There were a lot of questions around regulation at last year’s Lender Drinks. A year later and we find ourselves only 11 months away from becoming a fully regulated industry. How time flies.

Thank you to all our Lenders who made the trip into Central London for RateSetter’s 3rd annual Lender Drinks event. It’s an event which brings together our Lenders from across the country, some from far and wide for which we really appreciate. It was a great evening for all involved, and the presence of RateSetter staff with badges proudly pinned allowed for more mingling than the last two years put together. Lenders had the opportunity to ‘pop the hood’ and chat to the people running and maintaining the RateSetter engine.

After an initial introduction from Rhydian the floor was opened for a session of Q&A with lots of questions around the Provision Fund, how the peer-to-peer industry is evolving, the RateSetter credit process, the security of our IT systems, who RateSetter banks with and how the rates you are all setting on RateSetter fit into the wider world – all answered with the tell-it-as-it-is style of Rhydian and Peter! Thank you to those who got involved, and if you didn’t get your chance to ask your question you can always send it through by email to contactus@RateSetter.com.

Those that attended were given a sneak preview of an up and coming feature which will be added to our website soon. For those that didn’t attend you’ll have to wait a little longer to see what it is!

Here’s to another successful Lender Drinks and to many more in the future. We look forwards to seeing as many of you as possible at the next one.

Lenders can now download our ‘loanbook’ by year of origination. You can do so by logging into your account and selecting RateSetter Info > Provision Fund and scrolling to the bottom of the page.

The data tells a compelling story: that we have carefully managed the default rate, well within the expectations and the limits of the Provision Fund. In total, the amount of bad debt experienced is currently 0.37% of the total amount of loans originated and less than 1% of the amount collected – this is, we believe, very solid and in line with or ahead of what some mainstream high street banks and building societies might expect.

The reason why we are publishing this data now is that – after 2 and half years of lending – we are starting to see how the loans perform over time. RateSetter understand that it takes time for trends to emerge and so we are always cautious with extrapolating numbers that have yet to settle down. However, the early signs are encouraging: take a look, for example, at the 2011 ‘loanbook’ – made up of loans that have had a year or two to mature – and you will see that the bad debt rates are currently 0.62% of originated and 0.80% of collected. We feel this is decent proxy for the quality of RateSetter’s credit assessment.

When we launched RateSetter, we wanted to give an indication of what we expected the bad debt rate to be – this is obviously in reality a dynamic number but we felt it was right to publish a static number to give our lenders an indication of the type of credit policy that RateSetter employs.  The figure of <1.4% was based on our analysis of 7.8 million loan records. We are obviously pleased that the actual bad debt experienced has so far been within our expectations. This has allowed RateSetter to ensure every lender has received every penny and allowed our unique Provision Fund to grow.

Our belief is that RateSetter’s success is built upon our risk management: protecting Lenders first and foremost by careful credit management, with the Provision Fund there as the back-up. Having the Fund makes us no less stringent in our credit process.

We will will continue to update the loanbook data in real time, so those who keep a keen eye on our performance can make accurate assessments. We hope it is clear and helpful.

Below is the 2011 ‘loanbook’ downloaded as at Thursday 28th March 2013:

Loanbook 2011

Explanatory notes:
Month: of the year (1 = January)
Origination: amount of new loans originated in that month
Paid Back: amount that has been paid back
Balance: amount outstanding
Bad Debt: the bad debt experienced from those loans (please note, we would still expect to recover some of this bad debt as part of the post-default recovery process)
Bad Debt rates: they can be viewed as % of the amount or the amount already repaid (once the loans are fully repaid, the figures will be the same). We have quoted both numbers here for clarity.

The feedback from Lenders has been encouraging, with many telling us that is has rounded out the RateSetter proposition for them – if you can get out, you are happier to get in.

Some Lenders have been wanting to exit for one reason or another and have welcomed the new functionality. Others have used it, only to reinvest in longer term markets – it’s gratifying to see that people are using Sellout to increase rather than reduce their commitment to RateSetter!

Over the past two weeks we have seen £174,868.54 of loans sold out across all the four markets.

Our objective was to create a simple system that lets Lenders access their funds quickly and easily and design a secondary market that allows reliable access without encouraging speculation – we want to create a situation where the rate matches your commitment, even if you exit early.

