Could FSCS protection boost confidence in online investment platforms?

The Financial Services Compensation Scheme (FSCS) is largely misunderstood and potentially a bit of a red herring, a P2P lending platform has claimed.

The comment follows a recent announcement by LendInvest that its platform investors will now be covered by the FSCS.

The online platform for property finance and investing said that individuals and small companies that invested through its online investment platform would now be covered by the scheme.

What does the FSCS protect?

LendInvest claimed that following a change in scope by the FSCS, the majority of its platform investors may now be eligible to compensation in the event of a default from the management company.

At present, the maximum level of compensation an investor could receive from the scheme for a claim is 100% of the first £50,000 per person.

This will rise to £85,000 from 1st April 2019.

LendInvest’s platform provides customers with direct access to secured loans offered on a deal-by-deal basis.

An investment on the platform is an investment in an alternative investment fund, and these funds each invest into a loan secured against property.

In 2017, LendInvest took the decision to tailor its platform to sophisticated and high-net-worth investors and investment professionals, providing a fund structure that offers greater protection to investors.

Retail investors are still able to invest in LendInvest’s loans by investing in its London Stock Exchange listed retail bonds.

“Because investors that invest in our online investment platform are investing in a fund each time, this provides investors with a robust regulatory framework that provides significant protections over many other online investment platforms,” claimed Christian Faes, co-founder and CEO at LendInvest.

“This now comes with the added benefit of FSCS coverage.”

Could other platforms follow LendInvest?

A spokesperson for the FSCS said: “We are not expecting any regulatory changes to enable online lending/P2P platforms to become FSCS protected, not least as the FCA in its recent consultation re: FSCS funding decided not to carry the issue forward at this point.”

However, in the FCA’s consultation, it added that it intended to keep the matter of FSCS coverage for the P2P sector under review, but was not consulting on any further changes at this point.

Louis Alexander, managing director at the BridgeCrowd, said it would look to follow LendInvest in the future.

Meanwhile, Chris Hancock, CEO at Crowd2Fund, added: “I think more platforms could follow suit, however, those platforms will obviously need to offer lower interest rates of return.”

“With an increase in regulatory pressure within the P2P lending sector, we are seeing different providers offering different structures to facilitate investors funding loans,” said Iain Niblock, CEO and co-founder of Orca Money.

“This is likely to be a continued trend in the alternative lending sector.

“The added advantage of opting for the Alternative Investment Fund structure is FSCS coverage.

“Although this may not be a primary driver for providers when designing products, it is certainly a consideration.”


Could FSCS protection increase investor confidence?

“FSCS coverage provides an added benefit to investors and should increase investor confidence,” said Iain.

“In a similar vein to the P2P lending sector gaining the IFIsa, the presence of FSCS coverage gives additional confidence to investors.”

Chris explained that it would provide investors with more protection, but lower interest rates due to the costs of being part of the scheme.

“I think it will attract more retail investors to the industry, however, sophisticated investors enjoy conducting their own due diligence on opportunities and, therefore, they would not be attracted to platforms that are FSCS covered.

“It also may introduce some confusion to the sector to distinguish between platforms that offer protection and those that don't.

“Our approach will be to offer an opt-in insurance policy for users, so users who want financial protection can pay for it independently, like an insurance policy, and investors who have a higher risk appetite can still take part and potentially earn higher returns.”

Nonetheless, Sam Handfield-Jones, head of Octopus Choice, questioned whether investors knew enough about the FSCS.

“The FSCS is largely misunderstood and, potentially, a bit of a red herring, but it’s no doubt viewed as a kitemark by financial consumers.

“Plenty of people think the FSCS offers an insurance policy against poor investment performance, but it doesn’t.

“If an investment doesn’t perform, the scheme will not be there to save you – that’s just the risk you run by investing.

“The FSCS is on hand to compensate investors if a provider has been shown to mismanage its product, and has subsequently gone bust.”

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