What does the latest Metro Bank deal mean for RateSetter’s investors?

It’s been an eventful 12 months for RateSetter’s retail investors that is set to come to a close in April when Metro Bank completes a purchase of the peer-to-peer lender’s remaining portfolio.

Investors were first hit with withdrawal delays as the pandemic hit the UK in March 2020, before half of their interest was diverted in May to strengthen the provision fund in May 2020 against future credit losses.

The platform was then acquired by Metro Bank in September 2020.

Under the initial terms of the deal, Metro Bank would fund all new consumer loans and P2P investors would continue benefiting from interest earned on the existing loans they funded.

But Metro Bank has said it is now taking on all RateSetter’s loans.

Here is how the latest deal affects RateSetter’s P2P investors.

What is happening with RateSetter loans?

RateSetter was acquired for an initial £2.5m by Metro Bank in August 2020, with up to £9.5m to be paid out after the completion of the deal.

Originally, Metro Bank was set to fund new consumer loans and the existing portfolio would be run off, with P2P investors receiving interest and repayments until their funded loans came to an end.

However, RateSetter announced last week that Metro Bank will purchase the platform’s remaining P2P loans at full value despite the ongoing economic uncertainty.

This means all investors will get their capital and any interest already earned back from 2 April.

It follows the purchase of RateSetter’s property finance development portfolio by Shawbrook Bank.

When will accounts close?

The updated Metro Bank deal for the remaining RateSetter loans is expected to go through on 2 April.

Investor funds will then appear in their holding accounts and they will have to log in to make withdrawals.

What about future interest?

This is a touchy subject among some investors and highlights an interesting issue for P2P lending.

RateSetter introduced a rate reduction last May with half of the investor interest going into the provision fund.

This was to ensure they could still get repaid if loans fell into arrears amid the volatile economic situation during the pandemic.

The reduction was lifted in January but now with the loans sold, investors won’t get any of the interest they may have expected in the future.

They will still get interest owed for February and March.

Some RateSetter investors have complained on the P2P Independent Forum that they have been short-changed as they expected their investment to grow a set amount, but the rate of interest is not guaranteed as it’s not a savings product.

P2P lending is a form of investing, albeit without the stock market volatility.

But one risk that investors have to accept is that they may not get back as much as they had expected.

That has come to fruition here, but all capital and owed interest has at least been repaid.

What about the provision fund?

RateSetter is the inventor of the provision fund.

The idea is that some of the borrower interest is diverted to the provision fund, rather than the P2P investor, so there is a pot of money that can repay them if loans fall into arrears or default.

Metro Bank will now receive money that is in the provision fund.

This has angered some RateSetter investors as the provision fund took half their interest between May 2020 and January 2021 and now Metro Bank will get the whole pot.

This raises the question of who is now taking on the risk.

P2P investors had the provision fund in place to protect against credit losses while their loans were active.

Investors will be repaid and Metro Bank is taking on the risk, so who should be entitled to the protection?

“Since the pandemic struck, our focus has been on delivering our investors their money safely,” a RateSetter spokesperson said.

“Strengthening the provision fund, protecting all investors equally, was a necessary part of that.

“The purchase of the remaining portfolio provides certainty of outcome for investors, every one of whom will get their money in full despite the ongoing economic uncertainty.

“The past year has seen losses in many investments but RateSetter’s 10-year track record of positive returns and no capital losses has been maintained throughout.”

Any change is likely to attract disgruntled investors but this case illustrates that P2P lending should be treated as an investment rather than a savings product.