Like many things that appear simple, there is a much complexity under the bonnet and it has taken a surprising amount of time and resource to build. Firstly, we applied that the principle that you can always withdraw your funds from RateSetter – provided there is another lender(s) to take your place. There were then three key things to consider: how contracts would be refinanced, which individual contracts would be sold and the cost to the Lender for being able to access their funds early:

• Contracts are refinanced in their original market. This means that there will regularly be situations where assigned contracts are shorter than the full market term. This happens quite a lot in peer-to-peer lending anyway because the Borrower has the right to repay at any time which means contracts are frequently not of the originally intended duration.

• As for which contracts are sold, it starts with the most recent. In one sense, it’s arbitrary as to which order we choose contracts to sell on Lenders’ behalf – our rationale was that younger contracts should be more reflective of current rates and less likely to incur assignment fees (even though the duration on those contracts would be higher). So, it is a real-time calculation based on live rates and specific to you on any given day that you look to Sellout.

• Balancing a decent rate of return without creating perverse incentives guided how we approached the question of cost. We feel the principle of our offering – that Lenders receive the rate of return they would have achieved had they chosen to lend for the same length of time they end up lending for – is simple and fair. Yes, you give up some of the interest you have earnt but you are fully rewarded for your time in the market.
  • So, a 5 Year Income contract sold out after 1 month receives the Monthly Access rate, after 12 months the 1 Year Bond rate, and after 36 months the 3 Year Income rate. These rates are based on a snapshot of the rates and markets that were available the day the contract was formed. As we add terms on RateSetter, the rates can become even more granular.
  • We initially intended an additional 0.25% fee to discourage “abuse”. We have amended this fee to apply as a 0.25% minimum to your entire Sellout order.
  • To smooth the sharpest drops, we have retrospectively applied the 1 Year Bond since its inception (Feb 2012) back to day zero. This has the effect of decreasing a sharp drop in return facing those Lenders who matched 3 Year Income rates before the 1 Year Bond existed.
  • There is another potential cost as well. If rates rise, the contract must be refinanced at a higher rate. In this situation, the Lender will also incur an “Assignment Fee”. The assignment fee is used to compensate the new Lender (“the assignee”) for being matched with contracts with an interest rate that is less than his request. This ensures contracts can always be sold, though at potentially a higher cost if rates have moved against you – it also ensures there is no benefit to Sellout only to re-lend at better rates. If rates have fallen, the excess interest – rather than going to you or the new lender – goes to the Provision Fund.
  • So, the overall cost of exit (the exit fee plus any assignment fee) can therefore vary depending on when the contract was originated and what the refinancing rate is. It is lower in the early stage of the contract (because the amount of interest foregone is so little) but can also be expensive because the assignment fee is most sensitive to interest rate increases when the remaining duration is highest.
  • In total, the £174,868.54 that has been refinanced has cost 1.12%: 0.95% in exit fees and 0.16% of assignment fees.

Below we have set out a worked example, showing what happens when someone exits the 3 Year Income market at various stages during the 3 years and what the net return is.

Sellout is our latest step in creating a richer and more rounded offering that reflects how Lenders want to use RateSetter. It requires a lot of calculations (and processing power!) but we think it follows fair and simple principles and adds reliable liquidity to the list of advantages of lending on RateSetter. Thank you for all your comments so far, and please keep them coming – we will keep looking to innovate and respond.

Kind regards

The RateSetter Team

Sellout: A Worked Example.
£1,000 lent and reinvested for 3 Years at 7.8% (1st January 2011)

Sellout ensures your rate matches your commitment

The accusation that is now being proven is that certain individuals and banks manipulated key interest rates to serve their own purposes. Sometimes, it was for excess profit. Other times, it was just to show that the bank was in a stronger position that it really was.

The ethical considerations are perhaps best left to judges and priests – we wanted to draw attention to the technical point: the rates the banks submitted were based on “quotes”, not actual transactions. This meant it was easier for humans to fudge the “quote” in a way you can’t with real data.

And the number of people quoting was tiny: just 16 banks for sterling LIBOR. Hardly a big sample.

While the financial world grapples with the ramifications of this scandal, the online world has moved on: RateSetter is where the rates are set by the users, not by reference to bank rates. The Monthly Access market references thousands of actual transactions a day to determine the Market Rate. Real orders, thousands of people.

In his report on the scandal, Martin Wheatley, head of the new FCA called for real transactions to be used, not quotes. Sounds like the online consumer world is ahead of the times…!

