Update on Dozens' fixed-interest bonds and protection

robert · March 19, 2019, 7:07am

A message from Gemma, our General Counsel/Head of Compliance:

Hi all

We’ve had a number of questions on protection in relation to our cash savings account and bonds (also following the thisismoney article), so thought we’d post an update here before we open the bidding process for the next tranche of bonds. As ever we like to make sure you have the full information so you can make an informed choice. We should remind you that if you are unsure about us or any of our products please don’t push yourself outside of your comfort zone by buying them.

In relation to protection on each cash savings account, you receive £85,000 FSCS protection (you’ll recall this is across all your accounts with the Lloyds Banking Group, as the money in your cash savings account is deposited at Bank of Scotland). This level of protection from the FSCS is straightforward – if anything happens to your cash, you are protected.

In relation to the bonds, our aim was to design a product that would encourage people to put money away, without having to worry about their capital being at risk, or the creditworthiness of us at Dozens. This is why we have engaged a trustee to look after your money invested, plus the full interest amount. When you make a purchase order for bonds, your money is still held in Bank of Scotland until the bonds are issued (and then transferred out to Dozens Savings plc only if your bid is successful). In conjunction with the bonds being issued by Dozens Saving plc and listed on NEX, your bond subscription money is then transferred to the trustee (US bank), along with the full 12 months’ worth of interest. US Bank holds this money on behalf of bondholders in case of any issue with any part of the structure. The money is held in a separate account that is not used by US Bank (nor by Dozens) for any other purposes. Therefore if anything happens to Dozens or the Trustee, the money to pay you back your principal plus interest is securely held.

We thought you might like to see what we receive from US Bank to confirm money movement. To explain what you are seeing:

We had a “test bond” issuance on 15 Feb of 4 bonds, so the full principal of £400 (4 x £100) plus the full interest of £20 (4 x £5) was moved that day into the trustee account.
On 1 March we had the pilot bond issuance of 906 bonds. This mean £90,600 (bond principal) plus £4,530 (full 12 month interest) was moved into the trustee account.
total £91k of principal, plus interest of £4550, is held by the trustee

They confirmed receipt of the monies by email, and we can also view a statement showing the full amount, set out below (note we have redacted names and account numbers):

When it comes to FSCS protection for investment products, the FSCS tends to assess issues with investments on a case by case basis and we appreciate it is difficult for our customers to know whether or not they are protected for investments (including our fixed interest bonds). We also know that the £50k limit for this kind of protection rises to £85k in April 2019, making it harder for customers to distinguish between this and the deposits £85k protection (relevant to our cash savings accounts).

Given the potential lack of clarity in this and given that we also believe that FSCS protection is an avenue of last resort and not a certain form of protection when it comes to investments, as customers and investors you should be comfortable that the firm you buy bonds from has put in place sufficient measures and protections to keep up their end of the bargain. We believe we have done this in relation to the trustee structure. We have therefore decided to remove any mention of FSCS protection in relation to our fixed interest bonds (you may have noticed we did this already with our FT ad earlier this month). Of course you may not agree with this, which is completely fine, and in which case we would suggest you look at other investment products on the market that provide you with more comfort.

In summary:

Current account : your money is held in a segregated client account at a UK high street bank in accordance with the FCA requirements and the Electronic Money Regulations 2011 (not FSCS protected), which means that dozens has no access to your money for its own purposes

Cash savings account : your cash savings are protected by FSCS up to £85k

Fixed interest bonds : a trustee structure is in place to safeguard your principal sum invested plus interest

Investments : the value of your investment may go up as well as down, which means that your capital it at risk

Thank you for all your messages asking when the bidding opens for the next tranche of our bonds. The answer is soon – we are just putting finishing touches to updated screens in our app to make sure the process is as clear as possible for everyone. We’ll let you know as soon as the bidding is open.

Note: Dozens’ Fixed Interest Bonds are allocated, issued and administered by Dozens Savings Plc. For more information on Dozens Savings Plc and the bond process, please take a look at Dozens Savings Plc’s 5% p.a. Fixed Interest Bond terms which are available on our website and on the Dozens app.

