Summary: Ratesetter is one of the oldest P2P companies, and is one of the biggest. It has a long record of reliably paying interest, and enjoys a good reputation within the investment community, offering investors some reassurance with investments backed by an active provision fund. More recently the company has made some errors regarding deployment of funds, and this has resulted in some heavy losses. Despite this I would expect Ratesetter to be durable enough to ride this out and to prosper going forward.
As of October 2019, there are a raft of new products hitting Ratesetter, and it remains to be seen how this will affect the product from an investment point of view. Here is how Ratesetter compares to similar platforms that I have invested in. Note that XIRR includes bonus funds I have received.
As of November 2019, there came another major change as the interest rates on the new products was sharply slashed.
|Platform||Link||Target Rate (%)||My XIRR (%)||Status||Live Rating|
DECEMBER 2019: With rates suppressed here, no further investments have been made.
NOVEMBER 2019: A bad month for Ratesetter as rates are pushed down again. With the top tier ‘Max’ earning just 4%, this is worthy of a downgrade of rating to 3.5 stars.
OCTOBER 2019 UPDATE: It seems as if lower rates are here to stay now. No new investments.
SEPTEMBER 2019 UPDATE: The new products have pushed rates down, permanently it seems. Score reduced to 4/5.
AUGUST 2019 UPDATE: Market rates have remained relatively stable, although impending new changes threaten this.
JULY 2019 UPDATE: No real changes.
JUNE 2019 UPDATE: A respite to the previous months, a couple of rate spikes meant saw some good rates on both the 5-year and rolling market.
MAY 2019 UPDATE: It’s clear the 30-day average has meant the 6%+ rates we seen in the past regularly will remain elusive. Will probably have to withdraw monies here this month.
APRIL 2019 UPDATE: A tough old month, with rates being suppressed.
MARCH 2019 UPDATE: No change. Market rates are now supposedly the average of the last 30 days in order to offer a little smoothness, but I have seen no real difference as yet.
FEBRUARY 2019 UPDATE: No issues. Interest rates have hovered around 6% on the 5-year market with little cash drag.
JANUARY 2019 UPDATE: No issues to report, interest paid as usual.
What is Ratesetter?
Ratesetter was set up in 2010 offering personal loans to borrowers in a more market-based way. Investors could choose the rate they could loan their money out at and the term (hence the name), although money would only be lent if the money was ‘matched’ on the market by a borrower. In practice from an investors point of view loans are somewhat aggregated as all loans are covered by a discretionary provision fund. There is no choice on borrowers, and monies are deployed as investments become available.
In recent years Ratesetter have used investors money to provide loans to a bigger variety of customers, much broader than the original idea of the crowd funding a personal loan to an individual. Property, business and wholesale loans were made, although this only came to light as some of these loans went bad. Despite this, Ratesetter took the financial hit rather than individual investors.
Here is a table showing Ratesetter’s main features:
|Advertised Returns||Up to 6.7%|
|Cash Drag||Dependent on strategy|
|Fees||None, fees to sellout|
|Available in ISA?||Yes|
|Active on forum?||No|
|Sign-up offers?||£100 on £1000|
Is Ratesetter profitable?
Profitability can be linked towards the health of a platform, as cashflow issues can often be serious. Ratesetter is a trading name of Retail Money Market Ltd. This was incorporated in 2009. The last accounts were filed on 16 October 2019 covering the year period to 31 March 2019. The company lost £8.3m on operating activities (down from £26.7m the year before). This is a poor result, considering that Ratesetter were working towards breakeven.
Putting the results in context, the company appears adequately funded for the moment. Current assets were bigger than current liabilities, and net borrowings decreased by £10m. This has been made possible despite the large losses by the company issuing equity: some £15m was raised in this way.
Currently, this is a very viable way of funding growth. The accounts say that 349,244 shares were issued for £15,047,773. That is £43 a share, and with approximately 6.5m shares outstanding the market capitalisation is £280m.
Ratesetter Operating Model
With no individual loan to fund or do research on, the Ratesetter model is one of the more straightforward. You can fund your account via debit card or bank transfer (although debit card deposits incur fees if under £1,000). There is a £10 minimum investment into loans. Ratesetter offer three choices to invest your money: the rolling market, the 1 year market and 5 year market. The difference in these markets relates to the access you have to the money: only in the rolling market is your access instant (fees are payable on the other markets). You may not be surprised to know that rates are lowest in the rolling market. With the 1-year and 5-year market the rates are higher, but you face being in the loan for the duration and chunks of the money inaccessible. Terminating a loan early can be quite expensive, especially if interest rates have moved adversely against you (but if the rate is favourable, you don’t get the benefit).
You can also choose to accept the prevailing market rate, or choose your own rate. Doing the latter allows you to earn a higher rate of interest, but there is also the risk of your rate not being matched, therefore earning you no interest.
It should be noted that the rates displayed are different from the rates used on other P2P platforms: the rates assume that your funds are continually re-invested which gives an annualised rate. If you withdraw any payments your rate will end up being less than advertised.
Repayments are made every month and are amortising: which means that interest and a part of the capital is repaid every month, spreading out the payments over the life of the loan.