Rhydian is rather passionate about this idea: “I love markets. That’s why I wanted to set up RateSetter – to bring a live market to a moribund savings world dominated by a few banks. The fact that it’s our customers who are the rate-setters as opposed to 16 banks is a sign of how the internet can democratise all sorts of things, including the previously opaque world of interest rates.”

Goodbye 2012, the Year of Peer to Peer

2012 will be remembered for many things, whether your interests lie in sport, the arts, politics… even financial services. It was a monumental year for both RateSetter and the wider world of peer to peer lending – the year the sector “came of age” as one commentator put it. Twelve months ago, RateSetter had matched £13m in 3,500 loans, and we felt excited by the prospect of more growth in 2012. One year on, we have matched £45m and well over 10,000 loans. There have been many highlights; below we have charted just a few.

January saw a record – our first time matching over £2m in a single month – with strong New Year demand. We were already aware of some of the restrictions our site was putting on us, and we started plotting a new version. It wouldn’t be unveiled for some months, as Development was furiously working on our next release which was to come in February with the introduction of the first ever P2P 1 Year Bond. This would prove to be an extremely popular product with Lenders, alongside a new 5 Year Income market.

April was a new record month, £2.6m matched which took us through the £20m barrier, and saw the launch of our referral programme. An indication that P2P would be viewed favourably as applicants for the Business Finance Partnership was announced. Whilst we didn’t apply for money through the scheme, it demonstrated that Government were taking a keen interest in our emerging sector.

Imminent staff arrivals in May predicated a change in office space – moving upstairs a  floor in our Southwark home to a much larger space to accommodate expansion. We hosted 50 lenders for drinks at the Coat and Badge on the river in London – Peter and Rhydian were quizzed expertly on a number of topics, not least regulation (more of that later). A night out for some of the team resulted in a much coveted gong at the Moneywise Most Trusted awards – “Highly Commended” in the Loans category. Lenders were reassured as the Provision Fund continued to grow – reaching £500k in June – and continues to ensure that every Lender has received every penny…. (all right all right… I’ll stop banging on..)

Whilst everyone else took the summer off to watch the Olympics, we launched a new website the day after the Opening Ceremony. An enormous piece of work completed by a small team, we were pleased to bring a new approach to the RateSetter experience. We continued to develop and innovate on the new platform (with more to come in 2013).

The new site also prefaced our first £3m month in September: by now, all our internal teams had grown and the engine room was purring nicely. That solid growth continued into October, a new record, as we celebrated our second birthday, and this new level of business was sustained throughout the rest of the year. In the US, Lending Club matched it’s 1 billionth dollar, demonstrating the scale that P2P can achieve in the right environment. November saw more lender improvements on the website, with the ability to split the reinvestment of capital and interest, and to automate withdrawals to your bank account introduced.

December was billed as being a month of big news as the government announced that it would regulate the sector as part of 2013’s Financial Services Bill, with formal regulation to start in April 2014. P2P was given another boost with news that it had been awarded government investment – RateSetter chose not to ask for additional lending funds as part of this deal, but it formalised the government’s positive response to peer to peer lending ahead of formal regulation.

So as a hectic and momentous 2012 comes to a close, on behalf of RateSetter, we’d like to thank everyone who has participated and made it such a fantastic year. Here’s to making 2013 even better.

Happy New Year!

Best Front Cover, 2012

Top 5 Peer to Peer Articles of 2012 (in our view)

Best on P2P: Anthony Hilton: London Evening Standard

Best on Regulation: James Hurley, The Daily Telegraph

Best Front Cover: Investor’s Chronicle (see right)

Best on Borrowing: Richard Dyson, Mail on Sunday

Best Consumer View: Martin Lewis, MoneySavingExpert

The Regulators

Last Thursday, Lord Leveson published his long-awaited recommendations on future regulation of the press. Much was made of “statutory underpinning” and the level to which legislation should clarify the rights and wrongs of how the press should operate. The press – as one might expect – has been crying bloody murder at the risk of having their power curtailed.

In the world of peer-to-peer, we exist at the opposite end of the spectrum. We welcome the prospect of legislation that would give us the ability to become a regulated entity, putting us on a level playing field with other financial services. It would enable us to participate within an accepted framework and be accepted as a credible sector in the financial world. From there, we can truly disrupt.

