RateSetter has been hit with a series of significant operational challenges as several large loans have struggled. The widely reported series of events have culminated in approximately £48 million worth of loans being taken over by the P2P Lender. This amount would have outstripped the Provision Fund, a reserve designed to shield investors from poorly performing loans. RateSetter is one of the UK’s largest P2P lenders have originated over £1.8 billion in loans and a prominent member of the UK Peer to Peer Lending Association (P2PFA).
RateSetter apparently lent £36 million to the Vehicle Trading Group Limited. The company has since fallen into administration (bankruptcy) after taking on too much debt. Additionally, £12 million was lent to an advertising company Adpod. Reportedly, £8.5 million of the loans are still outstanding and should not have cleared its own credit policy. These are two of the largest troubled assets. RateSetter has backstopped these loans and expect the majority to repay in full over time.
The rapid rise of peer to peer lending has created a solid option for borrowers and investors to trade in loans online. But the efficiency engendered by eliminating the bricks and mortar of a traditional bank is not without risk.
For many months, the Financial Conduct Authority (FCA) has messaged its concern about online lenders acting as a wholesale operation for other lenders. It appears that RateSetter has fallen afoul of this specific regulator concern and was slow to alter course. RateSetter has now stated it will no longer provide such a service and will thus be better able to manage credit policies and borrowers.
Last month, RateSetter backed away from a previously announced relationship with George Banco – a UK lending platform. Initially designed to grow RateSetter’s footprint, it has now become part of the retrenchment. RateSetter said it will only be a passive investor in the platform. When the news was revealed, RateSetter explained;
“We have subsequently decided not to go ahead with this new arrangement with George Banco. After further examination of the infrastructure required to do this, we concluded there were better uses of our development resources which may be deployed more effectively to source other borrowers.”
RateSetter said the existing wholesale loans to George Banco will continue to be repaid. The total of these existing loans currently stood at £31.5 million at the time of the announcement. RateSetter states the loan book continues to repay as normal.
Borrower Intervention Bombshell
In the P2P independent Forum a robust discussion regarding RateSetter is ongoing. One individual has commented;
“Without the FCA disapproval RS would still be gambling in these markets, so a plus for regulation.”
This likely investor raises a good point. Was RateSetter too aggressive in its push to become bigger, faster?
The good new is that RateSetter is doing the right thing and changing tack. They have updated policies in recognition of their errors. Even more importantly, they are using their own capital to make certain investors are whole. But another important question is what does this mean for the P2P industry in general?
Bruce Davis, Director of the UK Crowd Funding Association (UKCFA), issued a statement regarding the RateSetter debacle. Davis stated;
“This underlines why we need clarity from the regulator about the scope of loans based crowdfunding. The UKCFA represents members from loans and investment based crowdfunding and have always advocated maximising transparency for lenders and investors so they have a clear understanding of where their money goes, the risk it incurs and how the rewards are shared between platform and lender. RateSetter have done the right thing to acknowledge their errors but the industry must not lose sight of the benefits of simplicity and transparency.”
Statements like this one in the Guardian can tarnish the entire P2P industry;
“The endangered loans are among the first signs that the fashionable peer-to-peer lending sector might not be immune to the problems that have plagued traditional banking.”
The author called the RateSetter event the “first major setback for the nascent online lending sector.” RateSetter’s peers will now shoulder RateSetter’s foul just by association.
The UK peer to peer lending industry has continued to grow at a steady pace, providing value for both investor and borrower. A better lending service at a lower price. For investors in a low interest rate environment, P2P lending represents a solid lower risk option. Situations like this can cause investors to push pause.
The RateSetter saga will soon be forgotten by most, but for industry insiders and, importantly regulators, it is a cautionary tale of the intrinsic risk involved with any emerging asset class. It is also important lesson in fostering growth that is sustainable.