It’s been just over two years since we retired products with Safeguard coverage. But some investors still have Safeguard loans in their portfolio and even investors who joined Zopa since the fund was retired may have picked up these loans from investors who’ve sold them. You can find out if you have by checking your loan book.
It’s been a while since we wrote about the fund, so we thought it was time for a quick update. But before we look at where we are today, here’s a quick reminder of why we started Safeguard — and why we retired it.
What is Safeguard?
The Safeguard fund works by buying up defaulted loans and paying back the investor.
So, if a borrower defaults on a Safeguarded loan – which happens after four months of missed payments – the fund can make a payment to the investors in that loan, covering the outstanding balance. The fund is topped up with fees paid by borrowers.
Are Safeguard payments guaranteed?
Although to date all claims have been paid out, Safeguard is not a guarantee.
It’s really important to be aware of that. For example, if economic conditions were to suddenly worsen in a way we had not projected, we might be unable to make payments.
Why we created – and then retired – Safeguard
We offered Safeguard coverage from 2013 – 2017 for Classic and Access products. The fund was brought in to make up for a tax anomaly which we felt was unfairly putting some of our investors out of pocket. Our investors were not able to offset losses from loan defaults against interest income received. Safeguard ensured that they only paid taxes on net interest income they received from Zopa.
With the fund in place as a temporary fix, we spearheaded a campaign to fix the anomaly in tax law. Through determined lobbying, the law was changed to the benefit of P2P investors across the industry. With that job done and the primary reason for the fund redundant, we phased out and then retired Safeguard.
What’s the Safeguard state of play today?
The number of Safeguarded loans continues to fall as more and more reach maturity. The value of outstanding loans covered by the fund stands at £75m. These loans should have all reached maturity by December 2022.
All loans in the Safeguard fund are now at least two years old. This means they have a track record of repayments. At this point in a loan’s life cycle we tend to see fewer defaults.
Despite that, we have £1 million in our Safeguard fund which is regularly topped up by fees paid by borrowers and have budgeted for future contributions if required. In 2019, the fund paid out a total of £4.2 million and we expect this number to continue to fall as the loans approach maturity.
Our track record
As mentioned, so far all Safeguard claims have been paid out. Based on our modelling we are confident this will continue to be the case, but to reiterate, the fund does not guarantee payment. You can track how things are going on our website. We disclose how much we have in the fund as well as the performance of Safeguarded loans.
Will Safeguard come back?
In short… no. And here’s why: We believe that provision funds can give P2P investors a false sense of security about their investment. They are not guarantees but can be mistaken as such. In our view, customers should understand the performance of their loan book so they can make an informed decision about the underlying asset class they are investing in and the level of risk and return.
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.