Why Can’t Peer-to-Peer Lending Be Covered by the FSCS?

Written by Karen Bryan

While reading an article on peer-to-peer lending, I wondered why lenders’ deposits with online peer-to-peer lending firms can’t be covered by the Financial Services Compensation Scheme (FSCS). Under this scheme deposits of up to £85,000 are guaranteed if the institution which holds your savings goes bust. However, deposits with peer-to-peer lending companies have no FSCS protection.

With rates of around 7% (before tax) on offer for deposits with a peer-to-peer company, I’m very tempted; you’re lucky to get 4% on a two year savings account with a traditional bank or building society. However, I don’t want to take the risk of losing any of my savings by chasing a higher interest rate.

However, what I don’t understand is: why peer-to-peer lending can’t be covered by FSCS or a similar type of scheme? Yes, their rate of interest might have be slightly lower to pay a levy. Most peer-to-peer lenders already charge a 1% fee. Personally, I’d be happy if the interest rate paid to peer-to-peer depositers dropped by another 1%, to around 6%, if my savings were protected.

The UK Government claim to be supportive of peer-to-peer lending and is lending such firms £100 milion to expand. I think that the Government could do a lot more to support peer-to-peer lending, not only insisting on FSCS for deposits with peer-to-peer lending firms, but also by allowing savers to use their annual Cash ISA maximum, currently £5.640, for savings deposited with a peer-to-peer lending firm. The Government could also double the annual Cash ISA limit so that it’s the same as the Stocks & Shares ISA limit.

For goodness sake, the UK Government spent billions propping up UK banks. Might the Government have the interests of big business at heart, versus helping savers get a decent tax free return on their money without risking losing their savings?


2 Responses to “Why Can’t Peer-to-Peer Lending Be Covered by the FSCS?”

  1. Interesting. I believe the compensation scheme only applies to financial services regulated by the Financial Services Authority.

  2. I don’t see why peer to peer lending companies can’t come under regulation from the FSA? I suppose there’s all sorts of red tape and stipulations but surely being covered by FSA would led to a large increase in peer to peer companies business. I would definetly lend them money if my cash was guaranteed.