RateSetter restructures provision fund, cancels wind down clause

By Ryan Weeks on Friday 4 November 2016

Alternative Lending

Leading peer-to-peer lending platform RateSetter tweaks provision fund model, will not wind down book in the face of losses.

RateSetter, the peer-to-peer lender famed for never having lost a penny of investor money, has introduced a new interest buffer concept – made possible by changes to its provision fund model.

To date, RateSetter’s provision fund has never failed to reimburse investors in the instance of borrower default. But RateSetter has repeatedly come under scrutiny over the past few months for the structure of the fund, and indeed for its capacity to keep up with the platform’s expected losses. The provision fund’s current balance is £22m, equating to a provision fund coverage ratio of 120 per cent.

Up until now, were losses to exceed expectations, thus impinging on investor principal, RateSetter’s rules dictated that the platform’s loan book would go into run-down. As of 1 March 2017, those rules are changing.

In a blog post published yesterday, RateSetter for the first time began using terms such as interest buffer and capital coverage ratio – chatter that simply wasn’t relevant under the old rules. The platform now displays a graph on its website (pictured below) which shows the extent to which defaults would have to rise in order for investors to lose capital, as opposed to simply not receiving all of their expect interest.

As can be seen, RateSetter estimates that its interest buffer currently stands at over £30m. This estimate is based on the life time interest owed for existing active loans, with a discount applied to reflect the fact that some loans may repay early, or not at all.

Setting both its interest buffer and provision fund coverage against its expected losses, RateSetter has arrived at a “Capital Coverage Ratio” of 292 per cent (as shown in the table below). This metric will be reported on RateSetter’s website henceforth.

Provision Fund contributions 16,000,000
Provision Fund Contractual Future Income (discounted) 6,100,000
Provision Fund total value 22,100,000
Expected losses 18,400,000
Provision Fund coverage ratio 120%


Provision Fund total value 22,100,000
Lifetime interest on existing loans (discounted) 31,700,000
Provision Fund + interest buffer 53,800,000
Expected losses 18,400,000
Capital coverage ratio 292%

As of 1 March, RateSetter’s terms will allow for the interest buffer to be made available to the provision fund in times of stress. This would not be possible under the platform's existing rules, as a "resolution event" would have had to be called the moment the provision fund was touched. Were the provision fund to be depleted under the new rules, the interest received by every investor would be reduced equally, and siphoned off into the provision fund pool. This period of reduced interest would prevail until the provision fund coverage ratio was sufficiently strong to cover for defaults.

If the capital coverage ratio looked likely to dip below 100 per cent, thus putting investor capital at risk, then all investors’ capital would be reduced equally, as well all investors’ interest. According to the RateSetter blog post: “This capital and all interest would go into the Provision Fund to strengthen it.” The secondary market would remain open but liquidity would in all likelihood be negatively impacted by the conditions. 

In issuing its update, RateSetter has been at pains to stress that, while it’s important to consider “adverse scenarios”, the platform is not anticipating these adverse scenarios to occur. It said that it is “highly incentivised” to maintain its track record of delivering all investor capital and interest in full.

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