P2P body chief denies FCA delays damaged industry

“Compared with other parts of financial services, it’s probably a very high level of understanding.”

Ms Farnish added: “As long as people know it’s not a bank deposit and they may not get all their money back, then it’s a good product.

“You don’t get as much in the way of return as some racy equity investment, but you’re not exposed to the same risk. It’s a half way house between risk and reward.”

John Stirling, chartered financial planner and director of Walden Capital, said: “I think most early adopters of peer-to-peer absolutely understand what they are doing, although there is some evidence they underestimate the chances of a default, and overestimate the chances of recovery once a default occurs.

“The wider market on the other hand have very little understanding of what they are doing in terms of the quantum of risk, but also the type of risk they are taking with a peer-to-peer investment.”

On losses through P2P being covered under the Financial Services Compensation Scheme, Mr Stirling said this would be “extremely dangerous” because it would remove all “moral hazard” from the underwriting process, and encourage irresponsible lending at penal interest rates.

“Peer to peer will blow up at some point and once it has we may be able to build some firm foundations for the long-term.

“Until then it’s difficult to work out where the risks sit.”