9 November, 2016

RateSetter Makes Changes to Provision Fund

UK-based peer-to-peer lending (P2P) platform RateSetter has announced a restructuring of its provision fund following customer scrutiny over the fund's ability to cover expected losses.

The move will see the P2P lending platform's current £22 million provision fund, which is used to cover investor losses in the case of loan defaults, bolstered by a second complementary figure - the Capital Coverage Ratio.

The interest buffer is made up of the lifetime interest owed on existing active loans and is currently estimated to be around £30m.

RateSetter's standard coverage ratio, the value of the provision fund set against expected losses, sits at 120 per cent. And, at the time of writing, the Capital Coverage ratio sits at a value of 292 per cent.

This restructuring comes following an announcement in July in which the lending platform adjusted its Expected Future Losses figure from £13.9m to £17.3m - an increase of nearly a quarter.

RateSetter said this change was partly the result of “greater economic uncertainty due to external events”.[cm_form form_id='cm_58e787a02fc3b']

The peer-to-peer lending platform has always famed itself for never having lost a penny of investor money, a sentiment which may be strengthened by the changes to the provision fund, including existing interest buffer, providing greater assurances to its customers.

However, there are stipulations to these new rules. The announcement also detailed new lender terms, which stated that in times of severe stress, each investor could have their incoming interest reduced equally to build up the provision fund.

In practical terms, this means that if RateSetter's coverage ratio was reduced, then lenders' interest would be diverted to boost the fund. One spokesperson told Orca:

"We manage the Provision Fund with the objective of being able to cover all future expected losses with a margin to spare, but we wanted to communicate how we would act in the interests of investors in exceptional circumstances if expected losses increased significantly.  To summarise, if the Provision Fund is unable to cover expected losses, it will be possible for a portion of interest payments to investors to be used to strengthen the Provision Fund – this would mean that investors would earn a reduced rate of interest for a period."

This reduction period would stay in place until the storm weathers and the provision fund sufficiently replenishes, at which point things would return to normal.

In their blog post, RateSetter reassured its customers that these scenarios were not expected in the future and the new rules were simply a contingency plan.

"For the avoidance of doubt, we are making this update because it is always important to consider adverse scenarios, however remote – but we are not anticipating such scenarios! The purpose of this update is to introduce a structure that allows stability in the event of worse than expected outcomes. We believe this is in the overall interest of our investors."