mark123
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Post by mark123 on Feb 21, 2019 16:38:12 GMT
I am confused about the provision fund. 1. On the provision fund page of the RS website it offers scenario 2 "Credit losses = 122% of expected losses" which appears to state clearly that in this scenario there will be no loss of interest or capital, leading to "4.5% average return" (same as base case). 2. But in www.ratesetter.com/investor-terms it says "9.4 An Interest Reduction will be applied if RateSetter reasonably believes the Provision Fund Coverage Ratio is or will imminently be below 100%. An Interest Reduction will result in a reduction to the Lender Rate you are entitled to receive during the relevant period." I read statement 1 to say the provision fund has 122% headroom and the whole provision fund will be used to meet interest payments if losses exceed expectations. I read statement 2 to say that the provision fund has 22% headroom and once this has been used up (i.e. the coverage ratio is under 100%) an "interest reduction will result". This is a big difference. Can somebody please help me understand? Thanks, Mark
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Post by davee39 on Feb 21, 2019 17:42:41 GMT
The provision fund cover, at 120%, means expected losses are covered, with a 20% allowance for losses being a little greater than expected. So yes, it only takes a fairly small loss increase to wipe out the cover. Further the target of 125 to 150 cover is miles off.
Of course this is not the whole truth.
When I started with RS many years ago cover was quoted as 1.8 times expected losses, is 180%. This was REAL cash ready to be paid out if needed.
A large part of the current provision fund is based on expected accruals - contributions to the fund during the lifetime of a loan, so the real cash value is much less than the quoted value.
Furthermore the risks are greater with property investments since these could lead to a sudden sharp loss and fall in provision.
The new T @ C's represent another way RS is trying to squeeze their model towards profitability. I think the cracks are showing and the risks are too high.
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mark123
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Post by mark123 on Feb 21, 2019 18:29:32 GMT
Yes, but that doesn't clarify the apparent difference between the provision fund page and the investor terms page. Currently the provision fund is around 122%. If expected losses increase by, say, 30% does that just mean that the provision fund drops to 92% and interest is paid as normal (my reading of provision fund page)? Or does the 92% trigger a “Stabilisation Period” and an immediate loss of interest (my reading of the investor terms). Clearly the marketing blurb and the legal investor terms cannot be so significantly different, so I have misunderstood one or both of them. I was hoping somebody could explain Regards, Mark
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Stonk
Stonking
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Post by Stonk on Feb 21, 2019 18:56:00 GMT
The way I read it, if the PF drops below 100% then RS may take action that will reduce our interest, until the PF reaches a higher level again. At 100%, the PF is only just enough to cover the expected losses, so it cannot be allowed to stay below 100%, and RS would have to do something.
The action they take is discretionary rather than automatic, so it may not be immediate upon a drop below 100%.
I have always assumed when I invest in RS that it is a realistic possibility that the PF will drop below 100% in the timeframe of my investment (up to 5 years), and therefore for at least some of the time I will be subject to some form of interest haircut. I have no genuine idea about how severe such a haircut would be, but I'm kind of prepared for it to be along the lines of "interest payments reduced by 25% for 6 months". I always build that expectation into what interest rate I want to receive. I average a nominal 6.1% now, and if a haircut took that down to an average of 5%, then I'd still be happy. If there's no haircut and I actually get 6.1% over 5 years, then that's all the better!
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mark123
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Post by mark123 on Feb 21, 2019 19:03:53 GMT
If Stonk is correct, surely the diagram below is seriously misleading???