Over the last 12 months, we have proactively knocked on the door of Government and regulators – together with our industry colleagues – asking them to consider peer-to-peer as an industry worthy of some attention. The general response, from legislators and regulators alike, could be described as “intrigued but non-committal” – their view was that peer-to-peer was a fascinating alternative to traditional models but needed to demonstrate more growth and scale before it was a candidate for formal regulation.

So it was with some surprise that we were informed by the Treasury this week that the Government is committed to pursuing regulation of the P2P industry in the forthcoming Financial Services Bill and that peer-to-peer lending will become a “regulated activity” in April 2014. Our surprise was not that the Government thinks this is a good idea but that we had managed to effect change in a relatively short period of time!

We believe this is fantastic news for the peer-to-peer industry and for its customers: it is evidence that the government thinks we are a credible model which allows consumers and businesses to benefit; it is support for the self-regulatory activity that we have undertaken that sets out to ensure consumers are protected; it opens the door, in the longer term, to create regulated and tax-efficient products based on peer-to-peer lending. The P2P ISA, anyone?!

Thank you to everyone who has offered their insight and feedback on this topic.

As always please let us know your views.

Rhydian Lewis, CEO of RateSetter

There has been so much talk of financial regulation over the last few years that you are probably sick and tired of hearing about it. So… a big subject, but a short post.

I spend a lot of my time at RateSetter on the subject of regulation. Discussing it with law-makers and regulators, fielding questions from the media, talking over the phone with customers. From day one, I have believed a degree of regulation was appropriate for peer-to-peer finance as it grows and I am delighted that the industry has been genuinely proactive on regulation, coming together to form the P2PFA being just one example.

Most industries avoid regulation; the simple message from peer-to-peer finance is that we welcome the discussion of it. I don’t believe regulation is a panacea – far from it, the best thing to protect customers is the integrity of the people running financial services businesses. If you try to over-protect, you risk stifling everything as well as a dangerous complacency that kids people there is no risk in the system… which is what causes mis-pricing and bubbles to emerge.

But I do believe a sensible framework for peer-to-peer finance makes sense and good regulation can absolutely help that. The devil, of course, will be in the detail – for regulation to be proportionate and sensitive to the model; to offer oversight and rules without pointless restriction and burden. Peer-to-peer offers the customer fantastic value and choice – that is why it is growing – and that should continue.

You can see here in the Rules & Operating Principles of the P2PFA how we think peer-to-peer should be regulated. A blueprint, if you like. These principles are meant to be proportionate, place the burden on the operator, not the customer and, crucially, allow an objective framework that can accommodate peer to peer in many forms and products. The key is that the operator itself is sound, offering customers a robust platform through which they can exchange value. We blogged about this back in August 2011 – when the P2PFA was formed – and the same philosophy holds today.

That’s enough from me. What I would like to hear is what would you, the people actually using peer-to-peer finance, want from regulation? That is the most interesting question of them all…

Rhydian

RateSetter Lenders are spread across the UK (with the exception of the Channel Islands)

Scratching around on the best buy tables can be a humbling experience for the UK’s Saver.

“What’s this nugget I find in the Best Buy table? Ooh 2.5% from Nationwide! Oh. It’s only for a year? What then?  0.5%. Lordy.”

“Wait! 2.8% in an ISA! Grab it quick. It won’t last. ING will be bought by Barclays and then… oh… it’s gone.”

Those who are searching for an income from a nest egg are being brutally punished for their thrift by the current environment. To make matters worse, “Funding for Lending” has injected yet more cheap money into the banking system causing savings rates to plummet in the last few months – why would banks want to pay up for your deposits if they can borrow so cheaply from the central authorities?

So in a fit of self-righteous indignation, we set out to discover how the UK’s Savers were faring. The results were less than inspiring.

In our survey (where 85% of respondents stated “I have a firm grip on my finances”)…

- 70% had savings accounts which were failing to cover inflation. i.e. their  wealth in real terms was dripping away via the banking system.

- Only 1 person in 8 (12%) could identify the rate of inflation.

- 23% of respondents had no savings accounts whatsoever.

- 21% had a savings account, yet had no idea of the return it was achieving.

- In Cardiff (Britain’s “worst” savers) just 20% of people had accounts that were covering inflation.

