Is there a downside to the Innovative Finance ISA?
Current Affairs

Innovative Finance ISA: The good and the 'bad'

On the 8th of July 2015, the peer-to-peer lending (P2P) sector in the UK linked arms in celebration as news filtered through that HM Treasury (HMT) had announced the creation of a new Innovative Finance ISA (IFISA) from 6 April 2016 – one which P2P lending would form a large part of.

It gave the industry yet another boost, and was lauded by senior figures as a decision that would not only allow platforms to flourish, but also let peer-to-peer lending (rightly) position itself as a halfway house between the existing Cash and Stocks & Shares ISAs in terms of risk and reward.

Yet in some respects, the announcement caught industry experts off guard. The inclusion of peer-to-peer lending within the ISA framework as a whole had already been revealed at Budget 2014, but in terms of implementation, there had appeared to be two potential outcomes. Either P2P lending would be given its own ISA, or it would be added to the Stocks & Shares wrapper.

The Innovative Finance ISA, much to our delight, more resembles the former option, and platforms will be able to differentiate themselves as an investment from riskier options such as those associated with the stock market. However, the one caveat to emerge from the announcement is that it likely won’t be an ISA exclusively dedicated to peer-to-peer lending for long.

Below is an excerpt from HMT’s official statement at the Summer Budget outlining the plan for IFISA:

 

“The Government will introduce the innovative finance ISA, for loans arranged via a P2P platform, from 6 April 2016 and has published a public consultation on whether to extend the list of ISA eligible investments to include debt securities and equity offered via a crowd funding platform.”

 

It was arguably the only bone of contention in an otherwise momentous day for the P2P lending industry. Debt securities and equity offered via crowdfunding are well within the realms of alternative finance, yet there are marked differences between such platforms and peer-to-peer lending, and the potential cause for concern is that the lines could become blurred, and that communicating these differences to the public may prove problematic.

Andrew Hagger, an independent personal finance analyst and Director at moneycomms.co.uk, highlighted the complexities the IFISA could bring for consumers.

“There is a huge difference between peer-to-peer lending and investing in a start-up business via equity crowdfunding,” he cautioned. “This has been a bit of an albatross for the P2P sector over the years as too many people (including the media) frequently talk about P2P and equity crowdfunding in the same breath.

“A litmus test for me is whether I would be happy for my parents to invest their cash in a product - for P2P it would be yes as long as they understand how it works, but equity crowdfunding isn't really for them or the average man on the street, but more suited to the experienced investor.”

The Peer-to-Peer Finance Association (P2PFA) represents over 90 per cent of the alternative financial services market in the UK, including peer-to-peer lending to consumers and businesses. A study they conducted earlier this year showed that 74% of existing lenders favoured the idea of a separate Lending ISA, and the organisation’s chairman, Christine Farnish, emphasised the importance of understanding what the different financial products entail.

“P2P lending differs significantly from both equity investments and bank deposits, and it’s great to see that it hasn’t been shoe horned into either of the Cash or Stocks & Shares ISAs,” she noted. “As government consults further on whether other forms of innovative finance should be included in ISAs - such as equity crowdfunding of SME start-ups - it will be important to avoid consumer confusion and not mix such high risk forms of investing in with P2P lending.”

An alternative view

Yet of course there are always two sides to every coin, and, as a result of including these other branches of alternative finance, IFISA will ultimately enable an even wider array of people to reap the rewards of a major tax efficiency.

Dr Louise Beaumont is the Head of Public Affairs at Guernsey-based GLI Finance Ltd, who are leaders in Small & Medium Enterprise (SME) alternative finance, and she offered her perspective on the debate.

“It must be remembered that the consultation on the inclusion of debt securities and crowdfunding equity in IFISA is ongoing,” she explained. “By creating an Innovative Finance ISA, Government has gone about it the right way, and shown an appreciation for the breadth and depth of alternative finance. I believe they’ve given themselves the chance to understand the market properly before implementation.

“They’ve shown a consistent willingness to listen and learn, and it seems that the IFISA is intended to allow investors access to a wide range of benefits – with the consultation delivering recommendations on if and how to accommodate debt securities and equity,” Beaumont added.

Still a big win for P2P

In an ideal world, we’d see standalone ISAs created for peer-to-peer lending and for each of the other different branches of alternative finance. However, they do all share one important common cause - creating a more diverse and efficient financial landscape. Whether the IFISA includes equity crowdfunding or another financial product, the key factor is that ISA managers put as much effort into customer education as marketing the products to customers, so customers are well versed in both risk and reward.

Besides, as Hagger points out, peer-to-peer lending has all the ingredients at its disposal to define itself as the premier option within the new ISA in its own right.

“There’s no doubt that IFISA is still great news for peer-to-peer lenders. It's not just the attractive P2P returns that will appeal to traditional ISA savers, but also the simplicity of products, flexibility to be able to access funds and the comprehensive safeguard mechanisms which will all be key factors too. It’s another significant nod of approval for an industry already on the rise,” Hagger concluded.

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Michael Todt

Mike joined Lending Works in early 2015 with a background in marketing and journalism. Having long held a passion for economics, he is now the chief contributor to the Lending Works blog, and regularly writes about all things peer-to-peer lending, fintech and personal finance.