The information that follows sets out the key characteristics of the Shield and it comprises our Shield policy.
How it works
The way it works is simple. The Shield consists of a contingency fundA segregated account used for the purpose of making payments to a lender when a borrower does not meet its obligations under a P2P agreement. which is topped up by a share of the arrangement fees and interest paid by borrowers on their loans. Then, if a scheduled loan repayment is missed, or a loan defaults, the Shield will step in to make the repayment to the relevant investors instead. Any money subsequently recovered from the borrower goes back into the contingency fund.
The amount each loan contributes to the Shield is based on its probability of default and expected loss given default.
The Shield provides a range of benefits for investors:
- DiversificationYour investment will be diversified across all loans in each annual cohort, rather than simply the specific loans allocated to your portfolio. Since we build your portfolio for you, we don't believe there is any fairer way to do this.
- SimplicityThe Shield takes care of defaulted loans, providing you with prompt access to your money. There's no need to learn about things like default curves, recoveries, debt arrangements, Individual Voluntary Arrangements, debt sales and other consumer credit intricacies, to understand the value of your investment.
- FairnessReturns are distributed fairly between investors, rather than some ending up better or worse than the average simply based on the portfolio they've been given.
- ConsistencyYour returns should remain consistent throughout the loan lifecycle, rather than being impacted by deviations between the timing of interest payments and defaults.
Governance of the Shield
The Shield is administered by a trustee, Lending Works Trustee Limited (the "Trustee"), in accordance with a trust deed which governs its use. The Trustee is a not-for-profit company limited by guarantee, with a Board of directors which is separate to that of Lending Works and includes our CEO, CFO, Head of Risk and Non-Executive Chairman, who provides additional independent governance and oversight. The Board meets on a quarterly basis and reports independently into our risk and audit committee. Read more about the team and governance here.
All funds held by the Trustee are held in cash with NatWest Bank plc. All funds held within the Shield are legally owned by the Trustee but for the benefit of investors, for the sole purpose of providing compensation against potential credit losses and administering the Shield. Lending Works will not have legal ownership of any funds. In the unlikely event of the firm's insolvency, any funds held in the Shield would continue to be made available for this purpose.
It's important to reiterate that compensation payments from the Shield are always made at the absolute discretion of the Trustee and cannot provide a guarantee of achieving target returns. For example, consideration must be given by the Trustee to the ability of the contingency fund to make such compensation payment at the time of any such claim, based upon the latest forward looking financial projections. However, in the ordinary course of business, such compensation payments are made automatically by the Shield once a claim has been triggered by Lending Works, as a result of a missed payment or default on a relevant loan.
Our expected loss rate determines the amount of money reserved into the Shield, and we build in a healthy degree of prudence in our models. However, the performance of each annual cohort of loans, and the economy and macroeconomic conditions as a whole, are variable.
In the event that an annual cohort of loans performs worse than expected - i.e. the value of expected claims on the Shield is greater than the value of its expected future income, an adjustment will be made to the expected investor returns for that cohort to ensure the Shield receives adequate funding. Such adjustments are reviewed and communicated to investors on a quarterly basis, following approval by the Board of directors of the Trustee.
In the event that an annual cohort of loans performs better than expected - i.e. there is a residual balance after settling all claims, such funds may be utilised against other annual cohorts that might be performing less well, at the absolute discretion of the Trustee.
The following graph shows the potential impact on returns under various performance conditions: