How we manage the risk
Looking after your money is our number one priority. It's our intention that no Investor will lose even a single cent by investing through Squirrel Money (and we've delivered on that intention to date). Despite our 100% track record to date, we need to be clear that past performance is not a guarantee of the future. To help ensure we do continue to deliver on our stated intent, we have in place several layers of defence to help protect the money that you invest with Squirrel Money. If you're a visual person and prefer to watch a simple presentation, jump over here. Otherwise read on:
1. Loan Shield
We use a Reserve Fund, called Loan Shield, to help cover expected credit losses and offer greater predictability to investors.
Current Reserve Fund balance$212,389
How does it work?
With each borrower loan repayment received, a portion of the interest paid by the borrower is ceded into the Reserve Fund - this is known as the Reserve Levy. The Loan Shield Reserve Fund is administrated inside a separate trust that aims to protect investors from repayment delays when a borrower is late with their scheduled repayment or losses if a borrower defaults on their loan.
If a borrower misses a scheduled loan repayment, the Reserve Fund is immediately activated to fulfil the expected loan repayment (of both principal and interest) to the applicable investor(s) whose investment has been used to fund that loan. Provided there are sufficient funds available in the Reserve Fund, investors should therefore expect to receive the scheduled loan repayment amounts regardless of whether the borrower is in arrears.
If a borrower defaults on their loan, again provided there are sufficient funds available in the Reserve Fund, the Reserve Fund will immediately repay the principal and any interest owing on that loan to the applicable investor(s), with the loan closed and moved into debt collection. Squirrel Money will manage the collection efforts to recover that debt from the borrower with any subsequent collections of defaulted or arrears amounts being refunded back into the Reserve Fund.
What happens if the Reserve Fund is depleted?
Our expected loss rate on the existing loan book ranges between 1.1% and 1.2%, however we are currently reserving at close to 1.9% which provides circa 1.5x coverage over the expected loss rate each year. Whilst this does not guarantee your investment, the Reserve Fund provides a buffer to help protect investments from expected credit losses (and then some) and provide investors greater predictability of investment repayments.
In the event of a significant increase in default and/or arrears rates (above the expected levels), to a level that threatens the capitalisation of the Reserve Fund, the fund Trustee can pass a special resolution to divert up to 100% of all future interest payments into Loan Shield until it is sufficiently replenished to meet future expected losses.
In this situation, Squirrel Money will provide Active Management of the Reserve Fund with three principles governing the consideration of claims submitted to the Fund:
- To provide the most equitable use of the reserve funds available in the interests of all affected Investors;
- Repayment of affected Investors principal will take precedence over payment of interest to other Investors in the lending platform; and
- The Reserve Fund will not return to 'Standard Management' until all affected Investors have received repayment of their principal in full
For more information about how Loan Shield works, see page 8 of our Investor Booklet.
2. We aim to lend to quality, creditworthy borrowers
We do our due diligence on every borrower that applies for a loan to ensure they're creditworthy and have the capacity to service ongoing loan repayments. We have a credit scorecard that determines their credit risk grade and as a result the amount of reserve levy they pay into Loan Shield.
We take an image of the borrower’s NZ driver’s licence or NZ Passport and check its validity. We also verify email addresses and mobile phone numbers.
We check the borrower’s credit history with Veda and Centrix to make sure they don’t have outstanding debts or credit card bills from doing something silly like Uber-ing a helicopter.
We add a levy to the borrower interest rate that is based on their individual risk profile. Riskier customers pay a higher interest rate.
We check a borrower’s ability to service the loan by looking at their disposable income and expenses. This is to ensure they can afford the loan and won’t miss repayments if something goes wrong.
3. Protection from cyber fraud
1010100001010110010... not sure what that means? That's ok, we've got a team of expert programmers who do. They've gone to great lengths to make the Squirrel Money Marketplace secure, such as undertaking an external IT Security Audit with KPMG. Should a cyber-attack actually manage to breach our walls, your money is still protected. Money is held in a Trust and can only be transferred out of the platform using ASB FastNet with dual signing authority. We've also put in place the added assurance of a $5m cyber-crime insurance policy to protect against Investors losing their nest egg.
4. Control and adaptability
Our management team meets weekly (and our board monthly) to review the credit quality and performance of all our loan contracts. This means we can quickly tighten or loosen credit policy or pricing in response to changing credit losses or market conditions.
If you'd like to watch a simple presentation on the ins and outs of investing, jump over here.