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Which P2P Lending Sites Offer FSCS Protection On Unlent Cash?

Your unlent cash – but not loans – held by a P2P lending site might be covered by the FSCS.

I'll explain when it applies, give my view on how important this protection is, and give you a list of the P2P lending sites that have strongly confirmed in writing that FSCS applies on unlent cash.

Your main protection is that loans and cash are segregated

Firstly, lets get a sense of proportion. Because FSCS protection here is actually a very minor point.

If you have loans at a P2P lending company or if that site is holding some of your cash that is currently not on loan, the P2P lending company is strictly required to ringfence both the loans and cash to protect you if it goes bust. In other words, the money and loans are still yours and can't be used to pay the P2P lending company's suppliers or any banks to which it owes money.

However, your cash is usually held elsewhere, typically at a segregated client account at a high-street bank, such as Barclays, Royal Bank of Scotland or Lloyds.

When this happens, your unlent money is at risk if the bank itself collapses. However, in most cases where that bank folds, your unlent cash held by the platform is covered by the Financial Services Compensation Scheme.

Usually, it's a small proportion of your overall money that is in cash rather than on loan at any given time.

Basic rules of FSCS

Unlent cash of yours in your P2P lending account is held in a separate high-street bank account just for lenders. This money is yours and will be returned to you.

In addition, £85,000 of your unlent money is normally, but not quite always, protected by the government through the Financial Services Compensation Scheme, in the event the bank collapses. This limit is shared between all the rest of your current and savings accounts at the same high-street bank, and sometimes with other brands in the same banking group. For joint accounts, the limit is £170,000.

To be clear, your money that is currently being lent is not protected by this scheme. No investments ever are or we'd all just bet on crazy things!

Just as a quick aside, if you're wondering why you might have any cash at a P2P lending site in the first place, it's because you typically have to transfer money to the P2P site before it is lent out, and because your borrower repayments and interest usually go to the same holding account, at least until it is re-lent.

When you don't get FSCS protection

A small number of P2P lending companies never hold your money, making FSCS irrelevant.

However, some P2P lending websites do not have FSCS protection on the cash they hold. There can be two broad reasons for this:

Some e-wallets don't offer FSCS cover

Firstly some P2P lending companies use so-called “e-wallets”. Some e-wallets, but not all of them, aren't covered by the FSCS.

E-wallets, like those provided by Mangopay, PrePay Solutions and PayPal, are supposed to make it easier to do transactions and keep an overview of your money. (I find it hard to define why e-wallets exist when online banking is already so easy. Indeed, my own Paypal e-wallet a nuisance…)

E-wallet providers typically operate under e-money licences rather than banking licences. It's possibly for this reason that some of the wallets don't offer FSCS protection. This is even the case when the e-wallet provider itself stores your money in a segregated high-street bank account. The fact that the bank offers FSCS protection to people in other accounts doesn't always help you in this case.

Legal particulars can impact FSCS cover

The scheme has explained that while it generally offers FSCS protection for individuals using segregated client accounts, there's a legal test to be sure of the arrangement in each case. Its general guidance is for you to ask the specific firm if you have full FSCS protection on unlent cash. (We've done a lot of that work for you, below.)

Some P2P lending companies tell us unlent cash isn't protected for other legal reasons. The legal situation is potentially complicated more by the fact that they each use very different legal structures and models.

Which P2P lending sites offer FSCS protection on your unlent cash?

The rules are far more complicated than you might expect under the surface, which is why we have to rely on what each individual P2P lending company tells us, just as the FSCS recommends.

So far, the following P2P lending companies have strongly confirmed that FSCS is applicable on cash they hold on your behalf (but not your loans):

All your money at any banking institution – not just the money you have through a peer-to-peer lending website but also your savings – counts towards your FSCS limit.

For example, let's say you have a Barclays current account and savings account, and you have unlent cash currently held by British Pearl and Invest & Fund (which all have Barclays segregated accounts). If the total cash (i.e. excluding your P2P loans) is more than the FSCS limit, not all your money will be covered by it.

Barclays shares a banking licence with Standard Life Cash Savings and The Woolwich. This means that all the cash you have at all three combined counts towards one FSCS limit.

NatWest and Royal Bank of Scotland have their own separate banking licences, even though they're part of the same group. Each, therefore, operates under its own separate FSCS limit.

P2P lending companies where money is held at the Bank of England

Sometimes, client money can be held at segregated client accounts at the Bank of England. While this has no FSCS cover, it's also the only bank that cannot possibly go bust. FSCS is therefore unnecessary.

  • CapitalStackers*. Unlent cash in CapitalStackers is in an ewallet with Modulr. Money transferred to a Modulr ewallet from a UK bank account goes straight into Modulr's segregated client account at the Bank of England.

The P2P lending sites where FSCS on unlent cash doesn't apply

These companies have told us that your cash that they hold is not covered by the FSCS. This isn't an exhaustive list:

Should you be worried if you're not covered?

Should you worry when your unlent cash is unprotected by the FSCS? I don't think it's a big concern. Remember, FSCS protection is never about the P2P lending site. If any of these P2P lending companies were to go bust, the money is at the bank.

FSCS is about the banks that your money is held at. The risk of bank collapse is small – especially compared to other risks in P2P lending, such as bad debts.

A bigger risk than bank collapse is a platform going out of business. In that event, your loan contracts are between you and borrowers and your cash remains yours. If the P2P site goes out of business owing a lot of money to its suppliers, those suppliers aren't allowed to take the cash or your loans, because it's yours, not the P2P provider's.

See a different view on this in Why FSCS Protection Matters In P2P Lending.

Read more on the risks in P2P lending, how big they are, and what you can do to reduce them, in The 13 Key Peer-To-Peer Lending Risks.

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