No, peer-to-peer loans are not covered by the Financial Services Compensation Scheme (FSCS) but most lenders have procedures in place to either reimburse you or help you retain maximum interest.
There is always the risk with any investment that you could lose your money and for high street banks, insurance and pensions, the FSCS can be used to help you get your money back.
However, peer-to-peer lending is slightly different and you are not covered by this scheme.
What is the Financial Services Compensation Scheme?
The Financial Services Compensation Scheme is a government scheme designed to protect consumers and businesses from losing money if high street banks, credit unions, insurers or institutions go under. Since 2001, over £26 billion has been reimbursed to customers through FSCS.
If your bank or provider has not been able to provide a service or does not have access to your money, you can be reimbursed up to £85,000 for deposits, ISAs
and investments and up to £50,000 for mortgage advice and arranging.
This limit of up to £85,000 only applies for one authorized company – so if you bank with multiple companies under the same group, you can only get reimbursed for up to £85,000. Therefore, it is sometimes recommended to put money in two different banks, so you could claim for up to £85,000 with each.
Hypothetically, if you investments up to £85,000 through peer-to-peer lending and your money was lost or the company went under, you could claim through the FSCS and be refunded up to £85,000. However, this scheme is not in place for peer-to-peer platforms.
For this reason, peer-to-peer lenders
have their own methods to reimburse you for any potential losses and help you get the maximum interest rate that was agreed.
Why use peer-to-peer lending if is it not covered by the Financial Services Compensation Scheme?
Peer-to-peer lending is a very popular form of investing and can offer much higher rates than traditional savings accounts and ISAs.
For instance, ISAs available from your local bank branch will rarely exceed 3% per annum, meanwhile a peer-to-peer lender like Fund Ourselves can offer 5% to 15% per year, depending on your level of risk.
With peer-to-peer lending, you get a lot of the same benefits that you would get with a traditional ISA including the option to withdraw your money (although this may affect the overall rate you get) and you get to use up to £20,000 of your ISA allowance tax-free.
For some people who have lost faith in their banks, there is a lot of interest for alternative investments
and since peer-to-peer lenders are privately owned, some may consider them to be more innovative and less risky.
In fact, a lot of ISAs and Stocks and Shares ISAs are not covered by FSCS and usually you will need to check the terms of the provider for eligibility.
How is my investment protected at Fund Ourselves?
- Provision fund
- We diversify your investment
- Credit and affordability checks
- Customer service to follow up bad debt
When you lend out money with Fund Ourselves, part of the loan interest we charge the borrower goes into a Provision Fund.
The Provision Fund aims to reimburse your principle losses in the event the borrower does not meet their repayments and is subject to the fund availability, therefore not guaranteed.
To diversify your investment, we use a system called Auto-Diversify™ which will divide your investment across multiple borrowers. A single borrower cannot gain more than 10% of your investment.
Every customer is cross-checked beforehand to assess the creditworthiness and affordability to ensure that can afford to repay their loan on time and we can avoid the possibility of defaults.
Our customer service team is also dedicated to following up on missed payments and will work tirelessly to recover any lost funds.
When do you use the provision fund?
The provision fund is subject to availability and starts to be used when a customer is unable or has topped making payments entirely.
If a customer is in arrears by 35 days or more, we consider buying the loan back using the provision fund.
The Provision Fund would purchase the whole part of a loan from a single investment depending on the availability of funds. For example, if there is a loan of £3 and from investment A (£2) and investment B (£1), and available money in the Provision Fund would be only £1, only investment B loan would be purchased by the Provision Fund.