LET’S GET PHYSICAL
>> 5
Lenders defend use of business premises as collateral POWER TO THE PEOPLE
>> 18
What role will retail investors play in the future of P2P?
Folk2Folk’s Giles Cross on social impact and the rural economy >> 12
ISSUE 18 | MARCH 2018
New ringfencing rules will create ‘two-tier’ protection for P2P cash NEW ringfencing regulations in the banking sector look set to create a twotier system of protection for peer-to-peer investors’ money before it is lent out. P2P platforms can handle lender funds either by setting up separate client money accounts with a traditional bank or by outsourcing it to an e-money provider. Government banking reforms, introduced in response to the financial crisis in 2008, mean that UK banks must separate their investment and retail banking activities by January 2019. This means that money held in the retail bank is protected from the investment bank’s operations. Technically, this means P2P funds held in a client money account with a bank are protected by the Financial Services Compensation Scheme (FSCS) until the money is invested but the same does not apply to P2P
investor funds held by an e-money provider. Furthermore, e-money providers can be based anywhere in the world, meaning that they may comply to a different regulatory framework entirely. Neil Faulkner, managing director of P2P analysis firm 4th Way, said the distinction between platforms using client money or e-money accounts was a “long-tail risk” but one investors needed to understand.
“It is a small risk compared to others when choosing a platform, but they all add up,” he said. “Provided you are spreading across lots of platforms there is no reason to worry why some are in e-wallets and some are ringfenced.” Alison Donnelly, head of advisory at financial compliance firm FSCom, said the changes do upgrade the protection on offer where banks hold the client accounts, but said that doesn’t necessarily make e-money riskier.
“If you have a choice of credit institution or e-money, a credit institution has higher capital requirements and FSCS cover so in that sense it is more than likely always going to be safer on that whole ‘too big to fail’ point,” Donnelly said. “That said, there is no e-money institution that has gone out of business and most will safeguard funds with a European Economic Area-regulated bank.” Barclays has already been in contact with P2P lenders about the impact of ringfencing rules on their client accounts. P2P bridging and buy-to-let mortgages provider JustUs has been told by Barclays that their client accounts will be in the retail part of the ringfenced bank. Lee Birkett, founder of JustUs, told Peer2Peer Finance News he thought accounts held by ringfenced banks were safer for P2P investors. >> 4