The FSCS guards UK savers against the risk of their bank or building society going under, currently offering coverage for up to £75k of losses. Peer-to-peer investments have to date sat outside of the scheme. A number of major platforms in the UK operate their own internal provision fund structure – which can make investors good in the instance of borrower default – but P2P has never enjoyed the security of a state-backed guarantee.
That now appears to be changing. The FSCS has published an update suggesting that it may be able to step in in order to compensate investors who receive “unsuitable advice” about the merits of investing in peer-to-peer lending and loan-based crowdfunding platforms. Depending on individual circumstances, the scheme may be able to provide compensation of up to £50k.
There are a number of caveats. Claims will need to relate to advice that has been received on or after 6 April 2016. The firm offering advice must be authorised. The firm must no longer have sufficient assets to meet compensation claims (it’s somewhat unclear whether “firm” in this instance refers to the peer-to-peer lending company or the advisory firm). Most importantly, the FSCS has reiterated that it does not provide compensation in relation to losses incurred by poor investment performance. In other words, the scheme will not cover the risk of borrower default.
The advent of the Innovative Finance ISA (IFISA) – and the increased attention that financial advisers will likely pay to P2P products as a result – appears to have persuaded the FSCS to broaden its remit.
The IFISA – long billed as a game-changer for P2P – certainly seems to be living up to the billing. Yesterday we learnt that Octopus Investments would be entering into the peer-to-peer space with a new property backed offering. However, the “big three” peer-to-peer platforms (Zopa,RateSetter and Funding Circle) are as yet unable to offer IFISA investment, as they await full authorisation from the FCA. There are eight companies that have already received full authorisation, which were fast-tracked through the application process due to having launched after the closing of the interim permissions window.
Peer-to-peer lending has come under fire from incumbent lenders in the past for not being covered by the FSCS, and also for not making that lack of coverage clear. Yorkshire Building Society, for one, has issued several notes of caution about the sector’s rapid rise to prominence.
RateSetter CEO Rhydian Lewis has long called for a retooling of the FSCS – stating in December 2014 that it was “no longer fit for purpose”. Ceri Williams, senior commercial manager at RateSetter, offered his thoughts on today’s news:
“This is a further sign that marketplace lending is an increasingly important part of the UK’s financial landscape. Total investment with RateSetter made via advisers is significant, thanks to our IFA portal, and we expect this to continue to grow - this announcement is likely to give it a further boost. However, it is important to note that the FSCS will still not cover losses which arise from bad loan performance – our Provision Fund has protected our investors without fail for more than five years.”