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Post by Ace on Feb 21, 2019 23:39:16 GMT
mark123 , in the examples you gave the headroom is 22%. i.e. Losses would need to be more than 22% worse than expected for interest to be at risk. Having said that, I checked the current provision fund stats immediately prior to writing this and the headroom is now 18%. I'm not surprised that you're confused because RateSetter repeatedly overstate their PF coverage position with statements like the one currently on their lending performance page i.e. " Actual Future Losses would need to be 1.18 times larger than Expected Future Losses before investors’ interest income starts to be at risk.". As usual, they have a similar overstatement for their Capital Coverage description. This vastly overstates the PF safety net. I have reported this to them several times and they occasionally correct the statement by replacing the words " larger than" with the word " the", which does correct it. But, when they update the figures they revert the wording back to a misleading overstatement. Come on RateSetter , fix this once and for all. This is becoming tiresome. I'm way too lazy to report this to the FCA, but it's probably time I did. And, while you're fixing this RateSetter , you might like to take a closer look at the chart posted by mark123 above, where you use two different figures for each of the coverage ratios (119 and 122 for interest, and 226 and 230 for capital) none of which agree with the latest coverage stats (118 and 234) and are bound to lead to further confusion.
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aju
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Post by aju on Feb 22, 2019 0:53:47 GMT
Although I agree this is not correct it's probably just a case of an expert telling a subordinate to change something and assuming the Sub knows what they mean. Worse its a case of Bad QA checking on relevant and important data. I also am a little concerned now in that I spent quite a bit of time looking at these areas and thought they were not what they now seem. If I knew how to report this to the FCA and worse thought they'd even be bothered then I'd be happy to report it to them. Hopefully RateSetter is watching this although I have used their tag a few times across these forums and they have not stepped in with any comments at all.
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reinvestor
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Post by reinvestor on Feb 22, 2019 8:28:17 GMT
Aju, you might want to have a look at my post in DDC under the VC / VS thread. It would seem that the provision fund might be about to take a big hit....
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Post by gravitykillz on Feb 22, 2019 9:39:59 GMT
All rs data is inaccurate and misleading. They have a tendancy to publish data to lenders then blame human error. I dont think rs are as profesionál as they want everyone to believe.
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aju
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Post by aju on Feb 22, 2019 10:41:12 GMT
Aju, you might want to have a look at my post in DDC under the VC / VS thread. It would seem that the provision fund might be about to take a big hit.... Might that not be illegal though, mind you i'm not sure I fully understood it on initial read, i'll have another look later.
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jlend
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Post by jlend on Feb 22, 2019 11:23:19 GMT
For me, what is much more important than the actual ratio is how accurate I think the ratio is.
Like others I remember when the ratio quoted was 226%.
Although the ratio is lower now, my gut feel is it is more accurate but only time will tell...
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lara
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Post by lara on Feb 23, 2019 11:53:57 GMT
All rs data is inaccurate and misleading. They have a tendancy to publish data to lenders then blame human error. I dont think rs are as profesionál as they want everyone to believe. They are still advertising a Trustpilot score of 97% and have been for at least a year. The actual figure has not ever matched when I have looked at it, and is currently 94% Forget all the complicated Ts and Cs, that in itself is telling enough for me!
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Post by gravitykillz on Feb 23, 2019 12:00:17 GMT
What worries me is do they even know their current liabilities? And the state of their pf ? Is that data accurate and not being compiled by a team of homer simpsons!
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Post by gravitykillz on Feb 23, 2019 12:03:31 GMT
Inaccurate book keeping is quite common. Most recent cases include metro bank,manchester building society,and tesco. Financially they all took a big hit.
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ashtondav
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Post by ashtondav on Feb 24, 2019 13:29:32 GMT
LFrom a personal perspective I use the RS PF cover as a barometer of p2p health.
The sad reality is the even under the full employment, economically benign conditions of the last few years RS has never been able to consistently exceed its minimum targeted PF cover. In that respect it is systemically incompetent in terms of credit checking and debt recovery.
However it is one of the few published PF coverage ratios and useful as a guide to p2p health. Personally if it dipped below 110% for any length of time it would signal RED - problems ahead and I would sell up. Currently at 111% to 124% I consider the signal to be AMBER.
As as I believe a recession to be on the cards this or next year, I keep a close watch...
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