Investors in peer-to-peer companies are now protected by the Financial Services Compensation Scheme (FSCS).
The FSCS, which did not previously cover the peer-to-peer sector, said that it may be able to help investors get lost money back if they lose it after investing in a peer-to-peer scheme
The FSCS will cover investors if they have received “unsuitable advice” to invest in a peer-to-peer scheme, but only if the advice was given after April 6.
People will be able to claim compensation of up to £50,000 if they received advice from a regulated advisory firm to invest in peer-to-peer and lost money as a result.
AT A GLANCE
Peer-to-peer: the risks and returns
- You lend to individuals, businesses or landlords
- Peer-to-peer is now covered by the Financial Services Compensation Scheme
- Typical returns reach 5.19pc
- There are 100,000 lenders with a total £2.6bn lent out
- Savers will be able to hold peer-to-peer loans in an Isa, up to £15,240, from April 2016
- Borrower default rates range from 0.5pc to 3pc
They will also have access to the financial ombudsman service if they believe they have been give incorrect advice.
The protection could help investors who lose their money because of mismanagement, such as those hit by the failure of peer-to-peer site TrustBuddy, which declared bankruptcy last year.
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- Largest peer-to-peer lenders say they won’t be ready to offer Isas on April 6
The FSCS said that it could also potentially step in to help people who had lost their money because it had not been correctly ringfenced by the platform.
However, it will not cover people who lose money because borrowers default on their loans, as this is seen as an investment risk, and it will only cover those who invest after being advised to do so by a regulated financial adviser.
There has been concern that low interest rates on other Isa products could cause an influx of inexperienced investors turning to peer-to-peer, drawn by higher interest rates.
The launch of the Innovative Finance Isa, which allows investors to invest in peer-to-peer lending in a tax-free Isa wrapper, at the start of April is predicted to attract new investors to the sector.
However, many peer-to-peer firms have not yet been able to launch their Isas as they are waiting to be fully regulated by the FCA, a requirement before they can offer the Isa.
The FCA has updated its policies to allow investors advised to put money into peer-to-peer schemes the same access to compensation as those advised to make other types of investment.
In a consultation published last month it said: “We believe that consumers receiving regulated advice on P2P agreements should have the same access to the ombudsman service as they do when receiving regulated investment advice on other investments.”
Jason Hollands, of fund shop Tilney Bestinvest, said the FSCS protection could make investors more comfortable with the sector. “This will clearly give a bit more comfort to this area. It is still a very young industry and no-one knows how it would perform in very stressed market conditions, but this does add an additional degree of comfort, along with the innovative finance Isa.
“There has been a slight nervousness that that Isa brand was being lended to a very nascent industry, but I think this will help reassure people about putting their money in these platforms,” he said.