RATESETTER is updating its lender terms and will start reporting a “capital coverage ratio” on its website in a bid to reassure investors about the safeguards protecting their money.
The peer-to-peer lender, which is one of the ‘big three’ largest P2P platforms in the UK, said on Thursday that the move was in response to feedback that its provision fund is too “binary” and added that the changes should “build flexibility into the provision fund consistent with the interests of our investors”.
The provision fund is a pot of money set aside to compensate lenders, if default rates increase more than expected.
Questions were raised earlier in the year about the size of RateSetter’s provision fund and the platform’s predicted default rates. Some critics said the fund was too small to withstand worsening credit conditions – a view that was disputed by RateSetter.
The platform’s provision fund currently stands at £22m, which it claims should be sufficient to absorb its expected losses of £18m, with a margin to spare. It converts this into a “provision fund coverage ratio” of 120 per cent.
In the event that the provision fund runs out, the firm estimates that there is a £30m “interest buffer” sitting beneath the fund. This figure equates to the lifetime interest owed on existing loans, with a discount applied by predicting how many loans will repay early or not at all.
“If you add the £30m interest to the £22m provision fund and then look at this combined buffer in relation to the £18m expected losses, then you arrive at a ratio – a ‘capital coverage ratio’ – close to three times expected losses,” said the firm.
The predicted interest buffer means that investors can still earn some interest, albeit less than before, at a default rate of up to nine per cent, before they start losing capital.
RateSetter said it will start reporting the capital coverage ratio on its website and will update its lender terms “to make it explicit that in times of severe stress the interest buffer would be available to the provision fund”.
A spokesperson told Peer-to-Peer Finance News that the changes are what “some investors, journalists and analysts had suggested they do”.
The firm plans to make the new lender terms effective from 1 March 2017.