Peer-to-peer lending and investment crowdfunding

Peer-to-peer (P2P) lending is a way of lending money directly to borrowers through an online platform, instead of putting it in a bank account where the bank does the lending. The platform matches investors with borrowers, who could be individuals, businesses or property developers¹. In return, you receive the interest the borrower pays, minus any fees the platform charges. Investment crowdfunding works on a similar idea, but instead of lending you may be buying a debt security issued by a company or charity.

The trade-off is the central fact of the whole subject: this is an investment, not a savings account. The Financial Services Compensation Scheme (FSCS) does not cover investments in P2P loans², and peer-to-peer platforms themselves are not protected by the FSCS if they collapse¹. If a borrower does not repay, you lose that money. There is no deposit-style protection of up to £120,000 as there is with banks and building societies³.

Peer-to-peer lending began in the UK with Zopa, which was launched in 2005 as the first peer-to-peer lending business, specialising in loans to consumers⁴. Since then the market has grown, and the rules around it, including the Innovative Finance ISA, have developed alongside it.

How peer-to-peer lending works

A peer-to-peer platform sits between people with money to lend and people or businesses that want to borrow. As independent guidance on the Innovative Finance ISA puts it, peer-to-peer lending "matches up investors with borrowers, who could be individuals, businesses, or property developers"¹. You deposit money with the platform, choose loans or a portfolio option, and the platform handles the administration: credit checks on borrowers, collecting repayments, and passing your share of the money back to you.

The model is closer to being a bank's lending book than to holding shares. You are not buying a stake in a company that might grow; you are making loans that pay interest and repay capital over a fixed schedule. That makes the returns steadier than share prices in most conditions, but it also means the main risk is simple and severe: if the borrower does not pay, you do not get your money back. Unlike a bank, the platform is not lending its own money and is not standing behind the loans with its capital.

Most platforms spread your money across many loans rather than one, so that a single borrower defaulting only dents part of your holding. How much spreading happens, and what kinds of borrower you are matched with, varies from platform to platform and is set out in each platform's own terms. Some platforms also lend to businesses or fund property development, which behave differently from consumer loans in terms of how long your money is tied up and what happens if things go wrong.

The first peer-to-peer lending business in the UK was Zopa, launched in 2005, specialising in loans to consumers⁴. The sector that grew from it now includes platforms focused on different types of borrower, and the rules that govern them, covered later in this page, were built around the model Zopa started.

Your capital is at risk: there is no FSCS protection

This is the single most important thing to understand about peer-to-peer lending. The FCA's own rules require platforms to tell investors, in the risk summary they must be given, that:

The same applies to the platform itself. Independent guidance is blunt about it: peer-to-peer platforms are not protected by the FSCS should they collapse¹. So there are two separate failures to think about: the borrower not repaying, and the platform going out of business. Neither is covered by the compensation scheme that protects bank deposits.

It is worth being clear about what that protection would look like if it applied, because the contrast explains what you are giving up. The FSCS covers a range of financial products if a UK-authorised financial firm fails, including deposits, insurance, investments, pensions and mortgage advice⁹. For deposits specifically, it gives automatic protection up to £120,000 per person if your bank, building society or credit union fails³. Money lent through a peer-to-peer platform is not a deposit, so none of this applies to it.

Some platforms offer contingency funds, which are pots of money set aside to compensate investors for some borrower losses. But independent guidance is clear about their limits: "Some platforms offer contingency funds, but these don't guarantee to repay all investors"¹. A contingency fund is a platform's own promise, not a statutory guarantee, and it can be exhausted or withdrawn.

The FSCS itself publishes material explaining the boundaries of its protection, noting for example that most cryptoassets are not FSCS protected because they are not regulated¹⁰. Peer-to-peer loans sit in a similar position in one respect: the loans themselves are not a protected investment type, even though the platforms are regulated firms. Regulation of the platform, covered later in this page, is about conduct and disclosure, not about compensating you for losses.

Fees and charges: what to check before you invest

There is no standard fee structure across the peer-to-peer market. Each platform sets its own charges, and the amounts and how they are worked out differ from firm to firm. Fees are commonly charged on the money the platform handles for you: on repayments as they come in, and on selling loan parts to other investors where the platform runs a secondary market. Some platforms also charge fees on money deposited or on loans originated.

Because the amounts vary, the practical rule is to read the platform's fee schedule before depositing, and to work out what the fees do to the return you expect. A fee taken from each repayment reduces your effective interest rate, and a fee taken when you sell a loan part reduces what you get back if you exit early. Both are set out in the platform's terms and conditions, and the FCA's rules require platforms to give you a risk summary before you invest, which must include the statement that the FSCS does not cover P2P loans².

One point worth checking is what happens to money that is sitting in your account but not yet lent out. Platforms differ on whether uninvested cash earns anything while it waits to be matched, and the answer affects the overall return if your money spends time idle. This, like the fees, is in the platform's own terms.

