james
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Post by james on Feb 9, 2017 17:04:46 GMT
I might be wrong on this, but I think this logic assumes RS would sell the loans on the open market at a price reflecting current loan yields (i.e at a premium), then pass on the full proceeds to the original lender. The capital gain would offset the reduction in interest rate caused by crystallising and reinvesting. However, I think it is unlikely RS will pass any premium onto the lender who is selling out. I have never seen any accounting for prevailing rates in the normal sellout calculations I've requested. The assumption was that when making a reinvestment decision the person would look around for what's available and pick the best deals for their money. The capital gain wasn't really the thing, not having your returns cut long after you made the decision to invest was. But of course if RateSetter really doesn't charge the part of the fee which takes away the capital gain there would be further benefit to doing it. I don't trust that RateSetter will not try to keep that part of the fee and the profit from it for themselves. I also assume that at least one person won't appreciate having money that should be theirs taken from them by RateSetter and will complain to RateSetter then if necessary to the FOS if RateSetter tries it.
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Post by GSV3MIaC on Feb 9, 2017 17:14:10 GMT
As you say, the protection fund masks the difference between risk profiles of the loans and encourages investors to ignore risk. /mod hat off But this is RS we are talking about, and the investor has absolutely no visibility or control over the risk associated with any particular loan contract, and it certainly isn't reflected in any way in the rate on the contract, which is purely driven by how much cash was chasing 'being invested' at the time the loan was written. PF's in general (eg the SS one) may swap risk between investors, but I don't believe the RS one can be accused of that .. all risks are totally opaque anyway. 8>. As to whether older loans are more or less risky than new ones, I'd vote for 'probably more' (although it may be an inverted bathtub curve) .. the 'doing good' folks probably repay, or refinance, ASAP. As to how any 'haircut' is distributed .. again I'm unclear as to whether it is actually 'pro rata' (i.e. everyone's interest rate gets cut by half), or a flat rate cut (everyone loses 1%), and exactly how RS decides what to do, and when, and for how long, vs simply shovelling more $$ into the PF from the slice labelled 'RS profits'. As I've said before, I'd much rather it went away .. it obscures and confuses things. I joined RS (from ZOPA) because I wanted to set my own (floor) rates, preferably in the 3 year market, NOT because 'there is a PF'. Most of the rationale for that has long since evaporated .. floor rate no longer works, 3 year market has gone away, and the PF is morphing into something even more opaque than it already was. Since losses are now tax deductible, there appears to be little point in running a PF vs 'dicing and slicing to achieve proper diversification'.
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james
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Post by james on Feb 9, 2017 17:17:37 GMT
The investor does have some control over risk and return by choosing when to invest and which of the products they offer to choose to invest in. Easy for someone to have liked the consumer credit loans of the past at the higher rates of the past and not like the riskier new loan mixture at lower rates that RateSetter has been switching to. Such an investor would not have been investing as much via RateSetter recently. Being forced to bear the risk of the riskier lending, via possible return cuts to their older loans, after having chosen not to, is something I don't expect anyone to like.
There's no reason to think that older loans are more risky:
1. there's no bathtub curve, it's a steep initial slope, of varying degrees depending on the properties of the loan, which levels off over time. 2. RateSetter has been increasing the risk level of new lending over time.
Protection funds do have uses, particularly for platforms where there are comparatively few loans and a relatively high proportion of money goes to each, so broad diversification might be hard to achieve. But without that I broadly agree that tax was a big factor in making them useful, as we've seen with Zopa introducing one then introducing non-protected one again once the law changed.
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mason
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Post by mason on Feb 9, 2017 18:44:57 GMT
When making the decision to reinvest or not I expect someone to look around at the competition, not just at RateSetter. At the moment you can do better than RateSetter so today I wouldn't expect the money to go there. But that's today, rates could be more competitive later. Today it's a case of selling out of 6% less possible cuts then reinvesting above 6% because above 6% is readily available. BondMason for example is quoting expected returns in the 7-8% range with lending well diversified around many platforms with not a lot of work for the investor to do to get that. But there are plenty of other places to consider. Agreed, in which case there isn't currently a scenario in which taking the sell out from old higher rate loans in order to reinvest back into new loans at RS makes any sense at all.
