PEER-TO-PEER investments – including money put into Innovative Finance ISAs (IFISAs) – should be covered by the Financial Services Compensation Scheme (FSCS) in the same way as stocks and shares ISAs, industry figures have suggested.
The scheme, set up under the Financial Services & Markets Act 2000, provides the fund of last resort for customers whose financial services firms are unable, or likely to be unable, to pay claims against them. Money put into savings accounts, such as high street banks and cash ISAs, are covered up to £85,000 per person, per firm.
Meanwhile, certain investments – including stocks and shares when held in an ISA or purchased through an investment firm – are covered up to £85,000 per person, per firm. For investments, the scheme offers compensation when the provider goes bust, but does not offer protection for losses, unless this is due to bad advice.
In contrast, P2P investors would not be compensated if a platform collapsed. However, they may be able to claim if they received poor investment advice or if they had untouched cash sitting in an FSCS-protected bank account used by the P2P platform. Brian Bartaby, founder and chief executive of P2P property lender Proplend, questioned why the scheme does not cover the IFISA when it covers stocks and shares ISAs.
“Why isn’t and why shouldn’t P2P be covered by the scheme?” Bartaby said. “The scheme does not cover for losses so why should stocks and shares ISAs be covered and the IFISA not be covered? “It may make wealth managers and independent financial advisers more happy to promote it and people would then put it on the same level as stocks and shares.
“At the moment some people mistakenly believe that they are covered for losses with stocks and shares or that it’s safer because it has the scheme’s backing. “The chance of losing money because stocks go down is the same as losing money with P2P investments.” He called for more education on what the FSCS covers when it comes to investments.
Roxana Mohammadian Molina, chief strategy officer at P2P property lender Blend Network, also called for P2P to be FSCS protected in the same way as stocks and shares.
“This is important because we believe P2P can play a strong role in helping the government achieve its housebuilding targets by channelling private funding into housebuilding efforts and being covered by the FSCS would obviously bring more trust into the sector,” she said.
‘Big three’ P2P platform RateSetter also agreed that it would make sense for P2P to be included under FSCS protection that applies to investments.
“It wouldn’t work for P2P to be covered by the FSCS for savings as this would be at the expense of value,” a spokesperson said. “However, we are interested in whether the type of FSCS that applies to stocks and shares could be applied to P2P and we’d like to talk to the regulator about this.”
However, Charter HCP director and P2P veteran Terry Pritchard said that FSCS could not be extended in the same way as stocks and shares until the P2P sector introduces standardised reporting.
Furthermore, Carl Davies, chief operating officer at The House Crowd, warned that FSCS protection could make investors lazier in their due diligence. The Financial Conduct Authority (FCA) takes the view that consumers receiving advice on P2P agreements should, in relation to that advice, have the same access to the ombudsman service and the FSCS as they do when receiving regulated investment advice on other investments.
However, this does not apply to self-directed investors, who do not obtain advice before putting money into P2P platforms. The City watchdog said in March 2014 that it did not consider there is enough justification to include P2P within the FSCS remit when it comes to company failures.
“Bringing these firms within the FSCS remit would impose additional regulatory costs, which may be quite significant,” the statement read. “As loan-based crowdfunding is not currently within the FSCS remit, we do not expect this to lead to a reduction in new investment.
“Firms should ensure that investors understand the risks involved. “Other protections that we are introducing – such as the minimum capital standards and the requirement for firms to have arrangements in place to continue to administer loans in the event that the platform fails – should provide adequate protection at this time.”