Following the Covid-19 outbreak and the current economic environment, RateSetter announced on 4 May a temporary reduction in interest for the remainder of the year. During this time, investors will receive only 50% of their interest with the other 50% going to the Provision Fund, for the protection of all investors.  Also, since the outbreak, the time it is taking investors to release their investments is currently longer than normal. Further information is available here. 

Temporary Interest Reduction  

To read our announcement, click here

Why has RateSetter temporarily reduced interest for investors?

An Interest Coverage Ratio above 100% means everyone’s future interest and capital is covered by the Provision Fund.  In the event of the Interest Coverage Ratio going below 100%, RateSetter implements a Stabilisation Period during which investor interest is temporarily reduced.  This interest goes to the Provision Fund, for the protection of all investors. 

This is not something we have had to do before because the Provision Fund is normally able to absorb increases in Expected Future Credit Losses.  A Stabilisation Period has always been set out in our Investor Terms as the plan for what might happen in the event of an economic downturn beyond expectations.

Why is an interest reduction necessary?

Since the outbreak of Covid-19 in the UK, there has been an increase in borrowers requesting a payment freeze.  This is something that all banks and non-bank lenders have experienced.  We are required to provide forbearance in the form of breathing space under existing FCA rules.  We are always committed to looking after all our customers, both our borrowers and investors, and we have existing policies and procedures to manage forbearance.  Most borrowers will resume paying and go on to repay their loan in full but some, unfortunately, will not.  This has led to an increase in Expected Future Credit Losses.

As it is likely that the economic consequences of the lockdown and other restrictions will continue for some time, we have also used economic forecasts from specialists Oxford Economics in our calculation of Expected Future Credit Losses, and in view of the economic uncertainty, we have chosen to apply full weighting to their downside economic case. 

The effect of the increase in Expected Future Credit Losses is that the Interest Coverage Ratio has gone below 100%.  This means that while everyone’s capital remains fully protected (the Capital Coverage Ratio is 166%), not all future interest is.  We are reducing interest, with the interest going to the Provision Fund, to bring the Interest Coverage Ratio back to 100%. 

What does the temporary interest reduction mean in practice for investors?

We have taken into consideration the amount needed to return the Provision Fund Coverage Ratio to 100%, along with the timing of payments the Provision Fund will need to make in light of the current climate.  We also want to ensure you keep earning a positive return every month during the period. 

We have therefore decided on a interest reduction of 50% for the remainder of 2020.  We will keep this under review every 30 days and update you in your monthly investor statement.  If conditions improve, rates will rise as quickly as possible.

What does this mean for my interest? 

The interest earned on each investor’s existing personal investments will depend on the original interest rate of those investments. 

The following table illustrates how the interest reduction will apply to investments at the Going Rate in Access, Plus and Max.

* Assuming the interest reduction applies for eight months.

 

The 1 Year and 5 Year markets have not been available to new investors since October 2019 but are still available to investors with money in those markets.

* Assuming the interest reduction applies for eight months.

The Provision Fund we offer does not give you a right to a payment so you may not receive a pay-out even if you suffer loss. The Fund has absolute discretion as to the amount that may be paid, including making no payment at all. Therefore, investors should not rely on possible pay-outs from the Provision Fund when considering whether or how much to invest.  Learn more

FAQs

Why is RateSetter temporarily reducing interest for investors?

In the event of the Interest Coverage Ratio going below 100%, RateSetter implements a Stabilisation Period during which investor interest is temporarily reduced.  This interest will go to the Provision Fund, for the protection of all investors. 

The Provision Fund surplus (i.e. the Interest Coverage Ratio above 100%) is normally able to absorb increases in Expected Future Credit Losses, but this downturn has occurred with such speed and severity that a temporary interest reduction is now needed to return the Interest Coverage Ratio to 100%.

We expect the interest reduction will last until the end of 2020.  We will keep the interest reduction under review every 30 days.  If conditions improve, rates will rise as quickly as possible.

Yes, we will keep the interest reduction under review every 30 days and update you in your usual monthly investor statement.  If conditions improve, rates will rise as quickly as possible.

