LONDON — Peer-to-peer lending platform RateSetter has taken over two businesses and taken a minority stake in a third as part of efforts to protect investors from losses.
RateSetter COO and cofounder Peter Behrens told customers in an email sent this week that the fintech startup has “intervened over and above the usual course of business with three of its borrowers.” RateSetter lent a collective £80 million to the companies in question.
RateSetter has bought two subsidiaries of a motor financing business out of administration, taken over an advertising company, and taken a minority stake in a consumer lending business.
RateSetter’s platform lets ordinary people lend out money directly to those looking to borrow, giving them a more attractive rate of return than those offered by High Street banks. It began only doing consumer loans but has branched out into wholesale lending — financing for other lending businesses — which is where problems occurred.
RateSetter lent £36 million to Vehicle Trading Group, the motor financing business, which ended up in administration after taking on too much debt. Adpod, the advertising business, was “poorly managed and got into financial difficulty” after receiving a £12 million loan from RateSetter. RateSetter is also backing away from a planned partnership with George Banco, the consumer lender, which has received £32 million from the platform.
Loans made by Vehicle Trading Group and George Banco using RateSetter’s funding are still performing well. However, in the case of Adpod, RateSetter is standing behind the loan — effectively paying investors on its platform off its own balance sheet if it has to.
The Financial Conduct Authority (FCA) warned last year that it was concerned by wholesale lending by peer-to-peer platforms. CEO Andrew Bailey told Business Insider: “If one fails it could have knock-on effects throughout the other players. And then also investors may not understand the risks they are getting into because if they have chosen one platform because they like it they might find they’re exposed to other platforms.”
RateSetter, which is yet to be licensed by the FCA, shuttered its wholesale lending operation in December. Behrens says in the email to customers: “All stem from RateSetter’s wholesale lending which we discontinued in December 2016 and we do not intend to intervene like this again.”
The unusual interventions by RateSetter mean that the estimated 50,000 investors on the platform will be protected from any losses from the bad loans. RateSetter operates what is called a provision fund — a fund meant to cover a certain amount of initial losses, therefore giving investors some protection. However, the failure of the £80 million-worth of loans would have exceeded the fund’s capacity to absorb losses.
After the intervention, “the expected default rate on RateSetter’s outstanding lending is unaffected and stands at 2.9 per cent, and currently we estimate that the Provision Fund is large enough to cover all Expected Future Losses,” Behrens says in his email.
“All new lending is delivered directly to the end borrowers, who make an appropriate payment into the Provision Fund based on RateSetter’s assessment of their creditworthiness when the loan is granted.”
RateSetter is not unusual in absorbing losses that would otherwise be passed to investors and taking unusual actions to protect investors. Business Insider reported this week that Wellesley & Co, a peer-to-peer property lending platform, took the decision to take the hit on losses on three “outlier” loans, a move that forced it to raise £2.5 million from its founder and directors.
However, the FCA has also said it is concerned by provision funds and other devices that protect investors from losses, saying they pose problems around transparency as investors can’t easily see the risk they are exposed to.
RateSetter says in its email to customers: “The Provision Fund does not provide a guarantee of safety of your investment.”
The company is also giving customers the option to sell-out of their investments on the platform free of charge for the next month if they are unhappy with the actions RateSetter has taken with the three businesses.
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