Here is how Ratesetter compares to other platforms:
|Platform||Link||Target Rate (%)||My XIRR (%)||Status||Live Rating|
My final Ratesetter XIRR was 5.91%, although this reflects my strategy of only going for loans where the interest rate was over 6% (which used to happen regularly before the changes).
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). 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 which borrowers to lend to, as seen on other sites such as Bondora. Monies are deployed as investments become available.
In recent years Ratesetter have used investors money to provide loans to a bigger variety of customers. These were much broader than the original idea of the crowd funding a personal loan to an individual. Property, business and wholesale loans were made. 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 23rd February 2021 covering the year period to 31 March 2021. The company lost £8.6m on operating activities before tax (which was up from £8.3m the year before).
These results are slightly academic now given that the takeover has happened, and also that the reporting period largely excludes the coronavirus pandemic. Metro Bank injected a further £18.7m of funds in the last year to restore the regulatory position.
Given the results, it is no surprise that the company had to sell itself on the cheap. The previous year saw a capital raise to provide funds to the business, and another one would have been needed had the takeover not gone ahead. With the business consistently loss-making, it is unsure if it could ever be profitable even with the planned synergies.
Under New Management
The start of August 2020 saw the Metro Bank takeover formally announced, and it will go ahead subject to shareholder approval. The consideration amount is quite surprising: a maximum of £11m for the UK operations, and potentially as low as £3m if performance levels are not met.
This is a rather shocking fall from grace considering the previous valuations, and the fact that Ratesetter itself was a candidate for IPO not long ago. Either the Ratesetter Australia arm (not included in the sale) is more valuable or current operations have been impaired. It seems the latter is more likely, and that Ratesetter missed the boat. Funding Circle did go to IPO and is now worth a mere fraction of its listing price. But this allowed it to raise a substantial amount of money for the business and provide the founders with some real rewards.
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.
It used to be the case that you could 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.
Nowadays the choices have changed for new Ratesetter users. The only choices now are 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?
The recent pandemic has hit Ratesetter hard. There have been some rather urgent actions taken. Firstly, rates have been reduced by 50% across the board. This applies whether you take a fixed rate or had a rate matched in the legacy market. The 50% here accrues to the Provision Fund. This is likely to last until the end of 2020 at the earliest.
Unsurprisingly this has led to a long line of withdrawal requests. This has resulted in long queues to leave the platform.
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. It is obliged to kick in whenever a borrower misses a payment, but clearly requires the fund to have the cash to do so. The better news is that the provision fund has met all lender claims so far. This means 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.
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. This is a move that it looks like few took up. It appears that practices have now changed to avoid these more riskier loans. In theory the chances of this re-occurring in the near future are reduced.
Ratesetter Review: Pros
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. In my opinion it is one of the better platforms to have an ISA in.
- 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. Recent changes have seen rates cut, but this has been replicated across many other sites.
Ratesetter Review: Cons
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. They are unsecured and not backed by assets (although it is likely that asset values will be impaired in a recession as well.)
Ratesetter Review: My 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 (now renamed Access). 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). It should be noted that despite the previous exemplary record, Ratesetter has no FSCS protection and your funds still are at risk. Further if market conditions are not normal, access times may be extended. Because of this I believe it would be too risky to save money like this.
My own strategy perhaps is not available to new investors. It 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-only Ratesetter, choosing only to invest when the rate goes above 6% for this market. This interest rate seems heavily optimistic now due to the cuts, but I have still seen rates in the mid 5% range from time to time.
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.
I also do not use auto-invest, having being burned previously by repaid funds automatically accepting low rates at the time.
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.
Ratesetter Review: Conclusion
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. They are unavailable to investors now, but with full repayment of dues, nobody would have lost out.
Disclaimer: This Ratesetter review 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).