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Risk & regulation

  1. How does Lending Works diversify my investment?

    We have developed a three-stage diversification strategy which ensures your investment is diversified across our entire loan book.

    Stage 1: Front-end diversification

    The first stage of diversification is the specific loan contracts your funds are allocated to. We have developed a sophisticated algorithm which allocates your money across multiple borrowers in the fairest way, based on when you placed your lending offer. We call this the 'Fair Algorithm'. Your money will initially be allocated across multiple loans in 'chunks'. If you reinvest your repayments, these repayments will also be lent to many more borrowers so it won't be long before you've got a large, diversified loan portfolio.

    Stage 2: The Lending Works Shield

    The second stage of diversification is provided by the Lending Works Shield, which covers all loans funded by retail investors. The objective of the Lending Works Shield is to shield retail investors from losses on their loans by making payments to investors on behalf of borrowers who miss any scheduled repayments on their loans.

    This arrangement effectively means your investment is diversified across the entire loan book, provided the Shield is always able to cover missed payments and defaults. What happens if it can't? Read on.

    Stage 3: Back-end diversification

    We take diversification a step further by including 'back-end' diversification in our risk management approach. In the highly unlikely event of the Lending Works Shield being unable to cover a missed payment or default, either using its reserve fund or one of its insurance policies, the Trustee (in consultation with Lending Works) may declare a 'Pooling Event'. A Pooling Event would ensure that any losses are pooled and allocated to investors on a pro-rata basis. This ensures that no single investor would be exposed to any individual default. Given that our Fair Algorithm selects which borrowers your money is lent to, rather than you picking your individual loans, we believe the Pooling Event is the fairest way to protect investors against an 'unlucky' portfolio.

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  2. How does Lending Works assess borrowers?

    The first line of defence for any lending business is strict loan underwriting. Our Credit team is comprised of financial services industry experts, who ensure that your money is only lent to borrowers who meet our strict lending criteria and who can afford to meet their scheduled loan repayments. Our credit and affordability assessments comprise a large number of automated and manual checks, including:

    • Credit check - We use detailed data obtained from our primary credit bureaux, Equifax, to run hundreds of automated and manual checks on a potential borrower's credit history. We also check applications using data obtained from our secondary bureaux, TransUnion (formerly Callcredit).
    • Affordability check - We check income, outgoings, current account management and management of debt to ensure the potential borrower can demonstrate an ability to pay back the loan they've applied for
    • Identity check – We use sophisticated software in addition to traditional document verification and manual fraud prevention methods to verify the identities of who we're lending your money to
    • Cifas check - We check each potential borrower against the national Cifas register (leaders in fraud prevention) to help prevent fraud
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  3. What is the Lending Works Shield?

    The Lending Works Shield (the "Shield") consists of a reserve fund and a series of insurance policies designed to protect retail investors from losses on their loans. The Shield is managed by Lending Works Trustee Limited (the "Trustee"), who manages the Shield in accordance with the Lending Works Shield Trust Deed.

    If a borrower fails to make any scheduled repayment or defaults on their loan, the Lending Works Shield will attempt to make that payment to the investor instead. Under normal circumstances, this means that investors should receive exactly what they're expecting - on time. Lending Works will then attempt to recover those funds from the loan customer using its standard collections process, involving third party debt collection firms where required. All funds recovered will be reimbursed to the Lending Works Shield.

    Please note: The objective of the Lending Works Shield is to shield retail investors from losses on their loans. However, the Lending Works Shield cannot provide a guarantee against investment losses.

    The reserve fund is held as cash with NatWest within a segregated bank account, managed by the Trustee, which is completely separate from the day-to-day operations of Lending Works. The reserve fund is used to make payments to investors and is funded using a risk-weighted portion of the loan arrangement fees payable by borrowers, in addition to a portion of the 'spread' on each loan i.e. the difference between the rate payable by the borrower and the rate receivable by the investor. We monitor the reserve fund balance and coverage ratios closely against expected losses on the loan portfolio, including stress testing for extreme scenarios. The reserve fund balance and coverage ratio can be viewed on our statistics pages.

    Our insurance is the first of its kind in peer-to-peer lending. The insurance policies protect against many of the common causes of borrower default such as:

    - Loss of employment
    - Accident and sickness
    - Death

    There are circumstances in which the insurance would not cover a loan default, such as where a borrower could not prove loss of employment or if the borrower just decided not to repay. However, in these circumstances we would attempt to cover the loss using the reserve fund as normal.

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  4. What happens if a borrower misses a payment?

    If a borrower misses a scheduled loan repayment, the Lending Works Shield will attempt to make that payment to the investor instead. Under normal circumstances, this means that investors should receive exactly what they're expecting - on time. 

    Lending Works will then attempt to recover those funds from the loan customer using its standard collections process, involving third party debt collection firms where required. All funds recovered will be reimbursed to the Lending Works Shield.

