FSCS limit reset to £85k, but what's the impact for P2P?

By Ryan Weeks on Tuesday 17 January 2017

Alternative Lending

PRA proposes to return deposit protection limit to £85k, after slashing it in 2015.

The Prudential Regulation Authority (PRA) has announced its intention to raise the level of coverage provided by the Financial Services Compensation Scheme. In a newly published policy statement, after factoring in feedback from interest parties, the PRA has proposed to reset the deposit protection limit to £85k as of 30 January 2017.

The FSCS guards savers against the risk of capital loss in the event of their bank or building society falling over. The scheme does not encompass investment products, and so peer-to-peer/marketplace lenders have always existed outside of its scope. It was suggested in April 2016 that the scheme may be able to provide compensation of up to £50k for investors who had received “unsuitable advice” about the merits of investing via P2P sites, but that is the extent of the crossover to date.

When the scheme’s limit was lowered to £75k in July, RateSetter CEO Rhydian Lewis said that it only strengthened the case to “refresh the FSCS”. But is the resetting of the limit to £85k bad news for peer-to-peer lending?

Lewis' fellow co-founder, Pete Behrens, today commented on the latest inflation numbers, saying: “ …increasing inflation not only adds to the cost of the weekly shop, but with interest rates languishing at record lows, the value of people’s savings are being eroded.”

““Zombie accounts” pay rates that don’t even match inflation, meaning that many savers are actually losing money in real terms. This might prompt more people to consider putting their money to work, by taking on some risk in order to earn a better return through peer to peer lending.”

The Bank of England dropped the base rate to the historic low of 0.25 per cent in August. The peer-to-peer lending industry was overwhelmingly positive in reacting to the move, however a number have since been forced to adjust their own rates in the context of increasingly competitive credit markets in the UK.

Marketers within the peer-to-peer lending sector have long sought to position the sector as a glimmering alternative to state-insured deposit accounts, often echoing Behrens’ argument: that the real value of savings is eroded by inflation, irrespective of the presence of the FSCS safety net.

The truth of course is that more or less all people will look to hold both savings and investments within their portfolios, and peer-to-peer lending is rightly seen as falling within the latter bracket.

So the resetting of the FSCS limit to £85k shouldn’t have much of an impact on the peer-to-peer space. Nevertheless, it wouldn't be a surprise to see a few rallying cries from peer-to-peer lenders calling on savers to look elsewhere over the coming the week, in spite of the extra £10k of state-insured deposit protection.  

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Bank of England