RateSetter savers claim investments are being sold off ‘on the cheap’

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Savers with money in one of the UK’s biggest peer-to-peer (P2P) websites are crying foul, saying their investments are effectively being sold off “on the cheap” to a bank that will pocket the returns they would have enjoyed.

The dispute concerns RateSetter, a P2P platform where those with savings lend cash to other individuals in return for an agreed rate of interest. Metro Bank bought RateSetter last year and is expected to take over its book of almost £400m in loans in a separate deal.

But the terms have caused uproar, with some RateSetter savers claiming that “the big boys are making the money” while they have been “stitched up”.

Others have no objections, and RateSetter and Metro have rejected the claims, saying the 45,000 mainly small investors are getting every penny of their money back, despite the economic uncertainty.

Billions of pounds are tied up in the UK’s P2P platforms, which put savers looking for a better return on their cash in touch with those looking for a loan, for example for a car or a holiday. Launched in 2010, RateSetter became – in its words – the UK’s most popular P2P platform, with more than 750,000 people using it to invest or borrow money.

Last year was a bumpy one for the P2P sector, and in August, RateSetter announced it was being bought by Metro for up to £12m in cash.

The second deal, unveiled on 2 February, means the investing side of RateSetter will close and all lenders will be given their money back.

The loans are owned by the investor lenders but, under RateSetter’s terms, it acts as “custodian” on their behalf.

As one investor, Jet Cooper, put it: “Now they are going to repay all the investors’ money, whether we want it repaid at this point or not.”

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What has really angered some investors is that for nine months, until last week, RateSetter reduced the interest paid on their money by 50%, with the other half going into a provision fund “for the protection of all investors”.

With defaults increasing as the economy faltered last year, the fund was designed to cover losses.


What is peer-to-peer lending?


Peer-to-peer (P2P) websites bypass the banks by matching up savers with borrowers – the idea is that both benefit from better rates than they could get from traditional financial institutions.

Typically savers select the interest rate they want to earn, and the site matches their money with loan requests from borrowers.

However, unlike bank and building society savings, the money they lend via a P2P website is not covered by the UK’s Financial Services Compensation Scheme (FSCS).

That said, some sites operate a fund or similar scheme that will cover a lender’s losses in some cases. And P2P lenders are regulated by the UK’s Financial Conduct Authority.

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The three best-known players are RateSetter, Zopa and Funding Circle, though there are lots of others.

They all operate in different ways, and the sites that lend individuals’ money to businesses have traditionally tended to offer higher rates than those lending to other people.

Zopa, for example, breaks a customer’s investment down into small chunks in order to spread it across lots of loans to individuals, which can have terms of up to five years. Investors get monthly repayments, with interest added but minus the site’s borrower servicing fee. Some loans inevitably default, but the site says this is factored in when calculating projected returns, which are currently between 2% and 5.3%.

Each operator has different rules about accessing cash, but money might be locked away for days, weeks or months.

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Peer-to-peer investments are typically available as Isas, so savers can enjoy their returns tax-free.

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On 27 January, RateSetter disclosed that the provision fund was in a healthy financial position. This week it emerged that the provision fund “will remain attached to the loan portfolio” being acquired by Metro, and the P2P investors will not be getting any of the money from the interest reduction returned to them.

The investors will also no longer enjoy the often impressive returns that they signed up for. Cooper, who lives in Devon, has some of her money invested in a RateSetter five-year bond paying 6%-plus that still had three years left to run.

But now she and all of the other investors will have their accounts closed on 2 April.

Cooper is angry that the P2P investors “took the hit” of the 50% interest reduction for nine months, “but now Metro Bank is going to take all the profits from the loans”. In the case of her five-year bond, “Metro Bank is going to have that 6% for the next three years … I can’t get 6% anywhere else.

“I feel something unfair is happening here – the big boys are making the money. I feel like they are sort of selling us out.”

On the P2P Independent Forum, one poster claimed: “It does seem we were somewhat stitched up. We paid to restore the PF [provision fund] through reduced interest rates, but we barely benefit from that because at the point the PF is back in good condition and interest rates are restored, Metro step in, buy the loans and enjoy the benefits.”

Another said the loan portfolio should have at least been auctioned off to generate more money for investors, adding that this was “a great deal for Metro – meaning they are getting assets on the cheap – from us”.

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However, other forum users took a very different view, saying this was not a risk-free investment, and RateSetter had defied the challenging conditions to give investors 100% of their capital and some interest. “Under the circumstances, I think it is a very good and balanced result,” said one, while another said: “Investors get their money back – in full. Hard to see a better way out.”

In its deal announcement, Metro Bank said the portfolio it was buying was mainly unsecured loans with an average term of two years remaining, which was paying an average yield of about 8%.

In response to the investors, it said it is taking 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.”

A RateSetter spokesperson said: “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 … The last 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.”