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Why FSCS Protection Matters In P2P Lending
The FCA recently suspended a regulated financial business due to weak controls against money laundering, leaving up to one million account holders unable to access their money.
The suspended company, called ePayments Systems Limited, has nothing to do with the peer-to-peer lending industry. But it serves as a good example about how FSCS can be relevant when lending online and why you might look to lend through P2P sites that offer you some of this cover in limited circumstances.
The story of ePayment Systems
ePayments Systems is an e-money business that takes deposits, issues its own payment cards and arranges digital payments.
ePayments' suspension hopefully will be lifted sooner rather than later, so that customers can access their money. In the meantime, a lot of its customers are surprised to learn that their money is not covered by the Financial Services Compensation Scheme (FSCS).
The reason is because ePayments Systems is not a bank, but an e-money business, so it has no UK banking licence. While its customers await further news, many might suffer some consternation now that they know they don't have the FSCS fall-back option.
I think this helps to ram home the benefit of using peer-to-peer lending companies that hold your unlent money in bank accounts rather than e-money “wallets”. We try to list as many of them as possible in Which P2P Lending Sites Offer FSCS Protection? The benefit is that, if the company holding your unlent money (the bank) goes under, you have recourse to the compensation scheme.
Where FSCS applies in peer-to-peer lending
FSCS cover in peer-to-peer lending is limited to two scenarios:
- If the P2P lending platform holds your unlent money in a UK-regulated bank and that bank goes under, your money is usually protected under the usual bank deposit FSCS scheme.
- If you have received poor and inappropriate personalised financial advice regarding P2P lending from a regulated business (such as a professional financial advisor), you might be able to claim FSCS cover under the investment FSCS. (But losing money on your investments doesn't necessarily mean you received poor advice.)
Where FSCS doesn't apply in peer-to-peer lending
FSCS cover in peer-to-peer lending is limited to those above scenarios. Here are some scenarios when it doesn't cover you:
- If your investments (your lent money) simply perform poorly and you lose money, you're never covered by the FSCS. This applies to all investments, from the stock market to peer-to-peer lending.
- If your unlent money is held in an e-wallet, as opposed to a bank account, it usually won't be covered by the FSCS.
- Due to specific legal circumstances in terms of how the segregated account is set up and functions, and potentially even how the P2P lending company itself is set up, FSCS doesn't always apply.
- If the P2P lending company fails to hold your unlent money correctly in a segregated account and a shortfall arises, you're not covered. (Although you might possibly have an alternative FSCS claim, based on those failings.)
Sources: Financial Times for the ePayment Systems story.