There are good reasons SIPPs should not accept P2P investments
SIPP providers are caught between HMRC and the FCA when it comes to Peer to Peer lending, says Martin Tilley, director of Technical Services, Dentons Pension Management
In the current economic cycle of low interest rates, Peer to Peer (P2P) lending has had considerable appeal, so it is no surprise that we have seen some significant increases in the market. P2P is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers.
With interest rates expected to remain low for the foreseeable future, further growth can be expected and this will be further fuelled by the launch of the Innovative Finance ISA from April this year into which P2P investments will be permitted.
Consumers may also be reassured to know that the Financial Conduct Authority (FCA) have granted interim permissions for P2P providers to operate and are now working on full authorisations for operating firms, although very few of these will be in place for the 6 April.
Some large fund managers including Neil Woodford are supporting large P2P trusts so the momentum for the asset continues to grow.
There are however now over 100 P2P offerings ranging from long established firms with track records of low default rates to more recently set up new offerings. There will no doubt soon be comparison tables established and surveys but for now how does anyone go about selecting a “good” P2P offering?
The FCA issued a consultation on 2 February requesting opinions on the role advisers should or could play in the sector. The regulator suggests that it intends to make advisers with investment permissions able to advise on the P2P market, however it will not ask independent advisers who it usually expects to advise on all relevant products in the market to consider P2P arrangements. Further clarification is expected to be released this month.
Accepting P2P on SIPPs
In the interim however, we as a SIPP operator receive frequent requests from both direct consumer’s and financial advisers for acceptance of selected P2P investments within our own SIPP. In all but one or two we have had to turn these down, which often confuses the questioner. Below I will attempt to set out the reason for our approach which we believe is echoed almost unanimously across the SIPP market.
There are two main concerns which stem from HMRC practice and FCA’s requirements that a SIPP operator should be aware of where the funds of their clients are invested.
Dealing with the HMRC issue first, this revolves around the holding of assets that can lead to tax charges being raised both on the client and within the pension scheme as well. HMRC require that funds held within a SIPP are not lent back either directly or indirectly to a party connected to the SIPP member. With the vast majority of P2P lenders the end party to whom invested funds are lent is unknown and anonymous. Without some form of platform filter (necessary for those cases that have been accepted) it is therefore impossible for the SIPP operator to know with certainty that funds which it invests cannot be indirectly lent back to a connected party. Should such an event occur, tax charges would arise on both the member and the pension scheme totaling a minimum of 55% of the amount lent.
Whilst the chance of this indirect lending is remote it exists and a SIPP operator ignoring the possibility is opening themselves up to having permitted an investment which has caused a tax charge. This is hardly a charge that any operator would like to defend.
HMRC clarity needed
Some commentators suggest that HMRC should recognise this remote possibility and provide clarity that where funds are invested and are to be lent anonymously, usually over a wide range of lenders, that it should be acknowledged that any such indirect lending could not have been purposefully orchestrated and a concession to any tax charge should be made. Whilst this would be helpful there is no sign of such a concession as yet.
A further issue results from platforms which permit investments direct to individuals rather than through corporate structures. If a SIPP lends funds directly to an individual and those funds are used to acquire taxable property (such as residential property or plant and machinery) the SIPP is deemed to have an interest in the taxable property. This is irrespective of any connection to the SIPP member and will also result in a tax charge.
Turning now to the regulator, the FCA issued clear guidance following its thematic review of SIPP operators in 2014, which requires them to review and understand fully any investment into which they permit investment of client funds. This would include having a good idea of where client funds were ultimately invested. Unless the P2P lending platform can provide clear and categorical assurances of the processes they operate, the anonymity of some would render this impossible. Lastly, the basic principles of regulation require a SIPP operator to act in the best interests of its clients. Would permitting an investment that could lead to a tax charge arising on the member or the SIPP itself meet that requirement?