Recchan · March 19, 2019, 1:22pm

As I’m sure there’s someone skeptical, would you be able to clarify?

Although you say Dozens has no access to our money for your purposes, what if Bank of Scotland were to go bust? It’s nearly happened once

Would you be able to point to the legislation that ensures it would be held to pay to us before any other creditors?

Same thing as above, what exactly ensures in the event of the trustee going into administration, that the money would be paid directly to us?

daedal · March 19, 2019, 2:38pm

Your protection would be the same as if you was a customer of RBS group, so 85k is protected across the group. That’s how e-money licences work, your money with Dozens has to be deposited into another bank, that bank offers you the protection, not Dozens.

So Dozens does not offer FSCS protection, but Bank of Scotland does.

AC · March 24, 2019, 12:55pm

Guys, I have a bit of news about the bonds that probably won’t please you but I think on balance is what is required.

As you know, the entire team at Dozens has been working super super hard (often people won’t go home even when I personally request them to, till whatever they are working on is done). That hard work has definitely paid off in terms of early brand traction, customer growth, the success with the funding round, the engagement with the committed customer community etc, and also in the internal team testing out the FULL scope of the app (including bonds and investments).

However, as a heavily regulated business with two licenses, I need to ensure that along with our customer-facing tech and design features being enabled and made bug-free, our behind-the-scenes end-to-end processes, risk frameworks, headcounts etc also keep up with the customer count and reporting rigours of the license, and I think we still have a little bit of work to do on that front before its held to the same high standard that we hold everything else to.

As many of you commented at the Meetup event last Thu, we have an incredibly passionate and hardworking team of people here. We are all doing everything we can to get this issuance released soon. However, as the buck for culture definitely stops with me, I am also conscious of the need to balance the workload and pressure on the team with the right business commitments, and so have made the decision to not push for a pre-ISA deadline (pre-5 April) issuance.

This was an unpopular decision internally, but I hope this won’t disappoint too many of you. My rationale is as follows:

The bonds were designed to help people with smaller amounts of money, for which the annual ISA allowances are less of an issue, ie you need to be putting more than £20k into ISAs per year and therefore over £1.5k into them per month for the tax year deadline to hold significance for you. So, it is unlikely that we are inconveniencing our core target customer group for the bonds.
The regulatory processes and requirements are binary in nature and I want us to build a company that is always above the bar on those - not just enough, not just over, but way over. And while I am happy with the test bond issuance and the clarity and water tightness of the protection mechanisms for your money / documentation shared above, I felt we need a few more days to get there on the risk frameworks etc. to be fully documented and embedded into our ways of working internally especially given the number of new hires we are making every week and month.

This is an important bit for any regulated business and I don’t want to push the team into completing this in a hurry - I think we will get there soon anyway but just want them to complete the work without a commercial deadline hovering on their heads.
So you can rest assured that this is a process and culture driven decision and is not commercially driven in any way, I have a way for us to make good for any potential disappointment caused to you. We calculated that with around 5,000 customers onboarded and with £1,000,000 issuance size, the average successful bond bid would be around £200. £200 would make £10 annual interest in our 5% fixed interest product, which is less than a pound per month. So, to make up for this delay, I have requested that we do a one-off reward of £2 (more than double that calculation) for ALL our onboarded customers - so this will be a total outlay of c.£10,000 while the bond would have costed us £4.2k in total this month. Subject to our GC signing off on this from a Ts&Cs perspective, we will communicate via email and push, and process the reward.

I hope you see its not a decision I have taken lightly and feel happy and proud about being the customer and/or shareholder of a company that is ambitious, pragmatic and honest but also conscientious and caring towards its greatest assets, its employees. Am quietly confident that we will be around for long, so am committed to making decisions that will make us stronger and do better longer-term than those that only focus short-term.

We commit to using the extra time to also iron out any remaining issues with Onboarding, Spend and Track, so that when our new set of cards arrive end of April, we are totally ready and poised for supersonic growth.

We will also release Invest at the same time as the Bonds but I have asked the team to release Browse on Invest soon so you know what funds etc are going to be available there.

Till then, stay involved, keep the faith and enjoy the ride (and if you must, aim any brickbats on me - not the team. ). And thank you so much for all the love, already!

