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When FSCS And FOS Protection Doesn’t Work When You Think It Will

Some lenders choose to lend through a type of pension called a self-invested personal pension, or SIPP. These are many and varied, but they often give investors an expanded choice of what they can invest in, albeit for a high price.

SIPPs have historically suffered issues, such as lack of decent assessments by providers as to the quality of the investments they offer to investors.

More recently, over the past five years, basic protections that investors expect to have access to have been weakened or delayed when SIPP providers have gone out of business. A 4thWay reader has written in about some of these issues. I've added in explanations of some of his acronyms in italics:

Email from a 4thWay reader

I just wanted to bring your attention to what the FCA are doing with respect to SIPPs when providers hit trouble.

The Financial Conduct Authority (FCA) is responsible for making sure people can buy financial products safely, without stamping so hard on financial companies that it leaves you with no options and no choice of providers.

I have had problems with Hartley SIPP in that the FCA forced Hartley into administration. The FCA then decided to let the SIPP holders pay for their own legal and administration costs, thereby keeping FOS and the FSCS out of the equation. City firms have been complaining about having to fund the ongoing costs of paying compensation to wronged investors and this is the FCA’s way of dealing with it.

The Financial Ombudsman Service (FOS) is a powerful, free ombudsman that can - and does - force banks and other financial businesses to pay compensation to consumers if it hasn't treated them fairly. Consumers still have a right to take those businesses to court, regardless of the FOS's decision.

The Financial Services Compensation Scheme (FSCS) repays savers, investors and others consumers of financial products en masse when a financial company has failed you big time, such as by not safeguarding your cash properly. However, it doesn't pay out merely when your investments perform badly.

ShareSoc, of whom you have no doubt heard of, threatened the FCA with a judicial review so they have now backed down on forcing Hartley SIPP holders to pay for their own legal costs.

I am aware of Rowanmoor and another SIPP provider where the FCA are trying the same trick on SIPP holders. This also mirrors what has happened to the investors in the Neil Woodford fund. Investors entered the fund when it had full FOS and FSCS access, yet when it blew up the FCA removed this access.

I have to be honest and state that SIPPs are not worth the bother as the FCA’s approach is undermining this space completely.

Kind Regards

Sunil Chadda

As with most investments, your P2P lending and other online direct lending is not protected by the FSCS if it performs poorly, e.g. when your write-offs from lending bad debts are higher than the interest you have earned. Your protection there comes if you have received bad financial advice on your lending.

Even when the FSCS does pay out, as can be seen in the Rowanmoor case mentioned by Sunil, it can take far longer than the 12 months to get your money back than the FSCS itself often bandies around!

That's why the general point of spreading your money across lots of specific investments also applies when it comes to the accounts you use to invest with. So not just one P2P lending account, not just one share-investment account, not just one pension account – you spread across a number of accounts, too.

More on some of the stories referenced by Sunil here, with reader comments in those stories adding more opinion and context:

On the Neil Woodford story by FT Advisor.

On the Neil Woodford story by Portfolio Advisor.

On the Hartley SIPP by the FT Adviser.

On the Hartley SIPP by the Financial Times.

On Rowanmoor by FT Adviser.

Further reading: check out latest research from 4thWay.

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