May 19, 2016
We have had a number of questions recently relating to the Financial Services Compensation Scheme (“FSCS”) and what it covers in the realms of peer-to-peer lending. While individual circumstance may differ and we cannot provide any form of definitive advice on such matters, we thought it would be helpful to address the general issue and the specific questions together.
The FSCS is the “compensation fund of last resort” if a financial services provider should fail – but only if the financial service in question is actually covered by the FSCS.
When the peer-to-peer lending industry became regulated, the FCA decided that P2P platforms would not be included in the FSCS. This was driven by a number of factors, including the likely amount of loss suffered as a result of a platform failure which would be covered by the FSCS, other measures taken within the rules (such as requiring platforms to have resolution plans in place to respond to such a failure) and the potential for the cost of including P2P in the FSCS to become a barrier to entry. For those that like to read the detail, the FCA laid out its thoughts on this matter in Policy Statement 14/4, starting on page 17.
It’s worth noting that the FCA committed to review the situation when it looks again at crowdfunding and the associated regulatory framework later in 2016.
Some confusion has arisen lately as a result of a change to legislation. The activity of advising on P2P investment became regulated in April 2016; previously it wasn’t. As a result, FSCS compensation may be claimed if an investor is advised to invest in P2P, that advice is shown to have been unsuitable and the adviser has failed (gone bust) in the meantime. The FSCS put out a news bulletin which seems to have caused some to believe that P2P may be covered by the FSCS; only if unsuitable advice was involved and only if the adviser was authorised to advise on P2P investment at the time. Since P2P platforms presently tend not to offer any form of advice, and are unlikely to be authorised to do so at this stage, this is likely to apply only in situations where a properly-authorised third-party adviser has recommended investment in P2P. The FSCS news bulletin explains it well.
So platforms are not covered by the FSCS but all platforms must have resolution plans in place designed to effect an orderly run off of their loan book if the platform should fail. In theory at least, this means that your invested funds – money actually lent out to borrowers – should be “safe” even without the platform there and the loan repayments should continue to flow to you.
Platforms subject to the FCA’s client money rules will be holding your uninvested cash in a properly segregated client account. So again in theory, this means that cash should be protected in the event of platform failure and most, if not all, of it should find its way back to you.
Should the bank holding the client money fail, FSCS protection will apply because banks are covered by the FSCS. The FCA rules refer to this as a ‘secondary pooling event’. All money in the client account is effectively pooled and any shortfall in client money that has arisen as a result of the failure of the bank is borne by all clients equally according to the level of funds held. Under such circumstances, clients may approach the FSCS to settle any shortfall which may arise. Currently the FSCS will compensate up to £75,000 per person in such a situation where the money is with a bank.
In terms of your Assetz Capital accounts, the most straightforward way of thinking of things is to consider anything in your Cash Account or awaiting investment to be uninvested cash which should be sitting in the client account. Invested funds should not be in the client account because they will be out with borrowers.
The situation is a little more complex with the QAA as it holds some funds “liquid” to facilitate the quick access. These liquid funds are also effectively uninvested in the context of this discussion so they too will be sat in the client account.