Why FSCS cover doesn’t really matter in P2P

The Financial Services Compensation Scheme (FSCS) is seen as a safety net for savers, and it is often regarded as a negative that peer-to-peer investors are not covered by it.

However, according to Roy Warren (pictured), managing director of Folk2Folk, P2P investors benefit from having alternative protections in place which may in fact provide a better outcome.

“The purpose of the FSCS is often misunderstood,” he says. “It does not cover investment losses but compensates customers when an eligible financial firm fails.”

The FSCS provides compensation up to the value of £85,000 to customers of banks, building societies, or other financial services firms if they are unable to meet their obligations, ensuring that people do not lose out financially if their firms go bust. But there are limitations.

Any sums of money larger than £85,000 are not covered. Additionally, the scheme does not protect against poor investment performance or losses due to market fluctuations. It is specifically designed to cover the failure of a financial institution, not investment risks or losses caused by bad investment performance.

“In general, our existing safeguards such as property-secured loans and our comprehensive wind-down plan already offer substantial protection to our investors,” says Warren.

“And of course, this is against a backdrop of additional protective measures introduced by the Financial Conduct Authority (FCA) in recent years such as appropriateness testing, high profile risk warnings, and detailed governance and capital adequacy requirements to protect P2P investors.”

While the P2P sector is not covered by the FSCS in the event a platform ceases trading, the FCA requires all P2P platforms to have an effective wind-down plan to enable them to cease regulated activities with minimal adverse impact on customers.

Under its wind-down plan, Folk2Folk retains RSM Restructuring Advisory (RSM) as its standby service provider. This means that, should Folk2Folk cease trading for any reason, RSM will step in and manage the running down of the loan book in an orderly manner, continuing the collection and distribution of repayments to investors.

Additionally, a non-trading trust company (Folk Nominee) holds the charge on behalf of the investors. This means that if anything were to happen to Folk2Folk, it would not affect the loans, which remain in place.

“At Folk2Folk, we implement robust risk management practices, including thorough due diligence on borrowers, securing loans against property, and maintaining a comprehensive wind-down plan to protect investors’ interests,” says Warren.

“Our wind-down plan protects investors by ensuring continuity in the management and servicing of their loans.”

The FSCS is meant to protect savers and consumer bank accounts, but P2P investors are typically classified as either sophisticated or high-net-worth individuals, with a different risk profile and more expansive portfolios. The average Folk2Folk investor has approximately £300,000 invested in loans on the platform, while some investors have several million in their portfolios.

“In the P2P world, I’d argue that investors are afforded better protection on their money beyond £85,000, if the financial services company goes bust,” adds Warren.

“If all goes to plan, P2P investors should walk away with their capital and interest owed if the platform ceased trading, not just the £85,000 they would have received if the FSCS applied.”

All investments come with the risk of capital devaluation, but it is worth noting that to date Folk2Folk has maintained a zero capital loss track record. Warren puts this down to the underlying risk management policies of the firm, and Folk2Folk’s commitment to protecting investor capital while delivering competitive returns.

This article was initially published by Alternative Credit Investor in September 2024 and can be viewed here.