What does this tell us?
One obvious conclusion to draw is that the state of the UK’s financial literacy is dire. Perhaps the 85% who believe they have a firm grip on their finances are deluding themselves.

Or more likely, many have simply no idea of where to turn. Early adopters have embraced RateSetter because they are the kind of people who want to tame new technology – and have profited from some terrific rates. But the broad majority are aware that their wealth is deteriorating, but are unaware of the options they have.

As we continue to fulfil our end of the bargain by returning every penny to every lender, rates have dropped, and early adopters are giving rise to an early majority. The shrewd end of the savings spectrum are helping those who haven’t heard –  in a conversation that is increasingly taking place around kitchen tables, in pubs and golf clubs, and in the car on the way to the vet. It’s a very British revolution, and one that we are proud to be playing a role in. (OK admittedly the Welsh are a little way behind the pack. But they’ll be back, singing their way back into our hearts with their running rugby and spectacular lamb dishes.)

RateSetters meanwhile can sleep easier knowing that they are in that financial elite that continues to grow their money. In fact, when reflecting on our two years in business, we delved into historical rates and discovered immutable proof that lending on RateSetter has been 2.5 times more profitable than the average savings account over the last two years – we have created over £1m in interest that would have generated just over £380k in the banking system.

So our campaign to share the wealth of RateSetter with our friends (Welsh or otherwise) starts here. Save a Saver. Unleash a Lender.

Whilst this may sound like a significant development, we wanted to post a blog just to reassure you that nothing fundamentally is changing in how we manage contracts or borrowers, or indeed your rights within the contract.

As we have stated before, our key role is providing creditworthy Borrowers into the RateSetter markets, and assessing the risk levels of all Borrowers to ensure the Provision Fund is compensated adequately. This remains absolutely our priority and these changes are an extension of our desire to broaden the distribution of RateSetter Loans and match the ever increasing demand from Lenders. The contract differences are minor and refer to the process of how we originate the loan, in this case it is being “assigned” to be matched by RateSetter from a third party introducer.

The most important thing that we wanted to clarify is that the key principles of RateSetter still apply: our credit process remains stringent and solely our responsibility, the Fund protects our Lenders from bad debt, and our debt management processes are still clear and robust. All of these things are demonstrated in the data that you can see under the Provision Fund tab in the RateSetter Info area of the Member site.

As we develop our loans marketing channels, it is possible that we will introduce new versions of our loan contract to allow us to deliver new relationships for origination. But the principles above are non-negotiable as we agree new introducer relationships, and the protection of Lenders remains our number one priority.

Change for the better…

OK…breathe deeply. Head out of hands now… We understand that it can be annoying when sites change. You’ve learned the way to find the things you need, and suddenly everything has moved and you can’t find it. We understand… we’ve been there too.

But we’re very excited by our new site, and we hope it is the start of a much more user friendly version of RateSetter. The new site is a big change on a number of levels, and we think it will improve the experience of everyone who comes to RateSetter.

There are a number of technical reasons that we’ve made the change. We’ve upgraded the technology behind the site which will gives us a lot of potential for the future improvement of the site. We’ve got a lot of plans for new features in the coming months, and we wanted a platform that would cope with those improvements.. It was also important to us to separate the “Visitor” part of the site from the “Member” part of the site. There are some good reasons for doing this – it means that our Visitor pages can be more visitor friendly, without getting in the way of the important member screens, which is optimised for a functional user experience. It’s meant that we have enhanced the security of the site, and that we could start from scratch in approaching how we display the information that members need to see. You’ll hopefully see that in the new Lender area in the Member site.

You’ll see that Visitor site is a bit more “whizzy” – that is partly a function of some new technology and partly that we wanted to create a more interactive experience, particularly for Borrowers. The Visitor site is designed to explain RateSetter simply to potential Members, and to encourage them to participate, without having to see all the inner workings of the Member area on first inspection. Our main task is to find good quality Borrowers for our Lenders, and we felt that the website needed to work harder in that regard.

Lastly you will see that our brand has moved on to a more energetic incarnation of RateSetter. They say that nothing rhymes with Purple, and that’s how we feel about RateSetter – that there is nothing out there quite like us, and we want to be bolder and more confident as a business. After nearly two years since launch, we feel we have a great story to tell, and a fantastic peer to peer movement is under way that we want to tell the world about.

If you have comments, feedback or questions about the site, please direct them to contactus@ratesetter.com for prompt attention.