British savers in the Sweden-based firm have no recourse to the Financial Services Compensation Scheme (FSCS) if they cannot regain access to the frozen funds. This week the firm disclosed "questionable practices" by its management, which had been overhauled last month, and which meant it had to freeze remaining capital. • Budget 2015: how new '10pc' peer-to-peer Isas will work • First £1,000 of peer-to-peer returns will be tax free It said: "the company has used lenders' capital without their permission", leaving a £3.5m deficit between the amount owed to lenders and the capital available to repay them. The platform, which promised 12pc returns, has currently lent out £23m but said £2.9m of this had not been assigned to legitimate borrowers. TrustBuddy's difficulties have added to concerns that peer-to-peer is new to the savings market, yet is being recognised by the Government. There are 100,000 peer-to-peer lenders in Britain, who will soon be able to hold their loans in an Isa. From April, "innovative finance" Isas will be unveiled for peer-to-peer loans alongside riskier, crowdfunding investments, such as equity returns from start-up businesses and films. TrustBuddy is among the hundreds of peer-to-peer firms that have cropped up in Britain in recent years but new data suggests many of these are failing their "interim" approval stage as they fail to meet minimum requirements. "Peer-to-peer is fundamentally a great idea, but it would be good for it to evolve a bit more slowly. It hasn't got that history through a crisis period." John Spiers, Bestinvest founder Since the regulations were introduced, 114 peer-to-peer firms have applied for full FCA approval while 30 have withdrawn their applications. None have so far been refused, according to a Freedom of Information Request. John Spiers is the founder of the online investment service, Best Invest. He said it is a "mistake" to give peer-to-peer loans Isa status. • How safe is peer-to-peer lending? He told the Financial Times: "Becoming part of an Isa will convey an aura of respectability on something untested through a market cycle. "Peer-to-peer is fundamentally a great idea, but it would be good for it to evolve a bit more slowly. It hasn't got that history through a crisis period." Critics warn that peer-to-peer lending, which was first unveiled in Britain in 2005, has not proved it could sustain a prolonged economic downturn. Only one firm, Zopa, existed during the 2008 crisis credit crisis but no savers lost money, it claims. • Newsletter: Get a weekly round-up of investment ideas kate.palmer@telegraph.co.uk
As we reported earlier this week, Swedish P2P lender, TrustBuddy, has ceased operations due to “questionable practices” by its management. Now we learn that all remaining capital (at least £21m) has been frozen and British investors have no recourse to the Financial Services Compensation Scheme (FSCS) if they cannot regain access to the frozen funds.