alender
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Post by alender on Feb 16, 2016 14:57:18 GMT
...This will increase the risk to lenders and reduce the amount returned in the event of a collapse... Surely if the PF is calculated as a proportion of the total loans made, it makes no difference whatsoever to lenders' risk. Be that as it may, I think the most likely outcome, given the reaction on here, is that RS will change their policy. Which will make them less efficient and (at the margin) make everybody slightly worse off. If some of the PF is used in investments that it is meant to protect in the event of a large number of defaults this must increase the risk as there is therefore less in the PF and there is part of the PF in loans that are proving to be risky. This seems like some kind of structured instrument feeding on itself. It should be noted that the world’s financial markets are heading into a bad times and no one will be immune from the affects, the PF must be able to cope otherwise there are only losers.If RS change their policy to stop this activity it could well have an effect on RS profits and the rate that is being paid by borrowers. However if they do not I for one will think long and hard about committing more funds, if there is enough people like me, RS and those that are left may well find RS less efficient given economies of scale. It may also mean that rates will rise (as it will become a little closer to a market) perhaps not good for borrowers and RS but good for lenders, as a lender my main aim is to maximise return and minimise risk, not help RS or lenders, a lot of what RS does helps everyone but this does not, IMHO it is very dangerous.The main question I would like answered is how much of the PF is available to RS to use for anything except covering defaults. I am seriously concerned that if things get difficult for RS more of the PF will be used to extend the time before a lock in occurs using up the PF funds to keep RS going a bit longer and having less to compensate the lenders. When things are difficult RS may not find many/any other 3rd parties to help with liquidity putting even more pressure to increase the amount used from the PF for liquidity. The answer should not be how much RS intend to use but what is the legal position to prevent RS dipping deeper into the PF.
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alender
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Post by alender on Feb 16, 2016 15:07:59 GMT
I must be too relaxed considering the reaction on here. I trust the people behind RS and I like the fact Westkev goes out of his way to help and contribute on here with investors. My opinion may of course change over time but for now I'm happy with RS. I too appreciate Westkev input and time he spends in explaining a lot of the way RS works. However as investors we should hold RS to account, there is no point is just praising the things we like and ignore those that cause us concern. Hopefully if enough people do this it will be good in the long run. I am not sure so many people will feel so comfortable/relaxed if things start to go wrong, as been said we should hope for the best but plan for the worst.
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teddy
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Post by teddy on Feb 16, 2016 15:37:33 GMT
...This will increase the risk to lenders and reduce the amount returned in the event of a collapse... Surely if the PF is calculated as a proportion of the total loans made, it makes no difference whatsoever to lenders' risk. Be that as it may, I think the most likely outcome, given the reaction on here, is that RS will change their policy. Which will make them less efficient and (at the margin) make everybody slightly worse off. I don't understand why we as lenders would be worse off. If, as suggested, supply and demand is allowed to dictate rates instead of this ludicrious and borderline criminal use of the PF to massage the needs of borrowers, then rates will rise. Lendering will be more attractive, and if borrowers really need the money, they'll have to borrow at the prevailing rates. I noticed the 5 yr was down to 5.7% this morning. It was doing 6.3% at the weekend. Looks like someone's had their hand in the PF cookie jar again.
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Post by andrewholgate on Feb 16, 2016 16:17:44 GMT
I'm sorry I just can't see how this is acceptable. The mechanism is not so very different to that used by AC with their QAA fund, however that is explicitly not a provision fund. It might not be incorrect to label this a "process", but equally how is this different to a pension fund investing in the company that its members work for? Provision funds are not (should not be!) there to provide liquidity or to smooth lending. I am not going to comment on how RS use their provision funds as I have no knowledge of this or how they are set up internally. I'm sure as a well-known platform they have taken the appropriate advice before they have put in place any structure. As I say, I have no comment to make on their provision funds as I do not know their internal workings. I'm responding as you have mentioned AC and the QAA, and perhaps confusing it or leading others to be confused. QAA provides fast liquidity for lenders through a mechanism that complies client money rules, FSMA rules and FCA regulations. It is protected by a provision fund, but the provision fund is distinctly separate from the QAA and is held in an arms length account. For clarity, the AC provision fund is a distinct, separate entity and is there solely for the protection of lenders against possible losses. All our liquidity comes from lender appetite for the loans we offer either via the QAA or through inter-lender transactions. I'll not comment further and sorry for appearing on the RS part of the board.
