What does the FSCS Decline Mean for P2P?

The Prudential Regulatory Authority (PRA) has announced a rebalancing of the coverage offered by the Financial Services Compensation Scheme (FSCS).

The FSCS exists to cover savers in the event of their bank or building society going bust. The scheme currently offers up to £85k of coverage, but that amount will soon come tumbling down. The PRA today announced that the level of protection offered to traditional savings account customers will soon stand at £75k. The FSCS has provided a buffer for up to £85k since December 2010.

The reason for the recalculation, in short, is that FSCS protection is designed to stand in line with a European scheme, which offers up to €100k of coverage to savers. The PRA rejigs the sterling equivalent (the FSCS) every 5 years. With the pound climbing rapidly in relation to the value of the euro, thanks largely to the situation in Greece, a sizable £10k has been shaved off of the FSCS’ protective capacity.

But how is this relevant to the alternative finance space? Here’s RateSetter CEO Rhydian Lewis’ take on the situation:

“Moving the goalposts in this way with a lower level of protection and higher charges while offering no improvement to the pitiful returns for savers only strengthens the case to refresh the FSCS.  RateSetter is of the view that the one-size fits all approach of the FSCS is no longer fit for purpose and results in poor value.  This is why we have put in place our own bespoke, self-sufficient system - a Provision Fund which has ensured that nobody investing in our market has lost a penny whilst allowing them to enjoy healthy returns.”

While RateSetter was the first P2P outfit to establish a provision fund, there are now a number of platforms that feature a similar type of instrument. These platforms include Zopa, Wellesley & Co. and Assetz.

RateSetter in fact produced a survey on the very issue of FSCS protection towards the tail end of last year. The study unearthed some recurring misperceptions about exactly how the FSCS operates. Of the people surveyed:

• Only 47% had heard of the FSCS.
• 17% believed a low rate of interest on their savings was a fair price to pay for the protection afforded by the FSCS. Over 52% of people disagreed.
• Only 39% were aware of the £85,000 (soon to be less!) protection buffer.
• 71% thought that the scheme should cover unlimited amounts of money. On average, respondents believe that the FSCS should cover up to £115,137 – 35% higher than the current level of protection.

The £85k level of FSCS coverage will endure until December 31^st this year, according to the Bank of England. From there onwards, the low levels of FSCS understanding exposed by the RateSetter survey will likely dip even lower. Furthermore, indignation over the already low level of coverage (especially when set against the backdrop of extremely low returns) will surely become all the more pronounced.

Yorkshire Building Society recently raised concerns over the peer-to-peer lending industry. The company surveyed over 1,500 UK adults in mid-January, discovering that 42% claimed to be familiar with the concept of P2P lending. Of those people, 60% were unaware that P2P investments are not covered by the FSCS. 

Alarm bells?

Given the lack of general understanding that appears to plague the FSCS – a situation that will likely deteriorate thanks to the £10k cut – perhaps not.

RateSetter’s December 2014 survey also threw up the following statistic: 15% of the respondents that were aware of the existence of the FSCS thought that it protected their money from the effects of inflation. This is, again, false.

With traditional savings options offering unpalatable returns, and a gradually diminishing level of state protection, the allure of the alternatives stands only to grow.