Interest Reduction

No, this just applies to interest earned or accrued for the period that interest is reduced.

Yes, this applies to all existing and new investments across all our investment products.

The interest reduction applies to interest earned or accrued across all RateSetter investment products.

The interest reduction applies to all RateSetter investment products.

 

Annual rate so far this year

Annual rate for the rest of the year*

Effective annual rate in 2020*

Access

3.00% p.a.

1.50%p.a.

2.00% p.a.

Plus

3.50% p.a.

1.75%p.a.

2.33% p.a.

Max

4.00% p.a.

2.00%p.a.

2.67% p.a.

*Assuming the interest reduction applies for eight months. 

The interest earned on each investor’s existing personal investments will depend on the original interest rate of those investments.

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These markets have not been available to new investors since October 2019 but are still available to investors with money in those markets.

 

 

Annual rate (latest Market Rate)

Annual rate for the rest of the year*

Effective annual rate in 2020*

1 Year

4.80% p.a.

2.40% p.a.

3.20% p.a.

5 Year

4.50% p.a.

2.25% p.a.

3.00% p.a.

*Assuming the interest reduction applies for eight months. 

The interest earned on each investor’s existing personal investments will depend on the original interest rate of those investments.

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Yes, you can.  The interest earned or accrued will be reduced by 50%.

Changes to the Going Rate do not change the level of resources in the Provision Fund.  It is Interest Reductions that go to the Provision Fund.

£10.4m is needed to return the Interest Coverage Ratio to 100% and once this had been established we then considered the level of the interest reduction and the duration.  We considered a four-month period with zero interest but considered it important that investors continue to earn a positive return on their money every month during the period (i.e. 1.50%, 1.75% and 2.00% in Access, Plus and Max respectively).

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We always do all we can to ensure the loan portfolio performs, and our borrower customer service team and our collections and recoveries teams are working very hard to support borrowers and keep the loan portfolio performing.  We also recently successfully completed a debt sale which brought in £4.65m of cash in to the Provision Fund and boosted the Interest Coverage Ratio because the sale proceeds were higher than our expected recovery assumptions.  We have also increased the amount that new loans pay into the Provision Fund, with new loans being written with a Coverage Ratio above 100%.

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Investing and access

We are temporarily not open to new investors.  We want to make sure the interest reduction announcement beds in, and also update our Appropriateness Test (the test all new investors need to complete before opening an account with RateSetter) to ensure new investors understand the interest reduction.  We expect this to take a week or two, and we will then reopen to new investors. 

 We remain open for new investments from existing investors.

There are no changes to the investment release request process, nor the process of withdrawing money from your Holding Account to your bank account.

The Provision Fund’s purpose is to help investors manage credit risk.  It is not a source of liquidity for investment releases. 

The fees to access money in Plus and Max are calculated at the time that the investment release request is processed.  We will factor in the interest reduction in this calculation.  There are no changes to the early access fees for the 1 Year and 5 Year products.

Provision Fund data

Yes, by looking forward, the Provision Fund brings immediate visibility of Future Expected Credit Losses for the portfolio via a single figure, rather than credit losses only becoming visible as they actually occur over time.

 The Capital Coverage Ratio, a measure of the amount by which everyone’s capital is fully protected, is 166%. 

Yes, the monthly updates of Provision Fund data (resources, expected future credit losses, Interest Coverage Ratio and Capital Coverage Ratio) will continue as normal on our statistics page.

The monthly updates of the data on our statistics page will continue as normal.

The latest Provision Fund data is on our statistics page and will continue to be updated each month as normal.

Other

We are lending, but at a much-reduced level.  We continue to deliver to our existing Property Development Finance customers as they complete their developments because allowing construction to continue where possible is in the interests of borrowers and investors.  We are also delivering Consumer loans directly via our website, but with significantly tightened lending criteria.

We speak to each borrower that requests breathing space and our approach is tailored to the borrower’s specific financial circumstances.  We keep forbearance arrangements under review with each borrower.

There is no change for borrowers.  We think it is right to give support to borrowers, where appropriate, and we have existing policies and procedures to manage forbearance.