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teddy
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Post by teddy on Feb 16, 2016 16:23:08 GMT
I'll not comment further and sorry for appearing on the RS part of the board. You're just as welcome here as anyone else. You're reply was most helpful as I looked at the AC website the other day with a few to dipping a paw in the interests of diversification, so any info from you can add to my decision making process. As mainly an RS user, I usually loiter on this part of the forum, so don't always see information elsewhere. Only just caught the Wellesley £100 cashback by the skin of my teeth.
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Post by andrewholgate on Feb 16, 2016 16:34:50 GMT
I'll not comment further and sorry for appearing on the RS part of the board. You're just as welcome here as anyone else. You're reply was most helpful as I looked at the AC website the other day with a few to dipping a paw in the interests of diversification, so any info from you can add to my decision making process. As mainly an RS user, I usually loiter on this part of the forum, so don't always see information elsewhere. Only just caught the Wellesley £100 cashback by the skin of my teeth. Always happy to help customers and anyone can email me directly at andrew@assetzcapital.co.uk Alternative I can set up a call with one of my lender team and they can take your through the options.
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mark123
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Post by mark123 on Feb 16, 2016 16:50:59 GMT
Just to add one more voice to the consensus - using the provision fund to invest in loans is NOT OK.
Basically it means that the PF is being overstated, currently by about 10%, because that money is not available for its stated purpose. The policy indicates that the PF is not controlled with adequate independence.
Most worrying is that there doesn't appear to be a cap on the 10% so we cannot simply discount the stated provision by this amount.
For many of us the major perceived risk, which limits the amount of our life savings we invest in RateSetter, is platform failure. In the run-up to any failure it seems entirely possible that more of the PF would be allocated to loans (or used in some new way yet to be devised) making failure both more likely and more serious.
I for one will not stop investing ... but I will further restrict my exposure.
I guess that investor confidence is one of the major limits on RateSetter growth; maybe this shortcut appeared to be a good use of idle funds but turns out to cost far more than it appears.
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Post by fuzzyiceberg on Feb 16, 2016 17:42:55 GMT
If RS want a liquidity fund they should set one up explicitly. The Provision fund should be invested entirely separately from RS and in nothing more racy than deposits with good credit rated institutions. (Although even that is not safe in an armegeddon scenario - but I suspect in that situation my RS loans will be the last of my worries ). Given the difficulty/expense of exiting RS they really should not be monkeying around with the fund.
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sl75
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Post by sl75 on Feb 16, 2016 17:49:05 GMT
To put a bit of perspective on all this...
Following a resolution event, the PF takes on all existing loans (good or bad). The total value of all of these is MANY times the total value of the provision fund.
Prior to a resolution event, one assumes the PF has been reduced to the same level as the anticipated claims (currently 2.3% of the loan book).
If the PF had consisted entirely of cash or other liquid assets prior to the resolution event, then immediately after, it would consist of about 97.75% loans and 2.25% cash/other liquid assets (swelling to many times its current size due to the acquisition of all outstanding loans).
With 10% of the PF invested in loans prior to the resolution event, this would change, and immediately after, it would consist of about 97.98% loans and 2.02% cash/other liquid assets.
I don't really see this as a material difference - the return to investors after the resolution event is almost entirely dependent on the performance of the loans in either case, with just a small token amount sourced from the PF itself.
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toffeeboy
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Post by toffeeboy on Feb 16, 2016 17:54:54 GMT
I am going with the minority on this and have no problem with using part of the PF on the ratesetter market. Yes it would be good to know that an upper limit has been set to the amount that is used and 10% does sound like a sensible limit. I invest in ratesetter partly because I trust it so why shouldn't I trust it enough that the PF be partly invested in it as well.
