THE FINANCIAL Conduct Authority (FCA) is seeking views on whether peer-to-peer lending should be covered by the UK’s £3.5bn financial compensation fund.
The Financial Services Compensation Scheme (FSCS) protects consumers when financial services firms fail. It covers savings in a bank account of up to £75,000 and protects investments of up to £50,000.
The City watchdog announced that it has undertaken a wide-sweeping review of the scheme, proposing to overhaul the way it is funded, raise limits on compensation and broaden the types of firms that can participate.
If P2P were included under the FSCS, it would mean that investors could seek compensation if a P2P platform went into default.
At the moment, the main aspect of P2P that is covered by the scheme is client money when it is held in a third-party account, such as a bank, before being invested.
“If we extended FSCS coverage to loan-based crowdfunding, investors might also be able to make a claim where a firm had misrepresented the risk of a loan, causing the investor to make an investment they would not have made without that misrepresentation,” said the FCA.
The FSCS review comes less than a week after the FCA published its call for input on the crowdfunding industry, which signalled tougher rules on the sector. The regulator has said it remains “concerned that standards of disclosure in loan-based crowdfunding do not meet our expectations”.
FCA chief executive Andrew Bailey told Peer-to-Peer Finance News that he had concerns about whether the risks of P2P were being marketed to consumers properly, particularly in the case of provision funds.
The FSCS review said that rising interest rates, the greater pooling of credit risk and changes to the investor base could create new risks within the P2P sector. However, it said it was hard to predict whether an individual firm failing would have a contagion effect.
“Overall, given the small scale of the market…and what we believe to be a low risk to client funds on the default of a firm, we are not convinced that FSCS protection should be introduced,” said the FCA.
“However, we welcome views about the extent to which a failing crowdfunding firm may pose a risk to investors. We are conscious that it may not be sufficient to rely on client asset or client money rules, particularly when there are a variety of business models with different approaches to client money, such as using payment service providers (PSPs) to receive and hold client money or bank accounts which fall under the Solicitors Regulation Authority (SRA) rules.”
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The FCA said that if P2P were brought within the scope of FSCS protection, it would need to consider how it would be funded and which firms would contribute, “given that crowdfunding firms alone would be unlikely to form a sustainable funding class”.