FSCS may be the price of mainstream success. P2P should start paying it.
This article first appeared in New Model Adviser.
According the Government statistics, British consumers have around £500 billion either saved or invested within ISAs. Not only does the tax wrapper give investors’ returns a welcome boost, it can also give their investments a stamp of mainstream credibility.
It is little surprise, then, that some commentators estimated nearly half a million new investors would try their hand at P2P lending when the new ‘Innovative Finance ISA’ (IFISA) brought eligible platforms into the ISA fold.
However, I think it is fair to say that the stampede hasn’t quite arrived just yet. Though the market continues to grow at a rapid pace, many investors – and many more financial advisers – have remained cautious of the opportunity. And I think some of that is to do with another of our favourite kitemarks – or rather, its absence – The Financial Services Compensation Scheme (FSCS).
The FSCS was set up in 2000 as the ‘compensation fund of last resort’, and is bankrolled by financial services providers through an annual levy. It’s a piece of financial protection that may be as misunderstood as it is much-loved.
When they hear ‘FSCS’, most people think of the deposit protection service – guaranteeing the first £85,000 (2017/18 tax year) of an individual’s savings if a bank goes bust. But the scheme also protects certain investments, too, and it has become obvious to us that many investors don’t really understand how.
We’ve realised that plenty of people think the FSCS offers an insurance policy against poor investment performance. It doesn’t. If a share portfolio tanks, for example, the scheme won’t be there to save you – that’s just the risk you run by choosing to invest in the equity markets.
Instead, the FSCS is on hand to compensate investors if a provider has been shown to mismanage their product – and has subsequently gone bust, to boot. And only then does it offer up to £50,000 (2017/18 tax year), not the larger amount doled out to savers.
Clearly P2P lending products aren’t savings accounts; they’re investments. But even so, the market hasn’t been included in the FSCS’s remit – a fact which we’ve already seen has dampened plenty of financial advisers’ appetite to recommend it to their clients.
It’s a hang-up of the industry’s early days, when the FCA didn’t want to strangle young, nimble firms by taking on the additional regulatory costs that comes with the territory.
That said, I think the time is right to invite P2P players to pay into the pot. Over the last few years, the market hasn’t just grown very fast. It’s also become much more sophisticated, with a wealth of different offerings out there that are beginning to look quite complex and mature in nature.
As the industry grows up, it seems only fair that the exemptions of youth start to be lifted. After all, with adulthood comes responsibility: and as more and more people are looking to experiment with P2P, surely stringent and effective regulation is exactly what’s needed.
I’d even argue that it might help sort the wheat from the chaff. After all, if a product provider isn’t cut out to fulfil the requirements of the FSCS, then do we really want consumers investing in them? If you can’t stand the heat…
Include P2P within the FSCS purview and I believe we’ll start to see its mainstream popularity really take off. Because for most people it’s not a ‘nice to have’ or added-value feature – it’s the price for entry. I believe people don’t just want it, they expect it. And advisers in particular.
Despite having the scope of their investment permissions automatically widened to include advising on P2P lending, until now the response from most has been a little muted. Part of this is around brand: most providers are complete unknowns in the intermediary space. But I think a lot of it is because it doesn’t have the FSCS stamp of approval.
By bringing P2P into the ISA stable, the Government and the Regulator have kicked off the sector’s journey to the mainstream. Now they need to finish the job.
Gov.uk, Individual Savings Account (ISA) Statistics, August 2016
2 Intelligent Partnership, Peer to peer lending report. February 2017
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