Albatross · March 24, 2019, 1:25pm

No worries @AC! Personally, I’d rather wait and have this done right, without overworking the amazing team you have, than have it rushed out to please customers at the expense of the employees

CheaperByTheDozens · March 24, 2019, 5:49pm

Agree with your rationale. Although you say this isn’t a commercially driven decision, I also want to ask whether this is or is not a political/regulatory/PR decision given the backdrop of the LCF collapse that’s caught media attention recently.

Is this decision influenced in any way by any heightened regulatory risk or media scrutiny of the Trust Bonds themselves?

Is the name change of the Save Section to Grow Section in anyway linked to this delay?

Finally, can you share why you changed the name of the name of the Save Section to “Grow”?

joshylambo · March 24, 2019, 7:17pm

As I customer, I appreciate the update, but more so the transparency to the decision making.

o99 · March 24, 2019, 7:55pm

Ah well, at least I’ve learnt a new word

AC · March 24, 2019, 10:59pm

Nope, can confirm nothing to do with LCF - our fixed interest bonds are a totally different product and we have gone to great lengths to explain that. Also not looking for a long delay here, just a small one to get over some remaining internal hoops.

On the Grow bit, this was a considered decision based on a lot of feedback and number of questions we have fielded so far on the whether bonds are savings topic. We feel given the Trust structure takes away market and counterparty risk for all practical purposes, if we placed the bonds in Invest, the distinction with Capital at Risk products would be hard to tell. But equally, as we are not a bank and as we grow the ‘Save’ shelf by adding other banks’ term deposits etc, it would also make sense to distinguish the bonds from FSCS deposit guarantee (£85k) products including our Cash Savings product.

So within Grow, there will be:

principal growth of Cash Savings from roundups, IFTTT etc
in time, savings growth from other banks’ term deposits, and
interest growth from our fixed interest bonds

The Spender to Saver to Investor journey stays unchanged - remember we already had Track anyway, so Save = Track (your spending) + Grow (your savings), before you take risk and Invest.

Till such time we become a bank, this along with the exclusion of the FSCS £50k protection message, feels clearer to portray the bonds as not being ‘savings’ in a banking product sense, and focus attention back on the individual journey itself.

We are clearly in uncharted territories here with financial product innovation, so some iteration of messaging based on feedback is likely a good thing?

robert · March 25, 2019, 9:10am

o99 · March 25, 2019, 9:12am

I have always wondered the same in relation to all emoney accounts.

Thanks for the link to the document, but could you please point to the part of the document (or information elsewhere) that confirms that the bank’s FSCS protection applies to emoney accounts they are safeguarding?

When I search the linked document for FSCS all I find is the following…

In providing customers with details of their service, PSPs and e-money issuers must avoid giving customers misleading impressions or marketing in a misleading way, e.g…suggesting funds are protected by the Financial Services Compensation Scheme, or displaying the FSCS logo

If the bank holding the funds do indeed provide FSCS protection on these deposits surely it would be helpful for emoney providers to pass on this information to their customers?

daedal · March 25, 2019, 10:16am

If you wish to waste your time searching then you are welcome to. The regulations are complex and I don’t have the time to go searching for the relevant parts for you, and I personally don’t see the need, the FSCS scheme is simple.

However if you wish to find all the information, there is numerous reports, statements and resources about Third Party Claims on the FCA website, the Bank of England and the relevant regulatory sections of the EU Banking protection site.

The PRA Rule book has a whole section on the FSCS scheme and its protection, and covers Third Party Claims.

Have fun reading.

Tinku333 · March 28, 2019, 5:46am

Thanks for update AC. It make sense to provide customers a seamless experience and as you rightly pointed out considering the last month of tax year, most of us already used the allowance
For sure carry over the entire £1M next FY, not only give more scope.but also will help the new customers , who are in the final.process of on-boarding and will not get a negative feeling that due to long queue, they missed this golden opportunity effectively avoiding double misery of being in the queue and missing the big bond series. Now such customers can be in peace that they are not missing this opportunity.
While I was lucky to get on-boarded quickly within few weeks but even then few weeks waiting period was a pain. Hence I would like to suggest to give an option to existing customers, who are eligible for £2 bonus, if they want, they can opt to put this bonus in a pot which will be allocated to the customers in the queue (priority will be for highest waiting time after KYC is done ).

o99 · April 2, 2019, 12:21pm

Those sources will go over my head unfortunately unless I know the specific passage to look at.

