Safeguard Fund Policy
1. Background and purpose of the Safeguard Fund:
Zopa’s Safeguard Fund is a “contingency fund” held in trust by a not-for-profit organization, a trustee company called P2PS Limited (Company No. 06800515) (“Trustee”). As the fund is held in trust this means the money in it cannot be used by Zopa Limited (“Zopa”) and there are rules for how the fund can be used governed by the Trust Deed (the legal document which established the Safeguard Fund).
The amounts paid into the Safeguard Fund legally (but not beneficially) belong to the Trustee, and will be held on trust by the Trustee on behalf of the relevant Investors in the Zopa Safeguard Fund bank account.
What is the Safeguard Fund?
- The Safeguard Fund was designed to step in if a borrower gets into financial difficulty and can't keep up with their repayments to the point where they are behind on their loan by at least four months' worth of repayments.
- The fund will try to cover investors for the remaining capital outstanding on the defaulted loan as well as the overdue interest that investors are owed – however the amount disbursed by the fund is at the discretion of the Trustee.
- The fund is designed to cover against the level of defaults (net of recoveries) which Zopa would expect to occur in normal economic conditions.
What isn’t the Safeguard Fund?
- The fund is not a guarantee and investments covered by the fund are not covered by FSCS protection.
- The fund is not intended to protect investors from losses in a recessionary / stressed environment.
This policy is relevant for all loans that are covered by the Safeguard Fund. The Zopa Safeguard Fund was offered for all new retail loan originations between May 2013 and March 2015 and on all Zopa Access and Zopa Classic loans from March 2015 to December 2017. Investors who have participated in buying loans on the platform after that date may still have acquired Safeguarded loans through the secondary market. These were allocated into the Zopa Core portfolio where there was insufficient liquidity within the Zopa Classic secondary market.
Investors can see whether they have loans covered by the Safeguard Fund in My Loan Book Overview which shows the aggregation of the number and value of Safeguard Fund and non-Safeguard Fund loans.
The final loans covered by the Safeguard Fund are due to be paid back in December 2022.
3. Funding source
Zopa’s intends to maintain a coverage of 100% of the future expected lifetime net losses, through current and future planned contributions into the Safeguard Fund. The expectation for lifetime net losses are set at a market & term level in a non-stressed macroeconomic environment.
Zopa provides the money for the Safeguard Fund from origination fees and loan servicing fees as well as recoveries from collections activities and the proceeds of debt sales.
Origination and loan servicing fees
When a borrower is approved for a Zopa loan they pay an origination fee which covers the cost of originating the loan including operational, technology, direct acquisition and credit bureau costs. They also pay an ongoing loan servicing fee as part of their interest rate. This covers the ongoing maintenance of the technology platform and servicing the loans. For eligible loans, these fees will also include a contribution to the Safeguard Fund.
In order to fund the Safeguard Fund (where applicable to a Loan Contract), Zopa will pay to a proportion of the origination and servicing fee estimated by Zopa to reflect:
- the potential for a default under each relevant Loan Contract, based on the credit risk assessment applicable to the Borrower under the Loan Contract; andthe potential for a default under each relevant Loan Contract, based on the credit risk assessment applicable to the Borrower under the Loan Contract; and
- an assessment of whether there are sufficient funds in the Zopa Safeguard Trust.
The proportion of the origination and servicing fee due to the Zopa Safeguard Trust is then paid from Zopa’s own funds to the segregated bank account maintained by P2PS Limited with a UK bank for the sole purpose of holding funds to which Investors are beneficially entitled under the provisions of the Zopa Safeguard Trust.
At the beginning of each month, the above contributions are made to the Safeguard Fund to cover future expected net losses. The contributions are made as a combination of one large up-front payment (origination fees) and smaller monthly payments (loan servicing fees). The funding amount for each loan vintage is based upon the current coverage ratio of the Safeguard Fund as well as the expected net losses of the originated loans.
