FSCS Protection in Peer-to-Peer (P2P) Lending
The Financial Services Compensation Scheme (FSCS) is a UK government-backed scheme that provides protection to consumers in the event of a financial institution’s failure. While P2P lending is not covered by the FSCS, there are other protections in place for lenders and investors.
Contingency Funds
Some P2P lending platforms have contingency or provision funds. These funds are designed to compensate lenders if a borrower defaults on their loan. However, it’s important to note that these funds are not guaranteed and may not cover the full amount of the defaulted loan.
Segregation of Funds
P2P lending platforms are required to segregate lenders’ funds from their own operational funds. This means that lenders’ funds are held separately and cannot be used to pay the platform’s debts or expenses. This segregation provides some level of protection for lenders’ funds.
Unlent Cash Protection
While loans in P2P lending are not covered by the FSCS, there may be some protection for unlent cash held by the platform. In some cases, the unlent cash is held in segregated client accounts at high-street banks, which may be covered by the FSCS in the event of the bank’s collapse. However, the specific coverage and limits may vary depending on the platform and the bank used.
Conclusion
While P2P lending is not covered by the FSCS, there are other protections in place for lenders and investors. These protections include contingency funds, segregation of funds, and unlent cash protection. It’s important to understand these protections and the risks involved in P2P lending before investing.
Sources
- Peer-to-Peer Lending: What You Need to Know
- Which P2P Lending Sites Offer FSCS Protection On Unlent Cash?
- What’s crowdfunding? What are the risks?
FAQs
Is peer-to-peer (P2P) lending covered by the FSCS?
No, P2P lending is not covered by the FSCS.
What protections are in place for P2P lenders?
There are a number of protections in place for P2P lenders, including contingency funds, segregation of funds, and unlent cash protection.
What is a contingency fund?
A contingency fund is a fund that is designed to compensate lenders if a borrower defaults on their loan.
What is segregation of funds?
Segregation of funds means that lenders’ funds are held separately from the P2P lending platform’s own operational funds.
What is unlent cash protection?
Unlent cash protection is a type of protection that may be available for unlent cash held by the P2P lending platform.
What should I do before investing in P2P lending?
Before investing in P2P lending, you should understand the risks involved and the protections that are in place. You should also consider your own financial situation and investment goals.
What are the risks of P2P lending?
The risks of P2P lending include the risk of default, the risk of early or late repayment, and the risk of the P2P lending platform going bust.