As mentioned in a previous post the model seems to have changed for new Ratesetter users, called ‘Access’, ‘Plus’ and ‘Max’, paying 3.0%, 4.0% and 5.0% respectively. These have more or less replaced the rolling, 1-year and 5-year markets and remove the ability for one to choose an interest rate. Existing users will still be able to access the old markets, but for how long remains to be seen.
Less than a month after being introduced the rates on Plus and Max changed to 3.5% and 4.0% – a very large decrease. Ratesetter insist that this move was required to keep their product competitive, but it seems that moves in the last year have decimated what advantage they had. Where is the ‘Setter’ part of Ratesetter now?
How are funds protected?
Most loans from Ratesetter are unsecured. However, the platform offers a first-loss provision fund which compensates lenders against losses. This is funded by taking a small portion of the fees from every loan, therefore offering diversification of sorts.
The important note to make is that the provision fund is not guaranteed to save a lender from loss, despite being obliged to kick in whenever a borrower misses a payment. The better news is that the provision fund has met all lender claims so far, meaning that no lender has made a loss. Additionally, the provision fund is currently at a level where it can be expected to meet all projected future claims.
The key variable with regard to whether this will be viable is the underlying economy: a downturn will in theory increase the number of people defaulting on their loans. A graphic summarises the position:
We can see that any type of recession would be poor for investments, cutting the returns. If this is prolonged, it becomes inevitable that the fund account becomes depleted and therefore investors are exposed to the losses on their own.
The ‘Bad’ Loans
Ratesetter have made some gaffes of their own. In 2017, they made the unusual step of taking over 2 companies that it had loaned monies to which subsequently got into difficulty. Ultimately these loans had to be written off in the accounts, producing some very large losses in the last financial year. It is not too difficult to see why this happened: in order to maintain greater margins more risk had to be taken on, and some kind of default event thus became more likely.
To be fair Ratesetter have communicated this well (albeit after the event) and offered investors the chance to sell out of their loans for no fees – a move that it looks like few took up. It appears that practices have now changed to avoid these more riskier loans, and in theory the chances of this re-occurring in the near future are reduced.
Pros of Ratesetter
There are many things to like about Ratesetter, some things include:
Easy to use: Ratesetter can be very hands-off – the product is not complicated and your investments can be continually recycled.
Great Reputation: Ratesetter has a long record of paying out interest with no lender making a loss. That is worth something in these current conditions.
Provision Fund: The provision fund is more active and transparent than most others, which pays out quickly and also defines the level at which it may become redundant.
Variety of Products: Rolling, 1-year and 5-year markets make this suitable for investors with different time horizons
Competitive Interest Rates: Relative to the products offered I regard the interest rates as very good, and better than many of their competitors.
Cons of Ratesetter
There are also a few bad points:
Volatile interest rates: Rates are in theory defined by supply and demand, but can be highly variable. This can become a problem if you are auto-invested, as you can inadvertently accept a very poor rate for re-investments. This has been fixed with the introduction of the new products.
Cash Drag: If you have chosen to set your own rate, you may be waiting around a longer time to hit your rate (for instance, I choose 6% minimum for the 5-year market). Time spent unmatched reduces the effective rate you get as there is no interest paid while you are queuing.
Bad Investments: Some dubious investments made by Ratesetter have been covered already; whilst this had no impact on returns this may not be the case in the future.
Heavier exposure to recession: If a recession hits and the provision fund is used, Ratesetter loans become more risky in theory than other P2P platforms because they are unsecured and not backed by assets (although it is likely that asset values will be impaired in a recession as well.
Ratesetter Investing Strategy
A Ratesetter investing strategy would depend greatly on your personal circumstances. If you require access to money inside a year, the only choice should be the rolling market, as this provides the quickest access to your cash. I have heard of many people investing large sums of cash in here (for instance, proceeds from a sale of a house), but it should be noted that despite the previous exemplary record, Ratesetter has no FSCS protection and your funds still are at risk. Because of this I believe it would be too risky to save money like this.
My own strategy revolves around the 5-year market as I have no immediate need for funds and additionally this is where the greatest interest is paid. I am a manual Ratesetter, choosing only to invest when the rate goes above 6% for this market. I find the rates are very variable so this threshold will be hit at least once in a month, maybe more.
At present I have dis-regarded the new loan products, but it seems likely that in future rates for these will converge to their corresponding product and the old loan products phased out.
Repayments of loans occur every month of the individual loan agreement,. This may result in many small payments hitting your account regularly instead of a consolidated one-off payment at month-end. In addition, a good proportion of loans pay back early and are credited to the holding account. So if you are a manual investor, regular log-ins will be required to ensure your money is continually lent.
With a long track record and good reputation, Ratesetter is one of the safest P2P platforms in the market, although that assumes that market conditions stay the way they are. With competitive rates they make an ideal choice for those looking for a low-maintenance, reliable investment and despite recent woes carry less platform risk than most other P2P firms.
Disclaimer: This article represents my own opinions and should not be substituted for investment advice. Please research before you invest with any firm. Typically P2P investments are not covered by the Financial Services Compensation Scheme (FSCS) in the way bank deposits are, and there are no guarantees that you will receive the returns advertised (or even a return at all).