It is well documented that there are excess funds over the predicted bad debt in the provision fund so it is such a bad thing to use this to keep the fund ahead of inflation at the very least.
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mark123
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Post by mark123 on Feb 16, 2016 18:17:23 GMT
sl75: surely that is just an argument for not having a provision fund. Or for having a smaller one.
The maths you quote is based on what happens after a resolution event when all the loans are placed in the PF. This is the end of the RS platform - exactly the risk that worries some of us. The value of the PF is to avoid this total meltdown.
The RS business model is to offer investors a PF as a buffer against possible future issues. If we didn't value this, we might have selected a different P2P platform with no PF and therefore higher returns.
- platforms with no provision fund: investors expect to lose a proportion of bad loans. - platforms with PF quoting "number of investors who have lost money = 0": attracts investors who do not expect to lose their capital
If the value of loan repayments which go bad or are late is less than the PF, the platform can continue to operate. If the PF is inadequate, investors will lose money and it is likely that platform failure could follow.
So a PF which is 10% less than advertised is significantly less well placed to withstand adverse conditions. A material difference.
If RS promote their PF and quote it as a multiple of their bad debt prediction, they should keep available the provision they advertise.
If RS can decide to spend the PF in different ways, and how much to divert, they erode the trust which is the basis of their business model.
I hope more clarity will emerge in the coming weeks.
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mark123
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Post by mark123 on Feb 16, 2016 18:42:35 GMT
Kev, can you answer a question:
The release says "The Provision Fund is changing from being a trust to a legal company called RateSetter Trustee Services Limited. This change will not affect the day-to-day operation of the Provision Fund, nor reduce the level of protection it offers to RateSetter investors."
My question is: "Was the PF used to provide liquidity to the market when it was a Trust, or did this start after the change to a Limited company"?
Many thanks, Mark
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investibod
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Post by investibod on Feb 16, 2016 21:05:14 GMT
I am fairly new to P2P and started with RS as a "safe" option. I use the words in quotes as nothing is completely safe of course. The PF was one of the things which gave me that reassurance. However, the more that I learn about the way RS and the PF actually works, the less of a warm and fuzzy feeling I have left. There are three things that I do not like about this situation. - The PF is not just a PF, so the level of protection is less than advertised.
- The PF is being used to manipulate the market in order to keep rates lower than the might otherwise be.
- The directors of the PF holding company are the same as RS. This is starting to look like a conflict of interest. I fail to see how using the PF funds in this way are consistent with the best interests of the PF.
I am not pulling my admittedly small investments from RS at the moment, but I have set my reinvestment options to hold repayments in the holding account while I decide if RS has a place in my future investments.
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teddy
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Post by teddy on Feb 16, 2016 22:49:45 GMT
It seems hugely ironic that the one thing which exists to protect lenders is being used against them.
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Post by westonkevRS on Feb 17, 2016 7:34:53 GMT
So a PF which is 10% less than advertised is significantly less well placed to withstand adverse conditions. A material difference. The 10% use I think is misunderstood on this forum, and certainly the impact on lenders is misunderstood. I think the word causing the problems is " liquidity". And this is probably the fault of the blog. The 10% blog description is not being used to fund the markets when they are empty or help roll-over monthly money. Although it could under the Provision Fund rules. The 10% referred to in the blog is to fill new large loans. For example if there is a £1m loan (which is extreme in the RateSetter world, but quite possible) this is difficult to fund from the markets, and causes technical issues. So the loan is initially funded by the Provision Fund and then in a timely manner smoothly refunded from the lender markets. The target is always to do this within 90 days. This is a process to aid smoother lending to large secured borrowers, a process to allow RateSetter to function competitively with the banks normally. The impact on the lenders is zilch. If the loan defaults within the 90 days it will be depleted from the fund directly. If lenders had funded the loan from day zero they would be reimbursed by the Provision Fund post default. The net result either way is exactly the same and has no impact on lenders. In fact the Provision Fund gains from the short term interest, so the actual net result will always be marginally positive.There is nobody that cares more about the Provision Fund than me, and I am comfortable with this PROCESS. Kevin
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