Provision Fund: security and recoveries

By Rhydian Lewis

In over five years, and with £1bn lent, not one individual RateSetter investor has lost a penny. This is an enviable track record and one that we are highly incentivised to maintain.

RateSetter takes a highly proactive approach to managing investor risk. This starts with our policy to only lend to creditworthy borrowers: our team of experts conduct credit and affordability checks on all borrowers, resulting in only one in five applications being approved. We also diversify our loan book across various types of borrowers, in different parts of the country and through various channels.

We pioneered the Provision Fund to manage risk and offer greater predictability to our investors. All borrowers pay a risk-adjusted fee into the Provision Fund, which reimburses investors if a borrower misses a payment. The Provision Fund has grown over time and we have always reported its size on our website and will continue to do so. However, looking at the size of the Provision Fund alone does not provide the full picture of the protection. There are two other factors to consider: the security held on behalf of RateSetter investors and recoveries from defaulted loans.

Firstly, the security: In addition to the contribution they make to the Provision Fund, we require that some borrowers provide security. The security is agreed on a case-by-case basis but can include things like cars, residential properties, or financial assets. If one of these borrowers were to default, the Provision Fund would reimburse investors in the usual way, but would also be able to use the security to recover the outstanding debt.

In order to provide greater transparency for investors, from today we will report on the value of security held, in addition to the amount of cash held by the Provision Fund. The current value of the secured loans is £118m and the estimated current value of the security is £152 million (please note that these figures only include assets over which there is a fixed or floating charge, and do not include the value of any debentures taken over a business's assets). These numbers have been added to the Provision Fund page, and will be updated every month. You will see that the value of the security is higher than the value of the loans because of the loan to value ratios that we factor into to our secured lending decisions.

The loan to values range depending on the assets – in the case of money lent to other lending businesses where we take security over loans they write, the ratio is typically around 85% while for loans to finance property development we aim for a ratio at or lower than 65% of the pre-development value. Overall, we’ve erred on the side of caution when calculating the value of security held as we think it’s preferable to understate rather than overstate the position.

Secondly, the recoveries from defaulted loans. The Provision Fund takes on non-performing loans and reimburses investors. However, even after a loan is transferred to the Provision Fund, we continue making efforts to recover the unpaid balance. In December, we reported that the amount of recoveries from these loans in the month of November was £80k – this gives an idea of the kind of cash flow that is coming back into the Fund every month as it collects on defaulted loans. This cash flow can be seen as an asset of the Fund, over and above the cash balances we show on the website. To date, we have not shown these defaulted loans as an asset of the Provision Fund, but as we continue to develop how we report on the Provision Fund, this is something we will look to do.

We hope you agree that this is useful information that illustrates our robust approach to managing investor risk.