Some big news from the world of P2P investing: Ratesetter is initiating the first major changes to its product in years, and aims to ‘simplify’ their offering and make it less confusing to investors. Quite often as we have seen in this industry, making changes is often adverse to investors, with management mumbo-jumbo used to try to persuade investors that the move will be better off for them: examples include Property Partner’s double whammy of monthly and annual fees and Kuflink’s reduction of skin in the game first loss from 25% to 5%.
This is likely to have ramifications for many P2P investors. For a start, Ratesetter is one of the pillars of many people’s portfolios. It has been around an extremely long time, which tends to lend some confidence in its model. Granted, its accounts are not pretty reading from a profit point of view, but whilst the company has such scale it is able to sell off equity stakes to raise cash at relatively reasonable valuations.
Secondly, the performance has been good for many investors. With a provision fund attached to its products, returns have been reliable and as stated. Compare this to the erratic returns seen at Zopa, valuation and management debacles at other property-related companies and lower platform risk and it could be said that Ratesetter is a better performing investment out there than many other platforms which have double the headline rate such as Funding Secure.
Whilst there may be legitimate concerns on how this provision fund might cope during a downturn, it is easy to envisage that people’s holdings in Ratesetter may comprise a decent amount of a portfolio.
What is changing, then?
Currently, investors have three options: the Rolling market, the 1-year market and 5-year market. All operate independently, in that the rate of interest fluctuates according to demand. Take any two days and you will receive different rates. The range can be large. People that have chosen to automatically reinvest in the 5-year market for example can receive anything between 4% to 6% annualised depending on the prevailing rate at the time.
Here are the new products, which are slightly reminiscent of Zopa’s approach:
We can see here that the only change here is liquidity: by spreading it out over the whole product instead of the individual markets, we might guess that rates will be more stable. That might not be a good thing if we look at the new rates:
Whilst it is called the ‘Going Rate’, the key change is that this rate is fixed instead of taking the variable one on the market at the time. In some senses, this will benefit those who auto-invest, as it ensures not being locked into very low loan rates caused by a temporary anomaly.
The Rolling Market will end up disappearing to be replaced by Access, which seems logical enough as they share many traits, and 3% is a fair enough proxy for the rolling rate.
Plus and Max are a little different from the 1-year and 5-year counterparts as no loan contract length is implied, but the interest rate and fees offer some comparison. Roughly speaking, the early access fees are similar to those currently and may be slightly less than if you had taken out a 1/5 year contract at this going rate.
Crucially there is another aspect:
New investors will not see the old legacy markets. It may be prudent for existing investors to simply make a token investment into all the markets in case it turns out that this model works out better.
Another aspect is the repayments. Currently there is an option for all repayments to go to the holding account (which I am sure many do to avoid getting stung on lower rates). This option disappears and now all money is re-invested in the specific market.
It might be difficult to really assess what is happening until it is implemented. For certain, changes don’t come about very often which benefit investors.
On the face of it, there will be 5 different accounts for existing holders (Rolling, 1-year and 5-year, plus the new ones). Over time I would expect another ‘simplification’ email and these old markets to be ditched.
It does seem by adopting a going rate for the longer-term markets that overall rates will be lower, and perhaps will gravitate towards this benchmark automatically. Ultimately, I also suspect that the option to choose a rate will disappear over time which then leaves the Ratesetter product much the same as others such as Zopa, Assetz, or Lending Works. Which is a shame, as I would think the ability to choose a rate is a big differentiator.
It seems that for some time, this has been a bit of a gimmick anyway. I have used the Ratesetter service as a borrower and it is not the case that a loan simply takes the market rate at the time. Obviously, many other factors are taken into account such as credit worthiness. From this point of view, not having to pay out investors at 6% interest rates would increase their profits, all things being equal.
It could be the case that nothing changes, and rates drift upwards according to demand. Ratesetter may be preferred over others due to their size, but a 5.0% rate compares quite unfavourably with Lending Works’ 6.5% for the same product (with lower access fee) and 5.1% on Assetz for a 30-day access (or 4.1% on instant). Both companies I would regard as having a little higher platform risk although are regarded well in the P2P community.
We also must consider that Ratesetter is not FSCS protected and as such money is at risk in the event of insolvency. Given the promotional loss-leader type accounts such as Santander 1-2-3 or Nationwide they may offer decent alternatives for the lower-end of the market.
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