LANDBAY’S chief operating officer has said he expects the Financial Conduct Authority (FCA) to tighten up the way peer-to-peer lenders calculate provision funds, as part of its tougher regulation of the sector.
“We’ve had many discussions with the FCA about how our provision fund is deployed,” Julian Cork, COO of the buy-to-let lender, told Peer-to-Peer Finance News.
“We think we’re in the lowest-risk product in the P2P sector and we haven’t even had a late payment, but in all of our marketing we’re careful to say it’s a discretionary fund that is not guaranteed to cover all losses.
“There is quite a wide range of ways in which firms calculate provision funds. Some include future income to the fund, but what if those loans go into default and they don’t get the repayments they expect?
“I think there are some differences there and that will get tightened up and calculations will have to become more transparent.”
The provision fund is a pot of money set aside to compensate lenders, if default rates increase more than expected.
Cork did not name any other platforms when discussing provision fund methodology, although RateSetter is arguably best known for including future income in its calculations.
Last month, it said it would start reporting a “capital coverage ratio” on its website and update its lender terms “to make it explicit that in times of severe stress the interest buffer would be available to the provision fund”. The “interest buffer” 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.
Cork spoke to Peer-to-Peer Finance News on the day that the City watchdog released its interim feedback statement signalling tougher regulation of the P2P sector. He said he supported the FCA’s efforts and said that many of the major platforms were already adhering to the proposed rules.
“I think it’s a good thing in terms of levelling the playing field to help people compare platforms and the risks involved,” he said.