Perhaps FSCS regulations are simple to someone inside the industry, but from a consumer (my) perspective I don’t agree the FSCS is always simple. It is simple when you have a direct relationship with the bank involved but it does not seem simple when the relationship is indirect (as is the case with Dozens).

For example, you are claiming that money held in an emoney account would be covered by the FSCS protection of the bank holding the deposits (and I believe I have heard some emoney providers make this claim in the past). However, Dozens make no such claim and in fact state that FSCS protection does not apply. Surely if it was clear that FSCS protection at the bank holding the deposit did apply to the deposits, they would point that out?

It’s also confusing why FSCS protection does not apply to money in the current account section but does apply to money in the cash savings account section (assuming Dozen’s description is correct).

My confusion on all this is not something I blame Dozens for. I think they have been as clear as they can be with the descriptions provided on their home page. But the problem is I am left just having to have faith that Dozens are correct in their claims. It would be helpful if an authoritative source (i.e. FSCS or FCA) produced a consumer-facing document on FSCS protection for situations when you don’t have a direct relationship with the bank involved (i.e. emoney accounts and other account types where this may or may not apply).

daedal · April 2, 2019, 1:12pm

I’ve been saying that for years. I can’t see it happening anytime soon though.

There is no such thing as direct or indirect though. Your money is held with RBS, not indirectly with them.

I know what you are saying, and understand it. However in practice its not complicated, your money is with RBS, RBS is protected therfor your money is protected.

Dozens can’t claim any FSCS protection, however as they clearly state and as all e-money providers do, your money is always deposited elsewhere in an FSCS protected account.

The problem with anything to do with the FCA is everything has to be stated factually and legally and based on specific rules and regulations. It’s easier not to say something, than it is to say something in many cases. That’s an FCA issue and something the FCA need to work on.

o99 · April 2, 2019, 1:37pm

Why is it they can openly claim the money is FSCS protected in the savings section of the app but not in the current account section? Coupled with you saying there is ultimately FSCS protection in both situations (even though not provided by Dozens in either), this is perhaps the most confusing thing for me.

robert · April 2, 2019, 2:34pm

Thanks @daedal and @o99

I’ve spoken to our General Counsel to get you the right answer for this as we appreciate that FSCS is not a straightforward area, and we can see a few things getting a bit muddled on the comments trail.

Current account

this does not have FSCS protection as we hold this under an emoney licence. FSCS protection is for deposit taking bank accounts only (we are not a bank), and is primarily to protect customers should the bank fail after they have lent out the customers money (as this is what banks do). We safeguard your money with an authorised bank (currently Bank of Scotland), however the bank must treat this as emoney, and is not permitted to lend it out. FSCS protection does not apply, despite the money then being held with a bank.

In the event that the bank were to go under, the money would be ring-fenced from the bank’s assets – i.e. not be able to be used to prop up the bank, and still be clearly marked as belonging to the customers of Dozens. In the unlikely event that the bank were to become insolvent an insolvency practitioner would be appointed to look at how to return the money to its rightful owners (ie the customers of Dozens).

Cash savings account

this does have FSCS protection of £85k, because this is not held under our emoney licence, but instead under our investments licence. This is also on the basis you are looking to use the money in this account for investments (eg collecting a pot of money to buy bonds or other products) – as you are aware, if you decide you no longer want to use the money in the cash savings account for investment purposes you can return it back to your current account for normal spending (and then it is back under the emoney regime).

o99 · April 2, 2019, 3:37pm

@robert thanks for expanding further on this. That helps me better understand the protection level differences between the different sections.

Anj · April 17, 2019, 7:08pm

Is there a date for the next 5% band please?

katja · April 17, 2019, 7:11pm

Hey @Anj, I can’t give you an exact date, but soon!
Please also see last message regarding this from AC:
A sad farewell - #16 by AC