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Innovative Finance ISA 101

 

The Innovative Finance ISA will allow savers using peer-to-peer lending platforms to receive tax-free interest from April 2016.

 

Peer-to-peer (P2P) lending platforms that allow savers to lend directly to borrowers – individuals or companies – have grown exponentially and by the end of 2015 the amount lent was estimated to have passed £4 billion.

By cutting out traditional lenders such as banks and building societies, borrowers are able to achieve extremely competitive loans whilst lenders are able to beat the savings rates on offer on the high street.

borrowers are able to achieve extremely competitive loans whilst lenders are able to beat the savings rates on offer on the high street

Borrowers are carefully scrutinised by the P2P platforms and the lender is able to choose the level of risk (that the loan will not be repaid) they can accept, over what time frame they wish to lend and this influences the rate of interest they receive.

Albeit that very high potential returns may be had from highly risky lending most P2P savers are happy to beat traditional savings rates and many can achieve returns in excess of 5%; this contrasts with the £160 billion that is estimated to be sitting in easy access savings accounts earning less than the Bank of England base rate of 0.5%.

The government has been keen to encourage P2P lending in order to encourage competition in the banking industry and in the July 2015 Budget announced a P2P ISA – the Innovative Finance ISA.

 

  • Innovative Finance ISA available from 6th April 2016.
  • It’s a third type of ISA along with the Cash ISA and Stocks and Shares ISA.
  • A ‘wrapper’ around P2P investments – no tax on the interest that they earn.

 

Innovative Finance ISAs (not particularly snappily, ‘IFISAs) have been set up as is a third type of ISA because of the difficulties involved in allowing savers to withdraw their investments within 30 days; this is a feature of other ISAs, but trying to guarantee this on all P2P platforms presented difficulties.

From April, those wishing to avail themselves of one of the new accounts will need to decide how to apportion their annual subscription allowance between the three options and consider that P2P loans may already be held within products such as investment trusts which can be held within a Stocks and Shares ISA.
The IFISA is seen as sitting somewhere between the Cash ISA and the Stocks and Shares ISA on the risk/reward curve; there are currently no plans for a Junior ISA equivalent.
IFISAs are likely to come in a wide variety of shapes and forms with some of the better-known lenders such as RateSetter, Funding Circle and Zopa expected to allow savers to open accounts directly on their platforms whereas others will be offered through fund supermarkets or execution only brokers.

Bristolian behemoth Hargreaves Lansdown is believed to be considering its own solution, whereby customers will be able to get loans at competitive rates secured against funds they hold.

Bristolian behemoth Hargreaves Lansdown is believed to be considering its own solution

In his 2015 Autumn Statement, Chancellor George Osborne announced that the list of qualifying investments for IFISAs will be extended in autumn 2016 to include debt securities, or loans, offered via crowdfunding platforms.

The government says that it will continue to ‘explore the case’ for including equity crowdfunding – where individuals can invest in start-up and early stage companies – within ISA wrappers.

Debt securities are seen to come with more protections for the investor than equity crowdfunding although the government believes there could be a long term benefit of its inclusion to investors as well as UK PLC.

There is not expected to be a requirement for the IFISA to be transferable to another sort of savings, investment or loan although existing ISAs may be transferred in and retain their tax free status; instead, investors will be able to withdraw their funds, subject to the T&Cs of their account, and transfer it after it has been converted to cash.

Since April 2014 the P2P industry has been regulated by the Financial Conduct Authority (FCA) which gives savers an element of protection, and although savings are not currently covered by the Financial Services Compensation Scheme, there is a pledge to ‘review the regulatory framework in 2016’ and give it fresh consideration.

In the interim, IFISA savings may be at risk and investments may not perform to the predicted level, although many P2P lenders companies have protection schemes in place to mitigate at least some of the risk.

Currently just 6% of more experienced investors use P2P but recent research by lender ThinCats suggests that 40% of ‘everyday’ investors are considering it when the new wrapper is launched which could see the market expand by as much as one third.

55% of investors polled said they were ‘attracted’ to P2P, but the perceived risks involved were a key barrier for entry (43%), as well as the relative early stage of the industry and its unproven track record.

There has inevitably been some consolidation and some failures in this fledgling sector and savers looking for a higher degree of protection could seek out members of the Peer-to-Peer Finance Association which subjects all its members — Zopa, RateSetter, Funding Circle, LendInvest, Madiston, ThinCats, MarketInvoice, Landbay and LendWorks — to high levels of scrutiny before admission.

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