An update on Brexit

By Mario Lupori

As the Brexit process continues to ratchet up, it’s impossible to escape media coverage - yet it’s difficult as ever to separate conjecture from fact.

For many organisations, Brexit poses a challenge. As a forward-thinking, modern business, we recognise that change can also present opportunity. Without being drawn into the debate around what Brexit could look like, we wanted to set out some facts about how RateSetter is well placed to deal with economic change, including Brexit.

RateSetter is UK-focussed

RateSetter’s investors are UK-based and we only originate loans to creditworthy borrowers in the UK. We are regulated by the Financial Conduct Authority under UK designed and implemented regulations. As a result, the act of the UK leaving the EU will have very limited impact on the day-to-day operation of RateSetter.

Monitoring the economy…

We keep a close eye on economic data and other relevant sources of information including real-time data to monitor emerging trends in the economy. A large part of our credit monitoring process involves tracking a wide range of macroeconomic factors (such as employment, wage growth, inflation) with the objective of identifying trends that may affect the future performance of our loan portfolio.

History shows that open, free-market economies like ours operate in cycles of growth and then slippage. These changes in the economy tend to be gradual, occurring across periods of several months. Even big moments in time such as global stock market crashes take time to filter into the real economy. This means that there is a lag between a change in the macro-economic environment and any changes that affect borrowers’ ability to repay their loans.

…and analysing portfolio performance

This affords us some time to make adjustments to protect your investment. Potential adjustments include boosting contributions to the Provision Fund, changing the volume of loans written via different channels and revising our credit criteria.

RateSetter originates loans across different types of borrowers and sectors. This helps diversify risk as different types of borrowers perform differently through the economic cycle. We continually analyse the performance of every part of the portfolio and make adjustments.

RateSetter’s credit risk management

Managing credit risk is always our top priority. The key components of our approach to credit risk management are:

  • Portfolio management: we diversify loan originations across consumers and businesses using a variety of channels and actively monitor performance and control the amount of lending to each sector.

  • Underwriting: our expert underwriters conduct thorough credit and affordability checks on every loan applicant to ensure that they meet our robust criteria.

  • Monitoring credit performance of the portfolio and making adjustments.

  • The Provision Fund: automatically diversifies each investor’s exposure across the whole loan portfolio and acts as a buffer against losses for investors if a loan they are matched to does not perform. Combined with Expected Future Interest from the loan portfolio, this forms a Capital Buffer protecting investor capital against bad debts.

Consumer lending currently makes up three-quarters of our loan portfolio and compared to other asset classes, performance of consumer loans tends to fluctuate less. At the height of the last recession in 2009, credit losses on consumer loans doubled for a period of six months before stabilising. Our Capital Buffer means that credit losses on consumer loans would need to more than double for a period of 19 months (the average remaining term of active RateSetter loans) before any investor capital would be lost.

Interest rates

There has also been speculation that Brexit may lead to changes in the Bank of England interest rate. As we explained in August, Bank of England interest rate changes lead to banks widening the gap between what savers earn and what borrowers pay. RateSetter operates within this gap, so the wider the banks stretch the gap, the more RateSetter stands out - RateSetter will continue to deliver a premium over the bank rate for investors.

Conclusion

The economy is always changing, and there may be some additional economic developments specifically because of Brexit. However, we are a business that is alive to change and to risk management, and this is built into our model. So, whatever happens with Brexit, we are confident that RateSetter will continue to provide great returns for you.