Blog | RateSetter

How the Provision Fund invests its cash

By Harry Russell

Some investors have asked us what happens to the £17m+ that is held by the Provision Fund, so in line with our commitment to transparency we would like to shine some light on this area.

Given that the money in the Provision Fund must always be readily available to reimburse investors if a borrower misses a payment or defaults, our policy is to ensure that the money is held safely and in a liquid state. Obviously it would be impractical to keep such a large quantity of cash in a safe in our building. So instead the money is invested prudently with the objective of preserving the value of the capital while retaining a good level of access to the money. We do not seek to maximise returns.

The Provision Fund invests in assets which are considered to be very low risk. Most of these are UK bank accounts, fixed-term deposits with a maturity of less than six months, or money market funds with a rating of AAA or above. A proportion - currently 12% - is invested via an established fund manager with a low risk remit, with the objective of achieving a degree of diversification along with moderate capital growth.

The Provision Fund cannot invest in the equity of RateSetter (i.e. buy shares in it). However, a small proportion of the money in the Provision Fund can be used to provide temporary liquidity to the RateSetter market in order to bridge gaps between supply and demand for money, particularly in the case where a larger loan is approved. Less than 10% of the Provision Fund is currently used for this purpose. This liquidity is temporary – the cash must be returned to the Provision Fund within six months.

So in summary: 78% is held in bank deposits and money market funds, 12% is invested, and 10% is used to provide liquidity to the RateSetter market. We constantly monitor and evaluate performance against the investment policy and make adjustments to ensure compliance with it.

We hope that you find this information useful and we will keep you updated.

Update (19 February 2016)

We strive to be transparent as this builds trust and helps our market grow. Therefore, earlier this week we proactively set out the Provision Fund’s investment policy, which included using a small proportion of its money on a temporary basis to facilitate the delivery of larger loans. We believe that this is good for the development of the market, and beneficial for both borrowers and investors. However, we highly value the views of our investor community and, having listened carefully to them, have decided to suspend the use of the Provision Fund for this purpose with immediate effect. We have therefore also unwound the 0.6% of the Provision Fund balance that was being used this way. We will update our investors with more information shortly.