    Please note: The objective of the Lending Works Shield is to shield retail investors from losses on their loans. However, the Lending Works Shield cannot provide a guarantee against investment losses.

     

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  5. What happens if a borrower defaults?

    If a borrower defaults on their loan, for any reason, the Lending Works Shield will attempt to make that payment to the investor instead. Under normal circumstances, this means that investors should receive exactly what they're expecting - on time. 

    Lending Works will continue to attempt to recover those funds from the loan customer using its standard collections process, involving third party debt collection firms and legal action where required. All funds recovered will be reimbursed to the Lending Works Shield.

    Please note: The objective of the Lending Works Shield is to shield retail investors from losses on their loans. However, the Lending Works Shield cannot provide a guarantee against investment losses.

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  6. What happens if the Lending Works Shield fails?

    If at any time, in the opinion of the Trustee, the Lending Works Shield does not have sufficient funds to satisfy the claims arising from the loans outstanding (a deficit), and, the deficit is not, in the opinion of the Trustee in its sole and absolute discretion, capable of being rectified through the ordinary course of business, the Trustee in consultation with Lending Works may declare a “Pooling Event”. If a Pooling Event occurs, the value of the outstanding deficit will be split or 'pooled' among all existing lenders on a pro-rata basis. Given that lenders rely on the Fair Algorithm for the allocation of their funds, and do not make the choice themselves, we believe the Pooling Event to be the fairest way.

    Click here for further information on diversification.

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  7. What happens if Lending Works fails?

    Lending Works is well funded by a number of large institutional investors and has a sustainable business model. However, in order to protect our customers in the very unlikely event that Lending Works ceased to exist, we have a back-up servicing agreement with one of the UK's largest back-up servicing providers, Link Financial. The back-up servicing provider would step in to manage the remaining loan agreements to maturity and ensure that loan repayments continue to be made to our investors as planned. Further details of this arrangement are set out at section 27 of our Lender Platform Terms & Conditions.

    Please note that there is no recourse to the Financial Services Compensation Scheme (FSCS) in respect of investment losses. Click here for further information on how the FSCS affects your Lending Works investment.

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  8. What happens if a borrower dies?

    If a borrower fails to make any scheduled repayment or defaults on their loan, the Lending Works Shield will attempt to make that payment to the investor instead. Under normal circumstances, this means that investors should receive exactly what they're expecting - on time. 

    Our Customer Experience team will always try to handle such situations in a sensitive manner and be as straight forward as possible. If we receive notification that a loan customer has passed away, we'll first need to obtain appropriate evidence such as certified proof of death. We will then get in touch with the borrower's representatives and seek to recover the balance outstanding from their estate. All funds recovered will be reimbursed to the Lending Works Shield.

    Please note: The objective of the Lending Works Shield is to shield retail investors from losses on their loans. However, the Lending Works Shield cannot provide a guarantee against investment losses.

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  9. What happens if an investor dies?

    Our Customer Experience team will always try to handle such situations in a sensitive manner and be as straight forward as possible. If we receive notification that an investor has passed away, we'll first need to obtain appropriate evidence such as certified proof of death. We will then attempt to sell any remaining loans held by the investor to liquidate all funds held within the account. We will then close the account and transfer the funds to a bank account nominated by the legal representative dealing with the investor's estate, who will then handle it from there.

    We will reimburse any fees for the use of Quick Withdraw in this instance.

    Please note: There are specific rules relating to the death of an ISA investor. Upon the death of an ISA investor, their entitlement to tax exemptions will end. This does not mean that previous tax exemptions will be lost on ISA funds already within the ISA. However, any further interest or income after death will not be exempt from taxation.

    Thereafter, we will close the ISA and transfer all ISA funds to the person who has Grant of Probate in relation to the deceased ISA investor’s estate. We will not allow anyone to take over the deceased ISA investor’s ISA or make any further subscriptions to it.

    Please refer to the specific guidance set out on the gov.co.uk website for further details.

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  10. How is Lending Works regulated?

    Lending Works is authorised and regulated by the Financial Conduct Authority (FCA) with firm reference number 723151. Our regulatory permissions are detailed on the Financial Services Register.

    Lending Works is also a member of the Peer-to-Peer Finance Association (P2PFA). The P2PFA was established in 2011 as a representative and self-regulatory body for peer-to-peer lending in the United Kingdom. The P2PFA seeks to inform and educate, promote high standards of business conduct (primarily through the P2PFA’s Operating Principles), and work with policy-makers and regulators to ensure an effective regulatory regime.

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  11. Is my investment protected by the Financial Services Compensation Scheme (FSCS)?

    Any investment losses arising from peer-to-peer loans would not be covered by the Financial Services Compensation Scheme (FSCS). The FSCS is the UK's compensation fund of last resort for customers of authorised financial services firms. The FSCS may pay compensation if a firm is unable, or likely to be unable, to pay claims against it. This is usually because it has stopped trading or has been declared in default.

    Please refer to the FSCS website for further details.

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