We are also announcing a planned update to our Monthly Access and 1 Year Bond contracts.
The simple principle that RateSetter applies here is that a Lender can exit at any time from any market provided there is another Lender to fulfil their contract.
• Lenders have requested the ability to exit their contracts early for some time and we have created what we hope is a simple and reliable mechanism for them to do so which is called the “Sellout” function. Please note that exiting early does have a cost to the Lender but we hope the new functionality will be a useful tool for Lenders. Further details are below.
• The second change is a new clause in the Monthly Access and 1 Year Bond contracts to clarify what would happen in the event of there being insufficient funds in these markets to continue to fund existing Borrower loans. The clause allows for the Lender to be locked in for a period until the loan has been fully repaid. We do not expect the clause to come in to effect but we are clarifying what would happen in this event. The new clause will be in the contracts from 31st January. Further details are below.
These updates are separate but related to each other, underpinned by the same principle that you can always withdraw your money (either early or as per your contract) so long as there are sufficient Lender funds in the RateSetter markets.
The new clause to the Monthly and 1 Year contract
What does it mean?
The new clause to the Monthly Access and 1 Year Bond contracts clarifies what would happen if there were insufficient Lender funds to refinance the existing loans. Clearly, in this event, it would be in no-one’s interest to ask the Borrowers to repay the full amount immediately (because that could potentially cause unnecessary repayment issues, putting strain on RateSetter’s Provision Fund) but this update formalises this commercial reality.
The Lender would be “locked” into the contract until it was fully repaid by the Borrower based on the Borrower’s amortisation schedule. The Lender should therefore receive all of his capital back (and would continue to earn interest) but it would be over a longer period than he had committed for. In the Monthly Access this would be over the course of a maximum of 12 months, in the 1 Year Bond it would be over the course of a maximum of 12 months after the bond matures. In this way, the Lender has not lost any money, they have just had it locked up for longer than they wanted. We would of course endeavour to “unlock” the Lender’s funds as quickly as possible.
To be clear, this situation has never occurred and we do not expect it to occur in the future. We mitigate the risk of it happening by setting prudent parameters and also by ensuring a diverse group of Lenders (no single Lender accounting for more than a certain amount of lending in any one market) as well as the obvious fact that with the Borrowers continually repaying their loans (early as well as over the expected term) there is a constant inflow of funds into the RateSetter markets. All of this is managed and monitored as part of our running of the RateSetter exchange. But it could happen – such a thing has happened to banks and in money markets – and so we wanted to be clear what the process would be. We believe this clause would deliver the optimum result were the event to arise.
The new clause in the contract will be:
a. On [the date on which the loan is due to be repaid] the Exchange will, according to the Lender’s Re-Investment options, either:
i. attempt to lend the Lender’s money again either to this borrower or another as determined by the Exchange; or
ii. attempt to return the Lender’s money to his/her RateSetter Account to enable it to be withdrawn or lent at a later date.
b. Should the Lender’s Re-Investment Options be set in accordance with Section 7(a)(ii) above and the Loan have a longer term than the term of this Loan Contract then the success of the Exchange’s attempt to return the Lender his/her money will be dependent on there being funds available from the RateSetter markets to replace this Loan Contract.
c. If there are insufficient funds available then it will be impossible to return all of the money due under this Loan Contract to the Lender, should that happen, the money will continue to be lent to the Borrower and will be returned to the Lender as the Borrower repays their loan.
The new “Sellout” facility
Where do I find the “Sellout” facility?
Sellout can be found in the “Payments > Withdraw” page of your account.
How does it work?
Lenders request the amount they wish to have returned to their RateSetter Holding Account. RateSetter works out whether this is possible and calculates the cost of doing so. The Lender confirms their wish to go ahead and then RateSetter processes all the necessary assignments. Please note that the Borrower will remain entirely unaffected by this.
What are the costs involved in exiting early?
RateSetter charges when you exit a contract early, with the charges made up of three elements:
• The exiting Lender’s interest is reduced to the level they would have received based on the length of time they have ended up lending for. This is based on the Market Rate and products available on the day they originally lent. So, for example, if you had lent into the 5 Year Income market nine months ago and choose to exit now, you would only receive the interest you would have got from lending in the Monthly Access market for that period of time; if you had lent 13 months ago you would only receive what you would have got from lending in the 1 Year Bond market; if you had lent 37 months ago, you would only receive what you would have got from lending in the 3 Year Income market. With regard to an early exit from the Monthly Access market, the cost is that you forego all the interest for that month. There is a minimum charge of 0.25% of outstanding capital. The purpose of this charge is to ensure there is no incentive to lend for five years if your intention is only to lend for two years;
• An “Assignment Fee” to ensure that if the interest rate in the relevant RateSetter market has gone up the exiting Lender can still exit. This will calculate and deduct from the exiting Lender the amount required to be added to the interest rate to ensure the incoming Lender gets what they expect. In circumstances where interest rates are the same or lower there will be no Assignment Fee.
• Please note there was an additional fixed charge of 0.25% of outstanding capital but as of 7th February 2013 this was stopped.