Peer-to-peer lending carries real risks that mainstream savings accounts do not. This article explains the protections that exist, where they stop, and what to weigh up before using a P2P platform.
This article provides general information about peer-to-peer lending in the UK. It is not financial advice, and it does not take into account your personal circumstances. If you are unsure whether P2P lending is right for you, speaking to an independent financial adviser can help.
What is the short answer?
Peer-to-peer lending in the UK is regulated, but it is not risk-free. FCA-authorised platforms must follow specific rules around disclosure, wind-down planning, and how they market to retail investors. What regulation does not do is remove the credit risk you take on when you lend money to a borrower. Your capital can be lost if borrowers default, and the protection you get from the Financial Services Compensation Scheme is much more limited than it is with a bank deposit.
In plain English: P2P is safer than it was before regulation, but it sits closer to investing than to saving.
It is also worth noting that the UK P2P market has contracted significantly since 2020. Several well-known platforms have exited the market or entered administration, so the range of active, established platforms available to new investors is smaller than it once was.
When peer-to-peer lending can work well
P2P platforms can offer a higher potential return than a standard savings account, and some borrowers find rates that are competitive with personal loans from high-street banks.
For lenders, the appeal is straightforward. You spread small amounts across many loans, which means one borrower defaulting does not wipe out everything. Many platforms have automated this spreading process so you do not have to choose individual loans yourself.
For borrowers, P2P can be an option worth exploring if mainstream lenders have declined an application. Because credit decisions are made by the platform rather than a traditional bank, some borrowers find the criteria differ.
When peer-to-peer lending can make things worse
The main risk for investors is credit risk. If the person or business you have lent to stops repaying, you may not get that money back.
Some platforms offer a provision fund to cover bad debts. This is a pot of money the platform sets aside and uses to pay investors when borrowers default. It can reduce losses, but it is not a form of insurance. The fund can be depleted during periods of high defaults across the loan book.
Past platform failures matter here. Several UK P2P platforms have gone into administration, including Lendy (administration began June 2019), FundingSecure (administration began October 2019), and Collateral (administration began February 2018). Investors in these platforms faced lengthy recovery processes and, in many cases, did not recover the full amount they had lent. These failures are a useful reminder that FCA regulation does not prevent platforms from failing.
For borrowers, the risk is similar to any other loan: missed repayments lead to defaults, which damage your credit file and may result in debt collection action.
What does the FCA regulation actually cover?
The Financial Conduct Authority has authorised P2P lending as a regulated activity since 2014, with strengthened rules introduced in 2019 and 2020.
The main protections for investors include:
- Wind-down plans. Platforms must have arrangements in place to manage existing loan books if the platform closes. The aim is to ensure loans continue to be serviced, and that investors receive repayments as they fall due.
- Disclosure requirements. Platforms must be clear about the risks involved and must not present P2P as equivalent to a savings account.
- The 10% restriction. Most retail investors who are new to P2P are limited to investing no more than 10% of their investable assets in P2P products (FCA Policy Statement PS19/14). This limit applies unless the investor is classified as sophisticated or high-net-worth under the FCA's rules.
- Client money rules. Cash you have deposited with a platform but not yet lent out is usually held in a segregated client account. This means it sits separately from the platform's own money and may be returned to you if the platform fails.
What is not covered: the loans themselves. If a borrower defaults, that loss sits with the investor. No regulatory rule removes that risk.
What to check before using a P2P platform
It can help to go through a few checks before committing money to a P2P platform.
Check the platform is FCA-authorised. The FCA register at register.fca.org.uk lists authorised firms. If a platform is not on the register, it should not be offering P2P lending to UK retail investors.
Read the risk disclosures carefully. Authorised platforms are required to show you material about the risks involved. It is worth reading these rather than skipping past them. Pay attention to the default rate figures the platform publishes and how the provision fund (if there is one) works.
Consider how quickly you can access your money. P2P loans are not instant-access. Some platforms offer a secondary market where you can sell your loan parts to other investors, but this is not always possible, and it may not be available during periods of market stress. If you might need the money at short notice, that is a factor worth weighing.
Think about how P2P fits alongside other savings or investments. The FCA's 10% rule for retail investors exists for a reason. Putting a large proportion of your savings into P2P concentrates your exposure to credit risk in a way that a broad mix of savings and investments would not.
Look at the platform's track record. How long has it been operating? What is its published default rate? Does it explain clearly what happens to investors if it closes?
Risks and warnings
A short summary of the main risks for anyone considering P2P lending:
- Capital at risk. You may lose some or all of the money you lend. This is not like a savings account.
- No FSCS deposit protection on loans. The Financial Services Compensation Scheme protects bank deposits up to £85,000 per person per authorised institution (FSCS), but not P2P loans. If a borrower defaults, there is no scheme that steps in to repay you.
- Provision funds can fail. A provision fund is not insurance. It can run out.
- Platform failure risk. Even FCA-regulated platforms can fail. Wind-down plans aim to manage existing loans, but recovery processes can take a long time and may not return everything investors are owed.
- Limited liquidity. You may not be able to get your money back quickly.