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james
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Post by james on Feb 9, 2017 19:04:30 GMT
When making the decision to reinvest or not I expect someone to look around at the competition, not just at RateSetter. At the moment you can do better than RateSetter so today I wouldn't expect the money to go there. But that's today, rates could be more competitive later. Today it's a case of selling out of 6% less possible cuts then reinvesting above 6% because above 6% is readily available. BondMason for example is quoting expected returns in the 7-8% range with lending well diversified around many platforms with not a lot of work for the investor to do to get that. But there are plenty of other places to consider. Agreed, in which case there isn't currently a scenario in which taking the sell out from old higher rate loans in order to reinvest back into new loans at RS makes any sense at all. One scenario is easy: wanting to use the one month product but sell out of the three and five year loans that are most affected by the risk transferring and change of new loan risk level over time.
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mason
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Post by mason on Feb 9, 2017 19:14:36 GMT
Agreed, in which case there isn't currently a scenario in which taking the sell out from old higher rate loans in order to reinvest back into new loans at RS makes any sense at all. One scenario is easy: wanting to use the one month product but sell out of the three and five year loans that are most affected by the risk transferring and change of new loan risk level over time. Possibly, if the rate is high enough (I can't remember what rates were realistically achievable on the RS monthly product). But it does have to compete with other products of the same type. For example the Assetz 30 day access account, which pays 4.25%.
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james
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Post by james on Feb 9, 2017 19:22:05 GMT
Some of the recent discussions have been mentioning periodic availability of rates similar to that.
Not that those are great rates compared to using platforms that allow free selling and 10% plus before bad debt, but the protection fund offers handy diversification compared to those.
There are aspects of this change that are bad but that doesn't mean that everything at RateSetter is bad or equally affected. Entirely possible that selling out then continued use can be a good move.
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elliotn
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Post by elliotn on Feb 10, 2017 6:19:44 GMT
When making the decision to reinvest or not I expect someone to look around at the competition, not just at RateSetter. At the moment you can do better than RateSetter so today I wouldn't expect the money to go there. But that's today, rates could be more competitive later. Today it's a case of selling out of 6% less possible cuts then reinvesting above 6% because above 6% is readily available. BondMason for example is quoting expected returns in the 7-8% range with lending well diversified around many platforms with not a lot of work for the investor to do to get that. But there are plenty of other places to consider. Agreed, in which case there isn't currently a scenario in which taking the sell out from old higher rate loans in order to reinvest back into new loans at RS makes any sense at all. Yes, little point putting all the money back into the same market at a lower rate with possibilty of interest/capital haircuts being spelt out to us! BM also offers handsfree investment but primarily for different hues of SME/prop lending and I can get up to double managing that myself and I've already reached my caps on such platforms. However, RS still offers predominantly consumer loans and if i) the lower at rates at Z/LW/Orch did not suit ii) I didn't fancy putting too much in the way of riskier Z+/TMP, it would still provide some portfolio balance at, say, a 1/3 of my current investment even entering the new T&Cs with a (currently) slightly lower rate and enhanced PF haircut risk. If they would have me .
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dandy
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Post by dandy on Feb 10, 2017 9:21:40 GMT
When it comes to the fund being under-funded, the cuts are percentage-based. A person receiving 6% is going to lose 3% of their return while one receiving 4% is only going to lose 2%. Just because they lent at different times one is made to pay more than the other even though the one paying more has loans that are placing a lower cost burden on the protection fund. It's a fundamentally unfair approach. Thanks james - but is this part actually confirmed? If so I agree it is unfair and deductions should be proportionate to investment not rates received. i.e. if investor A has £10,000 (at 6%) and investor B has £10,000 (at 4%) - then they should both have the same £ amount deducted. So if £100 contribution was needed from the two of them it should be £50 each not £66/£33.
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spiral
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Post by spiral on Feb 10, 2017 10:29:45 GMT
Thanks james - but is this part actually confirmed? If so I agree it is unfair and deductions should be proportionate to investment not rates received. i.e. if investor A has £10,000 (at 6%) and investor B has £10,000 (at 4%) - then they should both have the same £ amount deducted. So if £100 contribution was needed from the two of them it should be £50 each not £66/£33. It is confirmed. "8.4 - 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. For example, if you have invested £1,000 at a Lender Rate of 5%, during normal operation approximately 14p of interest would accrue daily ((£1,000 x 0.05) / 365). If there is an Interest Reduction of 50% for 10 days, the Lender Rate for those 10 days would reduce to 2.5% and interest would accrue at 7p per day. When the borrower pays that interest (which could be during or after the Stabilisation Period), 70p will automatically be deducted from the payment due to you (10 x 7p) and paid into the Provision Fund." Capital will be reduced if "the Capital Coverage Ratio is or will imminently be below 100%. " Does anyone know what the difference between PF coverage ratio and Capital coverage ratio is?
