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Is This The Real Reason RateSetter Changed Its Provision Fund?
Last year, RateSetter announced changes to its bad-debt provision fund that will now take place in March.
The old way RateSetter's provision fund worked
- Individual lenders lend to specific borrowers (although you don't get to choose your borrowers).
- RateSetter's bad-debt provision fund covers losses that it can't recover from borrowers.
- In a terrible recession or other shock, RateSetter's bad-debt provision fund could theoretically be used up.
- When the pot is used up, all loans are pooled, so that you and all the other individual lenders are lending to all RateSetter's borrowers together. In other words, you're no longer doing “P2P” lending directly between borrowers and lenders.
- From this point, any bad debts that occur are shared equally between all lenders, based on the amount you have lent.
- Due to the tens of thousands of loans being restructured in a pool, lenders could experience at least temporary delays receiving either their repayments, interest or both. This is particularly the case for those who were looking to lend for short periods, since they now might be tied in to longer loans for many years.
- Some people believed that this would have been the end of RateSetter, saying its reputation rests entirely on the bad-debt provision fund always being sufficient to cover all losses.
The new way the provision fund will work
- Individual lenders lend to specific borrowers – as before.
- RateSetter's bad-debt provision fund covers losses – as before.
- In a terrible recession or other shock, RateSetter might forecast that the bad-debt provision fund will potentially be depleted.
- In advance of the bad-debt provision fund being used up, RateSetter will take a proportion of each individual lender's loans and interest, and divert it to the fund. This prevents the fund from collapsing and the pooling event from occurring.
- This will probably cause less of a panic to lenders, meaning lenders might have less severe trouble selling RateSetter loans or exiting on schedule.
That said, some lenders could be worse off under the new way, since RateSetter could end up diverting money from you to the fund only to later find out that it wasn't necessary. So in some circumstances your returns could be lower from now on.
Why this change?
RateSetter has put forward good reasons. It says it has gathered feedback for some time that RateSetter is too “binary” – all or nothing.
4thWay has been contacted by lenders saying something similar. For the most part, these lenders believe that it would have been the end of RateSetter if the fund was depleted, and that was their biggest concern.
Was there another reason?
However, I and others here at 4thWay wonder if there were other reasons for this change.
It's not just that keeping the fund alive is surely vastly preferable to RateSetter than the administrative headache of restructuring everything as a pooled investment.
It could also be that, what tipped RateSetter over the edge to make this change, was whether some of this “feedback” it mentions came from the regulator: the Financial Conduct Authority (FCA).
Currently, RateSetter, like most P2P lending sites, has interim permission to operate, and is working towards full authorisation from the regulator. The FCA has made it clear that it wants P2P sites to be genuinely P2P, with contracts between specified borrowers and lenders. It might therefore have at least noted that pooling loans would mean RateSetter was no longer P2P.
RateSetter has become more simple again
As you may know RateSetter does personal loans, business loans and property development loans.
For many months RateSetter has been winding down lending to one type of business borrower. These borrowers took money from RateSetter lenders like you and me, and then lent it to other people or to businesses. The regulator decided it didn't want that to continue either.
Hopefully, with such lending out of RateSetter's system, and with the provision fund changes, we'll see RateSetter get full permission from the regulator soon, clearing the way for it to launch its IFISA, which will be a tax boost to RateSetter lenders with lots of savings.
At the very least, this all makes RateSetter a little more simple again, so that it is easier for us lenders to understand the risks.
Read the 4thWay RateSetter Review, written by one of the UK's foremost authorities on peer-to-peer lending.
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