t be taken from interest in your standard account or vice versa.

Is the fee tax-deductible?

We’re unable to offer tax advice, however these fees will reduce the interest that you are paid. The reduced interest that you are paid will be shown on your tax statement. We recommend that you speak to a professional tax adviser if you are unsure.

How can I see what fees I'm being charged?

Lenders using the Manual Lending Account or discontinued accounts will be able to see their total outstanding fee, which is the amount of fees that have fallen due, but have not yet been paid. This will decrease over the month as you receive interest payments and the fees are taken. By default, this will be switched off in your dashboard, but you can easily make this statistic visible in your dashboard settings.

Does the fee apply to all investors?

Yes, all investors operating under our Terms and Conditions will be charged this fee during this run-off period.

How long do I need to pay these fees?

Whilst the ability for Assetz Capital to charge the fee, as stated in our Terms and Conditions, is not time constrained, we hope and expect to reduce it over time. We’re unable to confirm how long the fee will be applied but it is likely that some sort of fee will be necessary until the loan book is completely run off.

How did Assetz Capital arrive at the percentages and front loading of the Lender Fee?

The derivation of the fee quantum and calculations used are commercially sensitive and, as such, will not be made public.

That said, if the Assetz Capital Board had not been able to demonstrate a viable financial model for the run off of the Retail Loan Book they would have been obliged, under FCA regulations, to trigger the Wind Down plan which would involve the inclusion of 3rd parties and additional costs as well as the potential cessation of funding of inflight Development Loans. This was something that we feel would have had greater detriment to Investors.

New loan origination income, previously used to subsidise the costs of the operation of the Retail Platform stopped fully on 15/12/2022, but operational overhead has continued at historic levels and will do so in the short term during H1 2023. This is due to the costs of consultations, reviews of the business model, restructuring and staff and 3rd party provider contractual notice periods.

The income needed to maintain the Retail Run Off needs to be front loaded, hence the lender Fee being higher initially and tapering over time. This is because income produced by the loan book will diminish over time, as loans repay, but sufficient funds need to be available to cover the expected run off period.

The Lender Fee expected to be generated over the first year is less than previously derived from new loan origination fees but equally, there are expected to be reduced costs. We expect the Lender Fee generated to be sufficient to safely support the operation of the Retail Platform, on its lower cost basis, and in the absence of loan origination income.

If you have any questions please contact our Investor Team via Live Chat or email enquiries@assetzcapital.co.uk.

- December 15, 2022

Back to News Stories