Is Ratesetter safe?

*Rainbow*Warrior*

Has anyone dealt with Ratesetter please? Looking for a fixed rate bond or similar savings plan, and Ratesetter came up on Compare the Market as offering 4.8% on 3 years and 6.2% for 5 years. Sounds too good to be true which rings alarm bells - but the fact that it appears on a reputable comparison site makes me wonder if it's ok.

Does anyone know anything about this company?

Reaper

It is not a savings account and should not be compared with savings accounts. It is peer-to-peer lending so you are lending money to others.

Unlike a savings account there is no FSCS compensation available if it all goes pear shaped, though they do have their own "Provision Fund" to try to cover any defaults. That is why the rates are higher as there is an element of risk.

P.S. If you are interested in the subject here is the MSE article on peer to peer lending:
http://www.moneysavingexpert.com/savings/peer-to-peer-lending?_ga=1.123120770.88245635.1395225779

Your_Hero

This is a completely different ball game. It's a peer to peer platform where you lock in your money to lend to others. There is of course default risk when the borrowers cannot repay you. It's also not covered under the FSCS.

Although they claim to have this "Provision Fund" which is a reserve to repay you if the borrowers fail to. This fund only stands at £6m. Compare this with the total peer to peer loans they are guaranteeing which is £175m and you will get an idea that it isn't so safe after all.

*Rainbow*Warrior*

Thanks - it's not a risk I can afford to take! I guess the search goes on...

TattyBear

Some unduly pessimistic posts here. If you want 2% from a 5yr fixed term on an ISA which probably won't even keep pace with inflation, then go for the ISA and watch the buying power of your money dwindle.

P2P is only slightly more risky than a stocks and shares ISA. You can just as easily lose all your money in one of those as you could lending to companies.

6%+ over 5 years is well worth the risk, and you can get your money in an emergency if you need it, and without penalty, which you can't do in a fixed rate ISA. You also get monthly repayments including interest, meaning you can reinvest your monthly receipts (and interest if you want) so that at any given time, a portion of your original investment is earning double interest, although this won't be of much significance unless your monthly receipts are at least four figures.

Scarpacci

TattyBear wrote: »

P2P is only slightly more risky than a stocks and shares ISA. You can just as easily lose all your money in one of those as you could lending to companies.

You may be able to easily lose all your money in a Stocks and Shares ISA, but that doesn't mean S&S ISAs are even close to being as risky. S&S ISAs can encompass so many different investment strategies that vary in risk that it's unfair to compare them to a single investment with its own risk level.

RateSetter might well work out better than opening an ISA and sticking all your money in shares of whatever hot rising company has caught people's attentions, but it's arguably much more risky than even some of the relatively more risky investments like a FTSE tracker or an equity fund. It's involves much more risk than a more diversified fund.

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Peer to Peer lending may well have a place in a diversified portfolio for people comfortable with more risk, but I don't think the above posts are overlyl pessimistic. I'd be concerned many people do view this not as investments, but on par with savings bonds.

Personally, I don't think the rates do justify the risks of not knowing how stringent their lending policies are and the resulting risk of borrowers defaulting. It seems to me something that will likely work well during stable/good economic times, but could come crashing down when the economy sours. Their provisions are fine when most borrowers are handling the repayments, but don't look all that strong when defaults start to happen across the board.

I'd be especially troubled by the fact loans are not spread out, so you lend your money and it goes to one borrower. In a crisis this would get very ugly if the provisions dwindle and some people are losing money because of a borrower they really didn't personally choose, while others get lucky when theirs doesn't default. The risks are somewhat lessened by the monthly repayments and that borrowers can and do repay early, but it seems like a game of musical chairs to me. It's fine until the music stops and you're without a chair.

Better_Call_Saul

While I agree with Scarpacci that Ratesetter p2p lending should not be regarded as a savings bond I'm not sure I see the risk level as more than a S&S ISA. Ratesetter has paid every lender everything they have leant plus the promised interest since its inception. So on the face of it with past performance as a guide there seems to be very little risk with this company.

Scarpacci

Better_Call_Saul wrote: »

While I agree with Scarpacci that Ratesetter p2p lending should not be regarded as a savings bond I'm not sure I see the risk level as more than a S&S ISA. Ratesetter has paid every lender everything they have leant plus the promised interest since its inception. So on the face of it with past performance as a guide there seems to be very little risk with this company.

True, but as they always say past performance isn't a guide to future returns. Ratesetter has being going about four years and has operated in a period of relative financial stability in the UK economy. Not to say things were good per se, but that the situation was clear. They weren't lending money in the same environment as banks were in 2007, for example, where everything looks rosy and then suddenly isn't. But how will things look in 2018 or 2020 or whenever the next crisis hits?

