Several peer-to-peer lenders have been hit with increased requests for withdrawals and an argument is emerging that extending Financial Services Compensation Scheme (FSCS) protection to the sector could provide a timely boost.
P2P platforms have previously called for FSCS protection to be extended to the industry, arguing that it is unfair that stocks and shares ISAs are covered if a provider goes bust, but Innovative Finance ISAs (IFISAs) are not.
Now some are suggesting that the protection would stem the tide of investor withdrawals on P2P lending platforms at a time when funds are needed to flow to borrowers hit by the coronavirus outbreak.
“Currently, the worry for many investors will be over the coming turbulence on the loanbooks,” Nic Conner, research consultant for business finance specialist Rangewell, said.
“The fear is that the default rates may soon be higher than a platform’s loan loss provisions fund.
“If P2P platforms can overcome this anxiety with something like FSCS protection then the platforms will become a very attractive proposition to the consumer lender.”
He said this could put retail investors at the heart of a platform as many institutional investors are also increasingly wary.
However, the introduction of FSCS protection for the sector could result in lower returns for investors, as platforms would have to pay a levy to the scheme.
Furthermore, investors would need to understand that this would be a protection against platform failure rather than bad performance.
Another way that the FSCS could be used, Neil Faulkner, founder of P2P analyst 4th Way suggests, is by funding government guarantees of loans from banks and P2P lenders.
“The FSCS doesn’t protect investors in any asset class from poor performance and I don’t think that it ever should,” he said.
“The government should directly guarantee all emergency loans that meet its criteria, including P2P loans.
“The government could ask the FSCS agency itself to make actual payouts when the guarantee is called upon.
“The FSCS is supposed to pay out for the failure of a bank within 15 days, so you would hope that it is ready for a large number of potential claims, should it come to it.
“If P2P lending providers are allowed to make claims on behalf of lenders, that will make the job even easier.”
There is an argument for extending FSCS protection to IFISA providers but investors will need to be happy to accept lower rates in return for increased confidence.