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Growth Street ISA: Is It P2P, What Are The Risks & Does It Beat The Classic Account?

By Neil Faulkner, 4thWay Head of Research on 7th August, 2019 | Read more by this author

There's a lot for lenders to learn about the Growth Street ISA, launched in 2019. Take a dive into all the important aspects right here, and find out how it compares to the Growth Street's ordinary lending account.

The Growth Street ISA is covered by the reserve fund

Just ticking off a simple point first, which is that Growth Street's ISA is covered by its reserve fund.

Also covered by the wind-down scheme

As you will learn a little further down the ISA is set up somewhat differently to Growth Street's regular P2P lending account, but it is still covered by the funded wind-down scheme, which is in place to make it easy for loans to continue to be repaid to lenders if Growth Street* itself was to go out of business.

You earn money even when your money isn't being lent out

The Growth Street ISA pays you 5.8%, which is fixed for 12 months. You are expected to earn this even if Growth Street doesn't currently have all your money in the ISA on loan.

Growth Street has minimised the risks of doing that

…Yet paying ISA lenders interest regardless of whether there are enough loans creates inherent risks – which might impact either ISA lenders or lenders using Growth Street's ordinary lending account.

Take this hypothetical scenario: imagine if a lot of lenders pile in with lots of cash – which Growth Street has to pay back with interest – and then high-quality borrowers start to dry up?

In that case, Growth Street would still be committed to keep paying 5.8%, so it will either have to take on riskier borrowers to fill up on loans, or it will leave some of your money unlent.

In the latter case, it might then have to either take the financial hit itself by paying the additional interest out of its own pocket. Or it might have to use other measures, such as reducing the amount it is paying into the bad-debt reserve fund on a regular basis.

Thankfully, the risk here should be very limited by the fact that these bonds are for just one year. That is a highly sensible precaution, which means just a little bit of short-term pain at the worst.

In addition, Growth Street has recently received £17.5 million in investment, which could potentially be used to save the P2P lending site from a damaged reputation.

The ordinary P2P lending account is prioritised

Surprisingly, lenders in the ordinary lending accounts are prioritised to get their money lent out first. Growth Street said that they will not try to prop up ISA interest payments by diverting loans to ISA lenders. ISA lenders get their fixed interest and ordinary lenders get to lend first.

You earn higher rates – for a fee

In return for the higher rates (the ordinary lending account currently pays [GrowthStreetInterestRate]), you need to pay back 1% to Growth Street if you decide to leave within 12 months.

P2P lending IFISA

The Growth Street ISA is peer-to-peer lending, but that was more complicated to figure out for us than usual.

In a legal and technical sense, it works a little differently to other peer-to-peer lending accounts and it's even different to Growth Street's own regular P2P lending account.

What's the big deal about being “P2P”?

It isn't always straightforward to establish if a lending account is truly P2P lending.

4thWay's definition of peer-to-peer lending is that it is direct lending between borrowers and lenders, or there is otherwise a legal structure in place that provides the same level of reassurance for lenders.

The benefit of the P2P structure is best explained by telling you about the alternative.

The alternative to peer-to-peer lending is to lend to one business, and then they lend on to other lending businesses. In this case, you're not lending directly to the end borrower. If that business you're lending to goes under, there's a risk that any repayments from end borrowers will be split between different parties.

In that case, individual lenders will get some of their money back, but if the closed lending business owes Barclays £10 million, that bank will also have a claim on some of the money you have lent, as and when it's repaid by the end borrowers. Any other businesses that were owed money by the lending business will also have a claim on it.

A peer-to-peer setup, therefore, lowers the risks.

How to turn lending into “P2P”

The main way to turn lending into P2P is simply for the P2P lending site to arrange legal contracts directly between end borrowers and the individual lenders. But it's not the only way.

One of the other ways that peer-to-peer lending is carried out is through companies called special purpose vehicles or “SPVs”.

To that end, many P2P lending websites set up a brand new SPV for every new loan that is arranged. That loan is put into the SPV, rather than passing through the P2P lending site's own company and accounts.

Each SPV is a company that is otherwise an empty vessel with no debts or operations, and it doesn't buy or sell anything. It can't rack up a load of debts if it doesn't do anything.

Assuming all the legals are in order, the repayments on the loan held in the SPV are protected from being considered part of any bankruptcy proceedings against the P2P website. That's in the event the P2P site itself goes bust.

This is a very common, and perfectly legal, use of SPVs – long before the P2P lending industry was born. It's why they're often called bankruptcy-remote entities.

Over time, SPVs are likely to be proven to be a good way to ensure lending is “P2P”.

What about the Growth Street ISA?

Growth Street's ISA introduces to peer-to-peer lending a much older use of SPVs: Growth Street puts lots of loans inside the same SPV. Not an SPV for every loan.

Confusing sentence alert: according to Growth Street, its ISA is set up to put all ISA lending within a mini-bond that sits within an SPV.

So far so unclear? I'll break it down for you:

Unusually for peer-to-peer, all the ISA lending goes into the one SPV company, rather than each loan getting its own SPV.
Lenders are actually lending to the SPV through a mini-bond.
A mini-bond is basically just a loan to the SPV.

But, while you are lending to a company that is an SPV, its only purpose is to contain the loans and not conduct other operations. These loans are protected from a Growth Street bankruptcy.

For people opening the Growth Street ISA, it's therefore closely equivalent to having actual contracts with all the end borrowers, and it's therefore peer-to-peer lending.

Growth Street has confirmed that banks or other companies that are owed money by Growth Street can't make a claim on the money you are lending, in the event that it goes out of business.

Is the Growth Street ISA better than the ordinary lending account?

I'd say there's not too much in it. The risk might be a tick higher for the Growth Street ISA and unlike the ordinary account there are exit fees. But for that you get a little more interest.

In addition, if you're not using up the generous personal savings allowance, it will save you in taxes on the money you earn. Read more in How Is Peer-To-Peer Lending Taxed? and The IFISA (P2P ISA) Guide.

Simple Q&A

We had some more simple questions for Growth Street, so here's the brief Q&A:

Will you allow partial transfers into the IFISA?

Yes.

Will you allow partial transfers out of the IFISA?

No. Each investment within a single bond issue will have to be fully redeemed.

Partial transfers out can help if you want to set up lots of IFISAs in the same year, which you're actually allowed to do – if you do it right. Read how in How To Lend Across Multiple IFISAs In One Year!

Is there a minimum opening deposit or minimum contribution?

There is no minimum opening deposit amount.

What is the minimum lending amount?

The minimum investment in a single bond issue is £10. Any investment amount must be in £1 intervals.

What is the minimum transfer-in amount (from other cash, share or IF ISAs)?

There is no transfer-in minimum amount.

What is the maximum transfer-in amount?

There is no maximum transfer-in amount.

Will investors with ordinary accounts automatically be able to divert repayments and interest to their IFISAs?

They will not be able to do this. Investors will have to wait until currently lent out funds are repaid, then they will be able to withdraw these from their regular account and deposit them into their Growth Street ISA account.