Recoveries and Debt Sales
Zopa’s internal collections team will continue to seek recoveries on loans which have been purchased by Safeguard. Occasionally Zopa’s management will assess whether selling defaulted loans, on behalf of the Trustee, to an external debt collection company will achieve more beneficial recoveries than its internal collections activities. For any defaulted loans that have already been claimed successfully against the Safeguard Fund, these recoveries or debt sale proceeds will be deposited into the Safeguard Fund.
The Safeguard Fund coverage is reviewed monthly by Zopa’s management as “Safeguard MI”. The MI is based upon the latest bad debt performance, current and future planned contributions into the Safeguard Fund and future expected losses on the outstanding portfolio of loans.
If the coverage is estimated to be lower than 100%, Zopa management will review the MI to understand potential remedial action which it may want to take.
Zopa makes the following readily available for the Trustee to review the health of the Safeguard Fund:
- P2PS Ltd cashflows
- Safeguard Fund coverage adequacy
- Actual vs. expected bad debt performance
The Trustee is responsible for making final decisions as to disbursements based on this MI.
5. Deciding when to exercise discretion to pay-out from the fund.
The Trustee has absolute discretion whether to approve or decline a claim against the Safeguard Fund, in whole or in part, for any reason so long as it acts as reasonably as a prudent trustee in its position acting reasonably would act.
The Trustee intends to approve each claim against the Safeguard Fund. However, in exceptional circumstances it may choose not to approve a case or may only approve part of it in order to protect the fund.
Safeguard may not be able to approve a claim in full where the fund drops below 100% coverage. Non-exhaustive example scenarios of when this may happen:
- Where historical losses being higher than expected at origination and there are insufficient funds committed to cover future expected losses
- Where recoveries against defaulted loans have been lower than expected for a significant time period e.g. due to credit worsening of the portfolio
- Where future losses are expected to be higher than intended for a significant period of time e.g. due to a sustained worsening in the macroeconomic environment, such as a financial crisis
- Where Zopa enters into insolvency and future committed cash into the fund is no longer possible
In each of these scenarios, the Trustee will consider whether coverage can be returned to 100% within a reasonable timeframe through Management action (e.g. commitment of additional funds). Based on this assessment, the Trustee will make one of the following decisions:
- Safeguard should continue to pay out in full in the meantime
- All future claims on the Safeguard Fund should be partially reimbursed
- All future claims on the Safeguard Fund should be frozen until Management action has been taken to improve the coverage ratio
- The Safeguard Fund should be fully liquidated and wound down with all covered investors partially reimbursed for future expected losses against their portfolio
6. Process for considering whether to make a discretionary payment
The starting assumption in exercising discretion is that the Trustee will pay claims in full. Once a loan with Safeguard has missed 4 consecutive payments the loan is assigned to Zopa and a claim is made to the Safeguard Trust which will pay out at a price that is par for the loan and includes the interest from the 4 missed payments. Zopa will then commence recovery proceedings against the Borrower for the benefit of the Zopa Safeguard Trust.
If the fund falls below 100% coverage from its current and future committed funds, Zopa’s management may agree on an additional injection of funds. If no agreement is reached and Zopa does not expect to be able to return the coverage to 100% (e.g. due to deterioration in credit performance in stressed economic scenarios), The Trustee will be responsible for deciding the mechanism to adjust pro rata any future payments of claims made from the Safeguard Fund to cover future losses.
In the unlikely instance that the Trustee declines a claim, Zopa will still commence proceedings to recover the outstanding debt under the relevant Loan Contracts which will be returned to the investor (after recovery costs).
In the event of insolvency of Zopa, the Safeguard Fund will also make a one-off pro rata payment to all investors with safeguard covered loans with the available funds in the account. This may not cover 100% of expected defaults. If borrowers fall into default subsequent to this one-off payment, investors will not receive any further payments from the Safeguard Fund but will receive any amounts recovered from collections activity minus any fees.
The Safeguard fund we offer does not give you a right to a payment so you may not receive a pay-out even if you suffer loss. The fund 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 Safeguard fund when considering whether or how much to invest.
Please be aware that we retired Safeguard products on 1 December 2017. Any Zopa investments taken up after that point do not come with Safeguard coverage.