A provision fund and a buyback obligation are two different P2P-loss protection mechanisms. A buyback obligation is the promise of the loan originator to repurchase a defaulted loan that depends on that originator's solvency. A provision fund is a shared reserve that covers temporary repayment delays. Maclear uses a Provision Fund, not a buyback obligation – the two are not equivalent.
A P2P lending buyback obligation is a commitment of a loan originator that requires the repurchasing of a loan from the investor in case of a borrower’s bankruptcy. The loan originator is usually bound by the contractual obligation in case repurchasing is possible. In the past, the requirement was marketed as a “buyback guarantee,” but now, industry players suggest the term “obligation” to highlight that a buyback obligation is not equal to an unconditional guarantee.
The structural reality behind the changed terminology is that it is not a third-party commitment but a contractual obligation under specific terms coming from the loan originator. This means that the buyback obligation’s strength is tied to the financial security and condition of the originator itself. In case the loan originator does not claim insolvency, the buyback obligation may be fulfilled, but if it goes bankrupt, the obligation may fail entirely.
Buyback obligations typically cover such aspects of the claim as the outstanding principal and the accrued interest. The issue of whether the interest and the principal are covered partially or entirely depends on the situation regarding a specific claim. Buyback obligations are the mechanisms used by some P2P platforms both in Europe and globally. However, this mechanism is not an industry standard and should not be considered a baseline of P2P investment.
Yes, a buyback obligation and a buyback guarantee are the same thing.
The industry is advocating for the shift from the term “buyback guarantee” to “buyback obligation,” as this contractual premise is not an unconditional guarantee of the returns related to the P2P claim in case of insolvency. The renaming is pushed on the premise of reducing confusion among the investors and increasing transparency in the understanding of the buyback obligation as a mechanism.
Yes, a buyback obligation can fail in case the loan originator goes bankrupt.
Since the buyback obligation is directly tied to the loan originator’s financial health, insolvency or liquidity issues may make the buyback obligation fail entirely.
A Provision Fund is a pool of money that is reserved and used in cases like temporary payment delay from the borrower to help the investor maintain the interest on the claim for a given period. A Provision Fund is not a contractual agreement that makes the originator repurchase the loan under certain circumstances. Instead, it is a tool that is funded jointly at a platform’s level.
Maclear features a commission-based Provision Fund established with the 2% commission taken from the operations with the claims. Maclear offers a Provision Fund as a temporary solution in case of maintaining timely interest payment if the borrower experiences short-term loan repayment difficulties. Provision Fund does not entirely remove the credit risk but tries to temporarily smooth the interruptions in the cash flow. It is not a buyback obligation and does not create a contractual commitment for Maclear to repurchase the loan.
If a borrower stops paying on Maclear, the interest payments to the investor may continue after a short grace period after the delay in payment (3 days).
The amount of paid interest depends on the reserves available in the Provision Fund and is tied to the specific terms of the claim.
In case there are multiple delays in repayment, the remaining amount may be distributed among the investors on a pro rata basis. The mechanism of the Provision Fund is designed to support the investors by maintaining interest payments in case of temporary delays from the borrower, not to eliminate insolvency or claim liquidity risks entirely.
Here is the illustrative example of how the Provision Fund would behave in case of a temporary delay in payment:
A borrower fails to repay the scheduled interest on time and still owes overdue funds after the grace period of 3 days. Maclear continues to pay the investor the interest based on the funds available in the Provision Fund. If the borrower still fails to continue repayment and the outstanding amount due is higher than the funds available in the reserves of the Provision Fund, the available funds from the reserve are distributed among the investors on a pro-rata basis.
Illustrative mechanism only. The Provision Fund operates as long as its reserves are sufficient and does not guarantee principal returns.
Provision Fund and a buyback obligation are different mechanisms trying to mitigate the risks of the P2P investment claim. Below is the comparative table of both tools.
Maclear does not offer a buyback guarantee or buyback obligation. The Maclear Provision Fund is a shared reserve that supports timely interest payments during temporary borrower repayment delays – it is not an individual promise to repurchase a specific claim and does not guarantee principal.
P2P investment platforms usually combine different mechanisms to try to mitigate the risks related to the P2P investment. A buyback obligation does that by transferring the responsibility for the loan repurchasing from the investor to the originator under the specific circumstances. Temporary payment disruptions can be mitigated by the Provision Fund and the available reserves. Collateral relies on the potential to recover the assets while portfolio diversification tries to reduce exposure risk. Each way to mitigate the risk operates in a different category: credit risk is kept on the originator, liquidity risk is kept on the structure in the market, platform risk depends on the operator, and systemic risk is the external influence.
All of the mechanisms stated above operate within a limited framework. No matter what protection model is used, there are risks that remain regardless of its efficiency:
Platform or counterparty failure – technical issues with the platform may disrupt loan repayment.
Loan originator insolvency – the insolvency of an originator may make the buyback obligation fail.
Provision fund exhaustion – insufficient funds in the pool may lead to a pro-rata distribution from the existing reserves.
Market and credit risk – borrower defaults and downward market trends may increase exposure and liquidity losses.
No deposit insurance – the state does not guarantee risk-free P2P investment.
This section provides general information and does not constitute financial, tax, or legal advice. Loss-protection mechanisms do not eliminate the risk of capital loss. Consult a qualified advisor.
Provision Fund and buyback obligation do not constitute a traditional way of deposit security protected by the state. A buyback obligation is a contractual commitment between the investor and the originator, whereas the Provision Fund is a reserve of the platform that can help an investor with temporary loan repayment issues.
Maclear uses the Provision Fund and acts as a financial intermediary operating under the Swiss financial regulations. As a member of PolyReg SRO, Maclear should comply with the SRO-regulated framework indirectly supervised by FINMA.
It is important to note that the tax returns, claim compensation, and disclosure differ across jurisdictions. That is why it is important to consult a lawyer in each particular case.
A Provision Fund in P2P lending is a pool of reserves that is used to help the investor maintain interest payments in case of temporary repayment delays. It does not offer a guarantee for the liquidity of the claim.
No, a buyback obligation and a Provision Fund are separate mechanisms that operate differently and address different risks. A buyback obligation puts the commitment to repurchasing the loan on the originator under the specific circumstances and borrower’s insolvency, whereas the Provision Fund may help the investor secure interest during the period of a temporary repayment delay.
No, Maclear does not offer a buyback guarantee. Instead, a Provision Fund is used to accumulate reserves and maintain the interest payment to the investor during the period of a temporary delay in interest payment from the borrower.
No, Maclear’s Provision Fund does not guarantee your principal. A Provision Fund may help mitigate temporary interest repayment issues after a grace period of 3 days by continuing to pay the investor the interest from the accumulated reserves. However, it does not guarantee a full recovery of the funds or the maintenance of the liquidity.
Yes, a buyback guarantee can fail. In the case of the originator’s insolvency or liquidity issues, a buyback obligation may fail, resulting in a potential entire failure of the mechanism and the partial or complete loss of liquidity.
The content of this article is provided for informational and educational purposes only. It does not constitute investment, financial, tax, or legal advice. P2P lending and crowdlending investments carry a risk of partial or total capital loss. Past performance is not indicative of future results. Liquidity on a secondary market is not guaranteed. Readers should conduct independent research and consult qualified advisors before making any financial decisions. Availability of products and services may be restricted in certain jurisdictions.