Fees also interact with tax. If you lend through an Innovative Finance ISA, covered next, the interest and gains are free of tax¹¹, which means the fee drag on your return is not offset by any tax relief. Comparing platforms on fees therefore matters more than it would inside a tax-sheltered wrapper where the gross return is what counts.

The Innovative Finance ISA: tax-free returns on loan-based investments

The Innovative Finance ISA (IFISA) is the wrapper that lets you do peer-to-peer lending inside an ISA. The Financial Ombudsman Service describes these accounts, sometimes called crowdfunding ISAs, as ones "which let you use your ISA allowance for peer-to-peer lending (P2P)"¹². The account has been available since 6 April 2016, when interest and gains from peer-to-peer loans first qualified for tax advantages where the loans are made through the platform⁵.

The tax treatment is set out in the legislation that created the account: "Interest and gains from these investments will be tax free"¹¹. The regulations define what can go in the wrapper: investments can either be an Article 36H "peer to peer" arrangement between a borrower and lender, or a debenture issued by a company or charity, which is the crowdfunding form⁶. So the IFISA covers both the lending model and the debt-issuing model of investment crowdfunding.

Two ISA rules matter alongside this. First, since 6 April 2024 you can open and pay into more than one ISA of the same type in a tax year¹³, a change made in the 2024 ISA regulations⁶. That means you are not locked into a single IFISA provider for the year. Second, your allowance resets every 6 April and unused allowance cannot be carried over¹⁴. The allowance does not roll between tax years: as official guidance puts it, "if you deposit £10,000 one year, you cannot deposit £30,000 the next year to make up for it"¹⁵.

What the IFISA does not change is the risk. Putting peer-to-peer loans inside an ISA removes tax on the returns, but it does nothing about borrower default or platform failure, and the FSCS still does not cover the loans². The tax wrapper and the risk are independent of each other, and it is a common mistake to treat the ISA label as a mark of safety. The dedicated page on whether P2P loans and Innovative Finance ISAs are FSCS protected covers this boundary in more detail.

Transferring an existing ISA into an IFISA

You can move money already held in ISAs into an Innovative Finance ISA. Independent guidance states that "you can transfer any money that's already within a cash Isa or stocks and shares Isa to an innovative finance Isa offered by a peer-to-peer provider"¹. The transfer keeps the money inside the ISA wrapper, so it does not use up any of your current year's allowance.

The process is done through the new provider, not by cashing in the old ISA yourself. Independent guidance sets out the route: the transfer is completed by filling in a transfer form with the Innovative Finance ISA provider you want to switch to¹, and the two providers then arrange the movement of money between them. Withdrawing the money first and paying it back in would count as a new subscription and could use up allowance, so the transfer route matters.

Transfers take time. Guidance from a provider sets out the limits: transfers could take up to 15 working days for a cash ISA, or up to 30 days for a transfer of a stocks and shares ISA to a cash ISA⁷. During that time your money is moving between providers and is not earning returns on the platform, which is worth factoring in if you are timing a move.

One restriction catches people out. You cannot simply move peer-to-peer investments you already hold outside an ISA into an IFISA if the platform you invest with launches one¹. Existing loans held in a general account stay where they are; only new lending done inside the IFISA wrapper, or ISA money transferred in as cash, benefits from the tax treatment. If you hold loans on a platform and want them in an IFISA, the route is to wait for repayments and re-lend the money inside the ISA, subject to your allowance.

Getting your money out early: secondary markets and exchanges

Peer-to-peer loans are not like shares, which can be sold in seconds on an exchange. A loan runs for a fixed term, and your money is committed to it until the borrower repays. To deal with this, some platforms run a secondary market: a place where you can list your loan parts for sale to other investors on the same platform. If another investor buys them, you get your capital back early, minus any fee the platform charges for the sale.

Whether this works depends entirely on there being a buyer. A secondary market has no obligation on anyone to purchase your loan parts, and if demand is thin, a listing can sit unsold. The price you get can also be affected by conditions on the platform: if many investors are trying to exit at once, sales can be slow or unattractive. This is a structural feature of the model, not a fault of any particular platform, and it is the main reason peer-to-peer lending suits money you can afford to commit for the full term of the loans.

The alternative route out, where a platform offers it, is an exchange-style mechanism that matches sellers with buyers automatically. These work in much the same way as a secondary market from your point of view: you offer the loan part, someone else takes it on, and the platform processes the change of ownership for a fee. The details, including any fee and how prices are set, are in each platform's terms.

If you hold loans inside an Innovative Finance ISA, selling on the secondary market keeps the money inside the ISA wrapper, ready to re-lend or transfer elsewhere. The sale itself is not a withdrawal, so it does not affect your allowance. What you cannot do is assume the exit will be available when you want it: the secondary market is a convenience that depends on other investors, not a right to your money back on demand.

Where you cannot sell a loan part

Not every platform runs a secondary market. Where a platform does not offer one, there is no way to exit a loan before the borrower repays it, and your money is committed for the full term. Before depositing, check whether the platform you are considering has any early exit route at all, and what it costs when it exists.

Loan parts where the borrower has missed payments are a separate problem. Each platform's secondary market has its own rules about what can be listed, and loan parts in arrears or default are often excluded, or can only be sold at a heavy discount if a buyer can be found at all. A loan part in default is, in substance, a claim on whatever the platform's collections process can recover, and other investors are understandably reluctant to pay much for it.

The position is set out in each platform's terms and conditions rather than in any general rule, so it varies across the market. The practical approach is to read the platform's rules on arrears and defaults before investing, and to assume when you deposit that the money may be committed for the full loan term with no early exit. Anything better than that is a bonus, not a plan.

This is also where the contrast with funds is sharpest. Funds can be suspended in difficult conditions, as covered on the page about fund suspensions, but peer-to-peer loans were never daily-dealing in the first place. Illiquidity is a designed-in feature of lending money for fixed terms, and the secondary market only softens it.

How to start investing on a platform

Peer-to-peer platforms are a form of investment platform: a service that lets investors buy and hold investments in one place online, and sometimes with a smartphone app¹⁶. Opening an account usually follows the same pattern as other investment platforms: register, pass identity checks, deposit money, and then either choose individual loans or use an automated option that spreads your money across a portfolio.

1. Check the platform's permissions on the FCA Register, and read its risk summary, which must state that the FSCS does not cover P2P loans².
2. Read the fee schedule and terms, including what happens to uninvested cash, how the secondary market works, and what happens if a borrower defaults.
3. Open the account and complete the platform's appropriateness or knowledge questions, which regulated platforms use to check the product suits your experience.
4. Decide on the tax wrapper: a general account, or an Innovative Finance ISA if you want the interest and gains free of tax¹¹.
5. Deposit money and lend it, either by choosing loans yourself or using the platform's spread option.

There is a gate at the door as well. Peer-to-peer platforms may only communicate direct-offer financial promotions to retail clients who are classified as certified high-net-worth investors, certified sophisticated investors, self-certified sophisticated investors, or investors certified as restricted investors¹. In practice this means platforms ask questions about your income, wealth or investing experience before showing you their loan offers, and some investors will find the products are not marketed to them at all.

If you are comparing this with other ways of investing, the pages on how investment platforms work and investment risk and your attitude to risk set out the wider picture, and diversification and asset allocation explains how lending fits alongside shares and funds in a mixed portfolio.

How peer-to-peer platforms are regulated

Peer-to-peer platforms are regulated by the Financial Conduct Authority⁸. The legal basis is Article 36H of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, described in Parliament as "operating an electronic system in relation to lending", that is, operating a loan-based crowdfunding platform¹⁷. The government's legislation on the Innovative Finance ISA confirms that platforms are regulated by the FCA where they carry out the activities detailed in Article 36H⁸.

This was not always so. When the sector was young, peer-to-peer lenders were unregulated other than by the Office of Fair Trading for the consumer credit part of their business, with the Treasury having announced they would be brought into the regulatory framework⁴. The rules that now apply, including the risk summary requirement and the marketing restrictions described above, came out of that process.

What regulation gives you is conduct protection, not compensation. The FCA's rules govern what platforms must tell you, how they can market to you, and how they must handle your money while it is with them. They do not make the FSCS cover your loans², and they do not guarantee returns. The distinction between a regulated firm and a protected product is the one that matters here, and it is the same distinction that applies to most investments: regulation sets the rules of the game, and losses are still yours.

If something goes wrong with the ISA side of a peer-to-peer investment, the Financial Ombudsman Service can consider complaints about individual savings accounts¹², and its remit covers how a platform has dealt with you, though it cannot reverse market losses or borrower defaults.

Where to get help

If you have a complaint about a peer-to-peer platform or an Innovative Finance ISA, the first step is the platform's own complaints process. If it cannot resolve the matter, the Financial Ombudsman Service is free to use and can look at complaints about ISAs and about how regulated firms have treated you¹². Its decisions can require a firm to put things right where it finds fault.

For checking whether any product is protected, the FSCS provides a protection checker and guidance on what its cover does and does not include¹⁸. The FSCS is funded by the financial services industry and is free to use¹⁹, but as this page has set out, its protection does not extend to peer-to-peer loans².

Free, impartial guidance on investing decisions is available from MoneyHelper, the government-backed service, and the page on investment scams and warning signs covers the fraud side of high-return lending offers, which is worth reading before putting money into any platform you have not checked. The pages on what happens if an investment platform fails and peer-to-peer platforms that closed to investors cover the failure cases in detail.