I don't know much about their underwriting and how likely its clients are to end up in financial distress, which is part of my concern towards peer-to-peer lending in general. They say they're competing for prime customers and that's all well and good, but even prime lenders see defaults rise. How much of their success so far is through good underwriting or benign conditions for lenders? Is the provision fund going to be enough in the face of a serious recession? How does it compare to what banks are required to hold? What would Ratesetter look like in a crisis when banks are failing, which are likely to see some sort of bailout, and they has no such protection? I would hope people investing with Ratesetter would have convincing answers to those questions.

People who lend peer-to-peer are taking on the risk of lending money to a person and whether that person can pay the money back. Ideally, this is abated by the provision fund, but then the person is left with the risk that Ratesetter might not have the provisions to cover. That puts a large amount of a person's investment at risk and could theoretically see them left with only the interest/capital they've already been paid out. These seems like risks most people wouldn't be willing to take, perhaps even some seasoned investors.

People investing in a FTSE 100 tracker, not the least risky of S&S investments by any means, generally just face the risk of under-performance. There is a risk that one or a few companies could fail completely, but this is unlikely and would not result in a loss of all the person's money and most likely not a sizeable chunk either. There's practically no chance the 100 companies go bust and people lose all their money. There's a minimal chance of some sort of corporate chicanery putting their investments at risk at the company holding them, though firms are generally well regulated and there is some FSFC protection for that. There's absolutely the risk that it will drop significantly and dividends will go down, but the potential for loss seems lower to me in that sort of investment. A more balanced fund or index would minimise some of those risks further.

TattyBear

There are very few certainties in life. If another banking crisis hit, would the FSCS be able to handle the load? I'm very skeptical as to Osborne's motives for raising the ISA allowance to £15K. He's just getting the public to fund the banks through the back door while ensuring that interest rates stay at their current pittance, so the banks are basically getting interest free loans from the public. If that Canadian buffoon at the BofE became anymore confused about interest rates, he'd give himself an embolism from the strain of remembering his own name. He's just Osborne's stooge.

To be honest, with your attitude towards risk, given what bank savings rates are, you might as well keep your savings in a locked box under your bed if you're not willing to push the boat out. As with all things though, never invest more than you can afford to lose.

Scarpacci

TattyBear wrote: »

There are very few certainties in life. If another banking crisis hit, would the FSCS be able to handle the load? I'm very skeptical as to Osborne's motives for raising the ISA allowance to £15K. He's just getting the public to fund the banks through the back door while ensuring that interest rates stay at their current pittance, so the banks are basically getting interest free loans from the public. If that Canadian buffoon at the BofE became anymore confused about interest rates, he'd give himself an embolism from the strain of remembering his own name. He's just Osborne's stooge.

We don't know what a crisis would hold but I think the country would be far less able to withstand letting a bank fail than it would seeing peer to peer lenders go to the wall. Which means the government is probably going to have to stand behind the banks again.

TattyBear wrote: »

To be honest, with your attitude towards risk, given what bank savings rates are, you might as well keep your savings in a locked box under your bed if you're not willing to push the boat out. As with all things though, never invest more than you can afford to lose.

It's not just an attitude to risk, it's an attitude to reward. If you're willing to take risk, why not go for investments which could shoot the lights out? Why take the risk for a capped 6% gain when you could see individual stocks, funds or even indexes rise much more? I have investments in indexes and also individual stocks, which many people here view as very risky, but I'm happy with volatility and understand the risks there.

That it's compared to savings rates is what concerns me about the popularity of peer-to-peer lending. It could be an appropriate alternative to individual stocks, corporate bonds or a myriad of other investments, but not to cash. I'm not saying it's insanely risking, I just think the risks can be overlooked.

epicurate

I have a small Ratesetter stake, and I think they do a decent job of presenting themselves as a cautious bunch who are making ample provision. You're right thought that there isn't full transparency on the general creditworthiness of their borrowers. You have to have a degree of trust in their default estimates being robust. They are checked and reported on by Equifax, for what it's worth.

I think they have a good answer on diversification though, which is one of your concerns Scarpacci. In the event that it's looking like the provision fund will be inadequate to cover all defaults, it switches to active management with the aim of securing a fair distribution amongst all affected lenders. In other words, just because "your" loan defaults first doesn't mean you get to have first dibs on the pot. So the structure of the PF is intended to provide a degree of risk-spreading.

Of course in this sort of disaster scenario the risk is that Ratesetter's own funds (not the PF) dry up because no one wants to lend through them and they stop making any money. How interested they are then in managing the PF is open to question. So there's a bit of a vicious circle risk.

The other two factors which affected my decision to dabble in P2P rather than increase my S&S exposure is that:-

1. I've maxed out my S&S ISAs and holding shares/funds in a taxable account is going to complicate my tax affairs beyond a level I want right now.

2. P2P doesn't have to be a long-term investment. With RS the maximum term is 5 years, so even though it's not very liquid it's still more a short/medium-term than long-term investment. If I had a personal financial squeeze, I know that I could stop reinvesting my P2P account and my money should be returned to me steadily over 5 years. If I have a personal financial crisis AND there's a global economic crisis meaning limited payout of my loans, well, I probably wouldn't have been much better in S&S would I?