FSCS protection would be spark that ignites crowdfunding and p2p lending growth – and finally levels playing field with banks

By Richard Wheat on Wednesday 10 August 2016

OpinionAlternative Lending

MRM's Richard Wheat believes recent proposals by the UK regulator, the Financial Conduct Authority (FCA), could be catalyst for explosive growth in the alternative finance sector. 

Recent years have seen an explosion in growth for the UK’s burgeoning crowdfunding industry, encompassing both debt and equity, with investments into platforms jumping from £657m to £2.81bn, according to AltFi Data - a more than a four-fold increase.

Breakdown of the alternative finance industry in 2015

Source: AltFi Data


According to the FCA, in its paper entitled FCA launches call for input on crowdfunding rules, there are more than 100 platforms either operating in the market or seeking authorisation.

The growth has been suitably rapid enough to not only get the Financial Conduct Authority (FCA) to spell out its concerns about the sector, but also to hint that it may be time for crowdfunding investments to come under the protection of the Financial Services Compensation Scheme (FSCS).

In its latest paper on the matter, it said: “We are currently conducting a review into the way that the FSCS is funded and will consider in that review whether, following market growth and development, this approach remains appropriate for the P2P sector.

Putting aside the blatant overtones in the statement that crowdfunding may be bought under the yoke of the FSCS simply as part of some regulatory cash grab, it nonetheless raises an important issue. The intricacies of customer protection for investors using crowdfunding platforms are somewhat complicated, with numerous potential options for recourse in the event of a platform failing, but none of them particularly explicit.

One thing that is clear is that the FSCS is not currently an option. Indeed, nearly every article written about the sector includes a reference to the fact that crowdfunding is risky and not covered by the scheme.

What the disclaimer fails to encapsulate is that the FSCS does not cover investors for losses incurred via most other products, such as open-ended funds which perform badly, or retail bonds. Therefore, any steps to move to a regime which sees crowdfunding platforms covered by the levy would be most welcome, putting a backstop under the whole case for investing via them in the first place.

In reality, the benefits of this additional protection might be fairly limited on top of current legislation around ring-fencing of client assets, and that may yet mean the FCA decides against widening the scope of the FSCS.

But that would be a mistake. Consumer finance relies on investors feeling safe in the knowledge that what they put into a product today will still be there tomorrow.

By including the platforms under the umbrella of the FSCS it would provide real stability, helping crowdfunding evolve into a long-term rival to the banking sector.

Richard Wheat is an entrepreneur and founder of MRM, an award-winning communications consultancy.

Sign up for our newsletters

Your daily 7am download of all things alternative finance and fintech.

Fintech and alternative finance headlines with an exclusive Editor's Note each week. Delivered Monday at midday.

AltFi's new weekly US newsletter breaking down the ins and outs of America's burgeoning fintech sector. Delivered Monday 9am EST/ 6am PST.

Companies in this Article:

Financial Conduct Authority

People in this Article: