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25 Feb 2021

RateSetter to sell all loans to Metro Bank - but are investors losing out from the deal?

The peer-to-peer investments will wrap up on 2 April 2021

Peer-to-peer investment platform RateSetter has confirmed to customers that Metro Bank has bought its consumer loans, meaning it will no longer offer investments. But some investors aren't happy with their end of the deal.

In an email to its investors sent out on 2 February 2021, it said that all investment accounts would be closed from 2 April. Investors should expect to receive all of their invested money back, along with the interest investments earn up to that date.

The sticking point is that investors had their interest rates halved back in May 2020 as the firm anticipated higher losses amid a grim economic forecast - and investors want their sacrificed interest back.

Here, Which? explains what the sale to Metro Bank means for investors and borrowers, and why some investors are unhappy about it.

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How do peer-to-peer investments work?

Peer-to-peer lending sites match up those who want to borrow money with those who want to invest it.

The borrower gets a loan, which they have to make repayments on - along with interest. The investor receives part of that interest (minus any fees or charges) as growth on their investment.

Some platforms will allow you to choose which borrower to invest in, while others will spread your investment across all of its borrowers.

Your money is at risk, as borrowers tend to be individuals or small businesses who have struggled to secure loans elsewhere, and are therefore at greater risk of being able to make their repayments.

The Financial Services Compensation Scheme (FSCS) doesn't cover peer-to-peer sites if you lose money as a result of your investments not performing in the way you were expecting.

If a borrower defaults, it may be that you lose some or all of your investment, or have a reduction in the interest you were expecting - what happens depends on how the individual platform works.

In the case of RateSetter, its Provision Fund was used as a safety net to ensure investors didn't lose their capital when a borrower defaulted.

What does the RateSetter loan sale mean for investors?

RateSetter investors will have their accounts closed on 2 April 2021 and they will no longer be able to invest with RateSetter.

The firm has assured investors that it will return all invested money to their Holding account, which can then be transferred (if your investments are held as an Isa you'll need to do this to protect its tax-free status) or withdrawn to its registered bank account.

While there is usually an early release fee to pay when you release investments ahead of their term, this will not be charged.

What isn't being repaid is the sacrificed interest that had been paid into RateSetter's Provision Fund - essentially a pot of money that's held to cover defaulted borrower payments.

In its email to investors, RateSetter addressed the question of what will happen to money left in the Provision Fund, saying: 'The Provision Fund was set up to protect RateSetter investors from credit losses in the portfolio. It has done its job and RateSetter investors will receive their money back in full. Following the purchase, the Provision Fund will remain attached to the loan portfolio.'

This means Metro Bank will receive the Provision Fund along with the loans it has purchased.

'Consumer loans have done well, so why have you taken my money off me?'

Mark Rafot, a 65-year-old retiree from Lincolnshire, has held investments with RateSetter since 2016-17. When his investments were earning the full rate of interest he was earning around 4%, sometimes more.

But, since the rate cuts last year, he says he earns 1.38% and estimates that the interest cut has meant he's lost out on around £300 of interest.

'I started investing with RateSetter for ethical reasons really,' he says. 'I liked the fact that it was a way to help people get loans who couldn't usually get them.

'At the time, you were getting quite low rates compared with what else was on the market.'

Mark thinks that the money held in RateSetter's Provision Fund should be given back to the investors, like himself, who have missed out on interest to build it back up.

'I, in good faith, thought that money was there to cover funds that I and others made in those loans,' he says. 'It's that simple. It's not there to cover investments that somebody else has made on the cheap.'

Mark refers to RateSetter's email, which told customers that the performance of the consumer loan portfolio has meant the sale to Metro Bank has been at full value. 'If the consumer loans have done well, why have you taken that money off me, then?'

Mark isn't alone in his dissatisfaction. A thread on the P2P Independent Forum contains comments from a small number of investors who also believe they've got a raw deal.

What does RateSetter say?

It's important to note that RateSetter investors will not lose out on any of their own capital and will still be paid interest on their investment. The money left in the Provision Fund is a result of adding more interest from investors since May 2020, minus any borrower defaults.

A spokesperson from RateSetter told Which?: 'Since the pandemic struck, our focus has been on delivering our investors their money safely. Strengthening the Provision Fund, protecting all investors equally, was a necessary part of that.

'The purchase of the remaining portfolio provides certainty of outcome for investors, every one of whom will get their money in full despite the ongoing economic uncertainty.

'The past year has seen losses in many investments but RateSetter's 10-year track record of positive returns and no capital losses has been maintained throughout.'

While it's understandable that investors feel they've missed out on interest for several months in order to bolster the Provision Fund, it's also true that no one has lost any money they've invested - which isn't always the case when it comes to peer-to-peer investments.

In 2015, for example, TrustBuddy (a peer-to-peer lender specialising in short-term loans) was shut down and investors faced a long battle to get their money back, with reports suggesting they lost at least a quarter of their principal investment in the end.

There's also the argument that, while RateSetter investors lost out on some of the advertised interest rate, having been repaid their capital they are no longer on the line to withstand any losses - instead, that risk has been taken on by Metro Bank.

What does Metro Bank say?

A spokesperson from Metro Bank told Which?: 'This deal provides certainty that all RateSetter investors will receive their money in full without any capital losses, despite the current economic uncertainty.

'Metro Bank will take on the loans and therefore the credit risk associated with them going forward. The purpose of the Provision Fund was to fund expected losses from the loans and it will continue to do this.'

What does the loan sale mean for borrowers?

Anyone with a RateSetter loan to repay shouldn't see any changes. It's confirmed that loan rates will stay the same and the loans will continue to be managed by the RateSetter brand.

If borrowers are unable to pay back their loans, Metro Bank will be on the line to cover the missing money - whereas, before the sale, this would be covered by the Provision Fund and may mean investors saw a reduction to the interest they earned.

What can you do if you have a complaint?

While many peer-to-peer firms are on the Financial Conduct Authority (FCA) register, the investment element is not a regulated activity.

That being said, investors can still take complaints to the Financial Ombudsman Service (FOS), which can order firms to pay compensation or put matters right.