- Tax treatment requires attention. Interest earned through P2P is usually treated as income and may be subject to Income Tax above your Personal Savings Allowance. The Innovative Finance ISA (IFISA) wrapper allows P2P interest to be sheltered from tax within the annual ISA allowance, which is £20,000 for the 2024/25 tax year. HMRC publishes guidance on the tax treatment of P2P income at gov.uk/guidance/peer-to-peer-lending. The tax rules depend on individual circumstances, so it can help to check with HMRC or a tax adviser.
How P2P compares to a bank savings account
A plain comparison helps to set expectations.
| Feature | Bank savings account | P2P lending |
|---|---|---|
| FSCS deposit protection | Up to £85,000 | No protection on loans |
| Capital risk | Very low for authorised banks | Real risk of loss if borrowers default |
| Return | Lower, set by the bank | Potentially higher, varies by platform and loan |
| Access to money | Instant or notice period | Depends on loan terms and secondary market |
| Regulatory oversight | FCA and Prudential Regulation Authority | FCA only |
| Provision fund | Not applicable | Sometimes available; not insurance |
The table is a simplification, but the core point is this: P2P sits between a savings account and an investment in terms of risk, and it should be thought about as such.
Frequently asked questions
Is my money protected by the FSCS if a P2P platform fails?
Not in the same way as a bank. The FSCS covers deposits at FCA-authorised banks and building societies up to £85,000 per person per institution (FSCS). P2P investments are not deposits, so that cover does not apply to the loans you fund. Some platforms hold client money in a ring-fenced account, which can protect cash you have not yet lent, but this does not cover the loans themselves.
What happens to my loans if the P2P platform goes under?
FCA rules require regulated platforms to have wind-down plans so that existing loan books can be managed until loans mature or are sold. In practice this can take months or years. Past platform failures show that investors often recovered less than expected, and the process can be slow.
Can I lose money on a P2P platform?
Yes. If a borrower stops repaying, you may lose part or all of the money you lent to them. Some platforms offer provision funds that absorb some bad debts, but these are not a form of insurance and they can run out during periods of high defaults.
Is peer-to-peer lending regulated in the UK?
Yes. P2P platforms that offer lending to the public must be authorised by the Financial Conduct Authority. Regulation covers how platforms market themselves, how they treat customers, and the need for wind-down plans. It does not remove the underlying credit risk to investors.
What is the FCA's 10% restriction for new P2P investors?
Under FCA Policy Statement PS19/14, most retail investors who are new to P2P are required to limit their P2P investments to no more than 10% of their investable assets. This applies unless the investor is classified as sophisticated or high-net-worth. The rule is intended to limit the impact of losses for people who are unfamiliar with the risks.
How does P2P differ from putting money in a savings account?
A savings account at a regulated bank is a deposit. Your money is protected up to £85,000 by the FSCS. With P2P, you are lending directly to individuals or businesses. You take on their credit risk. In exchange you may receive a higher return, but there is no deposit protection and no certainty about what you will get back.
Further reading and sources
For more background on how peer-to-peer lending works, the parent guide covers the basics: Peer-to-peer loans guide.
The FCA's consumer information on P2P lending sets out the regulatory position in detail. MoneyHelper also covers the topic as part of its broader guidance on investing and saving: moneyhelper.org.uk/en/savings/types-of-savings/peer-to-peer-lending.
- Is my money protected by the FSCS if a P2P platform fails?
Not in the same way as a bank. The Financial Services Compensation Scheme covers deposits at FCA-authorised banks and building societies up to £85,000. P2P investments are not deposits, so that cover does not apply to the loans you fund. Some platforms hold client money in a ring-fenced account, which can protect cash you have not yet lent, but this does not cover the loans themselves.
- What happens to my loans if the P2P platform goes under?
FCA rules require regulated platforms to have wind-down plans so that existing loan books can be managed until loans mature or are sold. In practice this can take months or years. Past platform failures show that investors often recovered less than expected, and the process can be slow.
- Can I lose money on a P2P platform?
Yes. If a borrower stops repaying, you may lose part or all of the money you lent to them. Some platforms offer provision funds that absorb some bad debts, but these are not a form of insurance and they can run out during periods of high defaults.
- Is peer-to-peer lending regulated in the UK?
Yes. P2P platforms that offer lending to the public must be authorised by the Financial Conduct Authority. Regulation covers how platforms market themselves, how they treat customers, and the need for wind-down plans. It does not remove the underlying credit risk to investors.
- What is the FCA's 10% restriction for new P2P investors?
Since 2020, FCA rules have required most retail investors who are new to P2P to limit their P2P investments to no more than 10% of their investable assets. This applies unless the investor is classified as sophisticated or high-net-worth. The rule is intended to limit the impact of losses for people who are unfamiliar with the risks.
- How does P2P differ from putting money in a savings account?
A savings account at a regulated bank is a deposit. Your money is protected up to £85,000 by the FSCS. With P2P, you are lending directly to individuals or businesses. You take on their credit risk. In exchange you may receive a higher return, but there is no deposit protection and no certainty about what you will get back.