FSCS and peer-to-peer: what's actually covered

What the FSCS is

The Financial Services Compensation Scheme is the UK's statutory safety net. For savings, it protects eligible deposits up to £85,000 per person per banking licence if the bank or building society fails. That is the protection a cash ISA enjoys, and it is why cash ISAs are genuinely low-risk.

Why P2P loans are not covered against loss

When you lend through a peer-to-peer platform, you are not depositing money with a bank, you are making an investment. The FSCS does not compensate you if a borrower fails to repay, or if the value of your loans falls. There is no deposit guarantee sitting behind your loan book. This is the single most important difference between an IFISA and a cash ISA, and it is why your capital is genuinely at risk.

The narrow cases where the FSCS can be relevant

FSCS protection is tied to specific types of regulated activity, not to P2P lending itself, so any cover is limited and situational:

• Cash awaiting investment. Money sitting in your account before it is lent out is often held at a bank. Depending on how it is held, that cash may attract deposit protection at the bank holding it, though this varies by platform and structure.
• Bad advice. If an FCA-authorised firm gave you regulated advice to invest and did so negligently, an FSCS claim may be possible against that firm. That is about advice failure, not investment performance.

Neither of these protects you from the core risk: borrowers not repaying. Do not treat them as a backstop.

What protects you instead

In place of the FSCS, P2P relies on loan security (such as a legal charge over property), diversification across many loans, provision funds on some platforms, and an FCA-required wind-down plan if the platform itself fails. These are real but partial. They reduce risk, they do not remove it, and none of them is a government guarantee.

The practical takeaway

Treat any money in an IFISA as money you could lose. Keep your emergency fund and short-term savings in FSCS-protected cash, and only consider P2P for a portion of longer-term money you can afford to put at risk.