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toffeeboy
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Post by toffeeboy on Feb 10, 2017 12:55:36 GMT
When it comes to the fund being under-funded, the cuts are percentage-based. A person receiving 6% is going to lose 3% of their return while one receiving 4% is only going to lose 2%. Just because they lent at different times one is made to pay more than the other even though the one paying more has loans that are placing a lower cost burden on the protection fund. It's a fundamentally unfair approach. Thanks james - but is this part actually confirmed? If so I agree it is unfair and deductions should be proportionate to investment not rates received. i.e. if investor A has £10,000 (at 6%) and investor B has £10,000 (at 4%) - then they should both have the same £ amount deducted. So if £100 contribution was needed from the two of them it should be £50 each not £66/£33. The original deduction should there be a shortfall is coming from the interest being received so the amount of capital leant has no relevance to the deduction. Use the same scenario but say only £80 was needed and there were no other loans, if you use capital contribution as the deciding rate then the person who leant at 4% has to pay from capital to cover the 6% interest as well as the shortfall:
£10,000 * 6% = £600 / 12 = £50 - £40 = £10 £10,000 * 4% = £400 / 12 = £33 - £40 = -£7
If they are reducing the interest being paid then it has to be based on the interest rate not capital invested.
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spiral
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Post by spiral on Feb 10, 2017 14:45:37 GMT
The original deduction should there be a shortfall is coming from the interest being received And of course, as loans get older, the proportion of interest in a monthly repayment reduces as the capital portion increases.
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james
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Post by james on Feb 10, 2017 16:55:32 GMT
And of course, as loans get older, the proportion of interest in a monthly repayment reduces as the capital portion increases. Which makes no difference at all to how much a person is getting their interest cut. They are still getting the same interest rate and the cut is proportional to interest rate. The higher capital part is because the borrower now had less money borrowed so they are paying that interest rate on less money
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james
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Post by james on Feb 10, 2017 17:02:08 GMT
If they are reducing the interest being paid then it has to be based on the interest rate not capital invested.
Most of what the fund is paying out is capital, not interest, so it's capital that is the key factor, not interest. All RateSetter are doing by taking interest first is sleight of hand to avoid taking capital when what really matters is the total return and that's being taken regardless. But at a higher rate from some than others just because of when they lent. If RateSetter did want to be fair about it they could take 1% of the interest rate from each person instead of 2% from one and 1% from another.
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james
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Post by james on Feb 10, 2017 17:26:32 GMT
"8.4 - 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. For example, if you have invested £1,000 at a Lender Rate of 5%, during normal operation approximately 14p of interest would accrue daily ((£1,000 x 0.05) / 365). If there is an Interest Reduction of 50% for 10 days, the Lender Rate for those 10 days would reduce to 2.5% and interest would accrue at 7p per day. When the borrower pays that interest (which could be during or after the Stabilisation Period), 70p will automatically be deducted from the payment due to you (10 x 7p) and paid into the Provision Fund." Capital will be reduced if "the Capital Coverage Ratio is or will imminently be below 100%. " Does anyone know what the difference between PF coverage ratio and Capital coverage ratio is? Defined here. When it's projected that taking all of the interest that lenders will ever receive on their loans and the current pot of money in the fund still won't be enough to pay for all future defaults they will start to take capital. Not because they have to use it to pay actual losses yet, most of those haven't happened, just because they want to keep the ratio above 100%. Instead they could observe that recessions take a while to happen and all of the future defaults don't happen at the same time and let the ratio drop, funding from the accumulated reserve in the fund, the ongoing interest and the fund payments made by borrowers, particularly new ones. So long as the pot in the fund didn't get to zero it could continue to pay up for every default, just having the size of the pot go up and down over time, as it should. That would take a long time to run out, years, during which there's plenty of time for fees to cut the rate of drop and replenish it. If it does eventually turn out not to be enough, capital cuts could be made then. Or they could just do the sensible thing that Zopa would do and have you take some of the cost of the defaults on your own loans at that point.
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