Mintos launched regulated 'notes' on 25th May
Mintos has finally launched its notes program. Notes will be the new way that Mintos structures all new investments from 1 July 2022. For full details, refer to the Mintos description page here, and their Q&A page here. As part of these changes, Mintos has become a regulated investment firm. It will comply with the European MiFID legislation and be regulated by FCMC (Latvia). Investments offered by Mintos will be regulated financial instruments.
What does this all actually mean for investors? It provides additional protections in the event that Mintos goes out of business. Investors may be able to recover 90% of losses relating to Mintos ‘failing to provide investment services’, up to a limit of €20,000. This should provide some additional security around protection of uninvested cash, or Mintos committing fraud (for example). However it is important that investors understand that this does not cover losses relating to loan defaults, or lending company failures.
Below we highlight the 3 most important differences between regulated notes and the unregulated claims that Mintos has offered up to now. Unfortunately, not all of the changes being made are positive for investors. We have listed four important downsides that investors should be aware of.
What are the biggest differences between notes and claims?
Investments are now regulated
The notes will be regulated financial instruments. Each note will be issued with an ISIN number. Most corporate and government bonds have an ISIN number which is used to facilitate identification and trading in securities. The Mintos notes will receive ISINs allocated by Nasdaq. Mintos will provide a prospectus for each note it offers on the Mintos platform. This will contain customary (but important) information such as details of the structure, terms and conditions, risk factors, information about the lending company and the underlying loans that are included within the note. If investors suffer losses relating to the failure of Mintos to perform its role as investment manager (such as passing on cash due to investors for example) the note holder may be able to seek compensation of up to €20,000.
Increased transparency
Until now investors have not had full transparency surrounding how Mintos has structured its agreements with lending companies, and what the key legal terms agreed were. Mintos is now required to provide significantly more legal information. This includes a 84 page 'base prospectus' for each issuing vehicle. In addition it provides a 'final terms' note that contains information about the underlying loans in each note. It also provides a key information document that summarises this information and provides a risk rating and an estimate of returns under different scenarios. Making the legal terms clearer is definitely a positive move. In the past some investors have not been happy with how Mintos have acted in certain situations - the prospectus documents should help to ensure that Mintos performs its obligations in the way expected by investors, and reduce the scope for future conflict and debate.
Better legal structures
The new structures that are being created by Mintos to issue notes are an improvement over the current arrangements. Mintos is creating multiple special purpose entities ('SPE') to hold loans on behalf of the investors in notes. There will be one SPE for each active lending company operating on the platform. These entities will allow Mintos to better segregate its own assets from those of its investors, and also be helpful in segregating the assets owed to each investor in the event of a failure of the Mintos platform. The structure is not perfect - we would have preferred the SPE's to be operated and managed more independently of Mintos. However it is still an improvement and will make it easier for Mintos to take recovery actions against lending companies on behalf of investors. It is disappointing that Mintos did not address one of their biggest structural flaws (in our opinion). When a lending company defaults, Mintos will continue to distribute recoveries based on maturity date priority, rather than allocating funds pro-rata to all affected investors. This means that some investors will receive a full recovery, and others zero, rather than sharing the losses equally.
What we don't like about the changes
The secondary market is closing
One of the most important changes is the planned closure of the secondary market on 30 June for all current investments (i.e claims format investments). This is a very big and unwelcome change. It's also a change that Mintos has failed to communicate to investors properly up to now. We suspect that many investors remain unaware of these developments. Mintos say that they are being forced to take this action by regulators, and they could not negotiate a longer period to run the secondary market. Even so, it is one of the biggest downsides to the new changes at Mintos. Many investors will have assumed that they can sell their investments if they need liquidity in the future. Some may now need to sell their claims at a significant discount during June, particularly if they own longer maturity claims. A new secondary market will be opened for notes, but it will take time for that to develop the same liquidity and size as the current market.
Withholding taxes are now being levied
Mintos plans to deduct withholding taxes from interest paid to individual investors. The standard rate will be 20%, although this can be reduced to 10% for many EU residents if they provide tax residency certificates to Mintos. While Mintos claim that this should not be a big deal for many investors, we disagree. Most of the questions submitted to Mintos so far have been about the tax changes. Who will be most affected? Some investors will not currently be subject to tax on their interest income for various reasons and withholding taxes will significantly reduce their net income. Some may live in countries such as Netherlands or Dubai where interest income is not generally taxable. Others may be retired and earn less than the taxable income thresholds. Some investors may not receive tax credits for the withholding taxes paid in Latvia. For those who do not face paying any more tax overall, the new arrangements still add extra complexity to tax returns which may require the assistance of accountants. All investors will pay taxes on their income faster than before, and will lose income due to only being able to reinvest net interest income, rather than gross income, during the tax year.
Minimum trade size is now €50 per lender
The minimum size of notes that each investor can purchase is now €50. This will impact investors who have smaller sums to invest, or may be looking to make their first investments into Mintos in a diversified way. It seems that this minimum amount of €50 will also apply to the various Mintos automated investment strategies. As these tools have a maximum allocation of 15% to any lending company, this implies that investors will need to be willing to invest at least €350 initially, and potentially substantially more under certain market situations. This minimum size will also make it more difficult for investors to keep fully invested, as they will only be able to invest in blocks of €50.
Can't buy individual loans
Until now, Mintos has allowed investors to individually select the loans they purchase. This has created a lot of opportunities for sophisticated investors in particular to find the best loans to buy and sell at any point in time. Unfortunately this will no longer be possible, as each note will be linked to between 6 and 20 underlying loans. Mintos says that the loans within each note will have similar profiles. We presume this means loan states, interest rates and maturity dates. It is unclear how this will work for loans that do not have buyback guarantees, and/or asset collaterals, where picking individual loans is most important. It will also make buying and selling loans in the secondary market more confusing. investors will now need to assess the status and terms of pools of loans that sit within each note.
I don’t even see the option to filter buyback notes when in the manual purchase UX.
Tax on investment in Belgium is 30%. If there is a withholding tax, then the interest remaining is taxed at 30%.
Previously
€100 euros – 30% Belgian tax = €70.
Now
€100 – 20% withholding = €80. -30% Belgian tax = €56
Mintos died to me and I suspect I’m not the only one
Fortunately there are still many “pure” P2P platforms out there that have not the chance of their lives to grow
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I thought I should add my 2cents considering how bad these Notes are at the moment.
On top of the “What we don’t like about the changes”, I’ll add:
– On the Notes individual pages, we can see that none seem to have interests on late payments anymore (even though the loan originators are supposed to, and had them with Claims)
– The above is aggravated by the fact that it is no longer possible to entirely exclude the purchase of late loans (at best it is now “up to 20%” of late loans in one single Note, i.e. up to 20% of late, right from purchase, in your portfolio)
– In the massive removal of Auto Invest filters, they also made impossible the exclusion of loans with pending payments and with extensions. Loan APR filter is also gone.
– In a coordinated effort to worsen the UX (or so it seems…), they even took out the “View available loans” in Auto Invest; we now have to blindly change and check, change and check, change and check…
Of course, loan originators are going to take full advantage of the lack of filtering from now on, as they did when the Issue Date filter was removed… Overall, the actual interest rate on Notes is probably going to be down 30% or so from the advertised rate because of all these negatives.
Be ready for Notes with 20% late, 20% pending payments and half of the loans already in extensions…
PS: It is also worth mentioning that the protection scheme (20k€) is so limited in the case of Mintos, it is far from the “miracle” they initially made it to be, and will be useless in most “common” cases.
Thanks for your comments, all excellent points. We will try and feed them back to Mintos management
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