The Provision Fund
The Provision Fund works as a buffer against bad debts. It has ensured that to date, every individual investor has received the returns they expected without losing a penny. This is not a guarantee for the future, but it is a track record that we are proud of and are highly incentivised to maintain.
In 2010 we established the Provision Fund to manage risk and offer greater predictability to investors. With £1,668,850,328 lent to date, we’re proud that the Provision Fund has ensured that not one of our 48,745 individual investors has lost a penny. We always like to be clear that the Provision Fund does not provide a guarantee and investments are not covered by the Financial Services Compensation Scheme.
Provision Fund Coverage Ratio
The Coverage Ratio is how we estimate the Provision Fund’s ability to ensure lenders get all their money back, plus interest earned. It is calculated by dividing the size of the Provision Fund by Expected Losses. A 100% Coverage Ratio indicates that the Provision Fund should be able to cover all expected claims. A Coverage Ratio greater than 100% means that all expected claims should be covered with money to spare.
RateSetter’s target range for the Coverage Ratio is between 125% and 150%.
Size of the Provision Fund
All borrowers pay a risk-weighted contribution into the Provision Fund. Some of this is paid upfront, some is spread over the lifetime of the loans. The contributions spread over the lifetime of the loans are called the "Contractual Future Income". The figure shown above has been appropriately reduced to reflect early repayments and defaults.
This is made up of £15,513,293 contributions plus £6,843,430 in Contractual Future Income.