Summary of a post.
Quick guide to Lending Works’ Contingency Fund
A fortnight ago, the former chairman of the now-defunct FSA, Lord Adair Turner, caused a stir 
when he stated (among other things) that “P2P platforms could be the source of huge losses over the next 5-10 years”, and would make “even the worst bankers look like absolute geniuses”.
These questionable quotes succeeded in doing two things. Firstly, it drummed up a whirlwind of PR attention at a time in which he is endeavouring to boost sales of his new book on Amazon – seemingly his primary objective. However, it also cast a spotlight on the peer-to-peer lending industry as a whole, and, in particular, put greater scrutiny on the safety measures platforms are providing in order to mitigate the risks to investors.
Although Turner’s comments are very much at odds with the sound, decade-long track record of P2P lending in the UK (and are rather ironic coming from a man who was at the helm of the FSA while the banks crashed around him during the recent recession), we welcome any scrutiny as we believe our levels of lender protection stand up to the test. We offer this protection in the form of the Lending Works Shield – a model involving meticulous standards of credit underwriting and a segregated Contingency Fund.
Our credit models and underwriting procedures are our first and perhaps most important line of defence against the potential for investor losses. But the contingency fund acts as an important safety net which seeks to compensate lenders for any late and missed repayments – our Reserve Fund.
How does the Contingency Fund operate?
The Contingency Fund is an interest-bearing, segregated trust account with NatWest which was established prior to the launch of the business in January 2014. Funds are held exclusively in cash, and are topped up using a risk-weighted portion of the fees and interest payable by each of our borrowers.
The sole and exclusive purpose of the Contingency Fund is to immediately compensate lenders for any missed or late payments (arrears) in order to ensure that they receive exactly what they’re expecting – when they expect it. Any use of the Contingency Fund is limited to those set out in the Lending Works Shield Trust Deed - Lending Works cannot access monies held within this account for any other reason, and this is kept entirely segregated from the day-to-day operational funds of the business.
Lending Works also has an agreement in place with an independent backup services provider, who would manage this account in the event of Lending Works ceasing trading, and use the funds therein to help ensure that lenders continue to receive capital and interest repayments due to them under their credit agreements. 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, please note that the interest rates retail investors receive on loans from the Shield are variable, to account for variations in the performance of the loan portfolio.
Has the Contingency Fund been a success?
Fortunately at Lending Works, the Contingency Fund has always been more than sufficient to cover past arrears and defaults, without even considering the additional layer of insurance.
Our rates of default are well below projections, which is a testament to the standards and criteria of our credit underwriting model. Such minimal losses have to date been comfortably absorbed by the Contingency Fund.
In fact, the present balance of on-loan consumer lending capital (the Shield is not offered to institutional lenders) currently stands at around £15 million, while the Reserve Fund balance stands at £333,000. This equates to a bad debt coverage ratio of roughly 2.2%; clearly well above the levels of arrears and defaults above, and that’s without even factoring in the additional layer of protection: the insurance against borrower default.
Clarifying our approach to risk management
Incidentally, when taken to task on his comments by Christine Farnish, the chair of P2PFA, Lord Turner backtracked and apologised profusely. He claimed that what he had actually said was that only if UK platforms begin chasing after lower-quality borrowers, drop their standards of credit underwriting, and abandon the models for lender protection, would these “huge losses” ensue. He has even offered to speak at the next P2PFA event in order to ‘right any wrongs’ he has caused.
The important thing for our lenders to take note of is that it is very much in our interests as a platform to instil confidence and reassurance in the minds of our lenders, especially given that capital is at risk and not protected by the Financial Services Compensation Scheme. Which is exactly why we have gone the extra mile in terms of lender protection, with the significant buffer of our Contingency Fund when compared with actual and projected bad debts. After all, without our lenders – and, more specifically, lenders who believe and trust in the service we are offering – we wouldn’t be sustainable as a platform. That’s why we can say with the utmost sincerity that the customer really does come first, and you are in very capable hands with us as a result.
Related articles:
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
As with all investments, your capital is at risk.
- Summary of a post.
- Summary of a post.
- Summary of a post.
In line with our risk management framework, today we published our Q4 2019 performance update.
As a platform, we take great pride in all that we've achieved since opening our doors for business nearly six years ago. We’ve
Featured
Wednesday’s Budget speech, coupled with the cut to Bank of England rates, represented a decisive response to the coronavirus. Here we analyse the impact it will have on mitigating disruption from Covid-19, along with the long-term implications of this significant fiscal stimulus.
Rumblings from the Treasury ahead of next week's Budget suggest tax grabs will be needed to fund increased spending, and it appears UK enterprise could be in the firing line. Here we articulate why targeting entrepreneurs and small business is ill advised.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
There is a variety of literature and research illustrating the importance of building brand loyalty, albeit with some degree of variance.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The idea of peer-to-peer (P2P) lending is a simple one; you lend money to those who wish to borrow, with a view to receiving a great return for doing so.
Most popular
The 2019-20 ISA season has been a damp squib, with banks disinterested in attracting savers’ cash, rates cut, and the stock market in freefall. However, the emergence of the IFISA means alternatives beckon for those seeking a stable middle ground in terms of risk and reward.
In a decade of slow recovery, the rapid rise in asset prices has been the standout. But how sustainable has price growth been, and could we be in the midst of a bubble?
- Summary of a post.
Most people consider income tax to be a given, but in the UK it is barely two centuries old. In this article, we look at how this tax has developed over the years, and also why it is set to remain at the core of our tax system for many decades to come.
Open banking celebrated its second birthday last month, but has the ‘revolution for financial services’ that was promised actually come to pass? In this article, we look at the progress the initiative has made so far, and what the future holds in the face of high levels of scepticism.
On the face of it, a 'broken' energy market needed fixing, and the price caps introduced in early 2019 were heralded as the solution. But, one year later, have they actually helped consumers save?
Recent
The Lending Works Shield does not give you a right to a payment so you may not receive a pay-out even if you suffer loss. The Lending Works Trustee has absolute discretion as to the amount that may be paid, including making no payment at all. Therefore, investors should not rely on possible pay-outs from the Lending Works Shield when considering whether or how much to invest. For more information click here.