The merits of a standalone ISA for peer-to-peer lending
One of the hallmarks of the cash ISA's success following its launch two decades ago was its simplicity, and it has undoubtedly proved a popular choice among UK savers. However, the derisory, sub-inflation rates of return being offered have begun to take their toll. In 2015/16, HMRC figures showed that 10.1 million Brits opened a cash ISA, while in 2017/18, this fell to 7.7 million.
It is clear that savers are beginning to vote with their feet, and it is only right that they should be given alternatives. The stocks & shares ISA has been around just as long, and is commonly used among seasoned investors. Nevertheless, these ISAs, and the products within them, invariably have a high degree of complexity and volatility.
This is where the Innovative Finance ISA (IFISA), which acts as a wrapper for peer-to-peer loans, has stepped into the breach, providing consumers with a middle-of-the-road alternative in terms of risk and reward. Uptake was modest initially, with just 7,200 accounts opened in its first year (2016/17), and a total of £36 million in subscriptions. However, this rose sharply to £290 million in 2017/18, invested across 31,000 new IFISAs, and the expectation is that HMRC figures will soon reveal continued exponential growth for 2018/19.
It is against this backdrop, however, that investment platform AJ Bell recently called for the abolition of the IFISA as part of their 'One ISA' proposal, which would seek to bring all the different ISA types into a single, tax-wrapped category. The principal aim would be to restore simplicity to the ISA framework, and shield inexperienced savers and investors from taking on undue risk.
Are the proposals a sensible solution?
As a consumer peer-to-peer lending (P2P) platform, we welcome any ideas which mitigate risk, and simplify the provision of financial services to consumers. Yet it is difficult to see how a 'One ISA' approach would achieve this, and, in our view, it could actually have the opposite effect.
The IFISA is still a new product, and even P2P lending as a whole is only in its second decade of existence. As such, it is important that the unique attributes, benefits and risks associated with this investment type are made clear to prospective investors. By having its own, standalone category of ISA, peer-to-peer platforms are therefore better placed to articulate all of the above to customers.
Shoehorning P2P investments into the same ISA as savings products, or stocks and shares will surely muddy the waters further, and make it harder for savers and investors to adequately evaluate the pros and cons of each product within the wrapper. This is further exacerbated by the fact that the P2P sector, of itself, is quite diverse, with a range of products which include consumer loans, business loans, property loans, invoice finance, retail finance and other forms of lending - all of which have their own risk profile.
Investments in an IFISA are thus not the equivalent of putting money into a cash ISA, as there is no cover afforded by the Financial Services Compensation Scheme. But equally, returns in most cases are far steadier and more predictable than those from stocks and shares, where the value of the investment can go up or down.
As such, a better solution is to ensure customers are fully aware of what investing in an IFISA involves, and that it does what it says on the tin. It is in this spirit that we have welcomed the decisive and proportionate measures within the FCA's new PS19/14 regulatory framework for the P2P industry, which comes into effect in December.
These rules will place a considerable onus on platforms in terms of customer disclosure, risk management and responsible corporate governance, thus ensuring appropriate protections are in place for investors, and a level playing field for IFISA providers. That is not to say that this should represent a final line in the sand - as our asset class evolves, so too should the relevant regulation. But the FCA's new policy will ensure that the next chapter in the IFISA's history kicks off on a sound footing.
A focus on Britain
Another significant benefit to the existence of the IFISA is the fact that it encourages investment within our country. Whilst stocks and shares and their likes offer the opportunity to earn significant returns, a lot of money tends to be directed towards global funds. IFISAs give Britons the opportunity to invest in British businesses, and particularly SMEs, which are the lifeblood of our economy.
Even at a consumer level, direct lending to borrowers enables them to fuel economic growth, whilst creating an efficiency which wouldn't otherwise be there. Banks and building societies absorb a significant share of the returns when they lend out the deposits they receive, while the fees charged by stocks & shares ISA platforms can be hefty.
With peer-to-peer platforms, that is simply not the case, as evidenced by the competitive rates enjoyed by both borrower and investor, and the ability for the latter to shield returns from tax via the IFISA acts as an extra incentive for Brits to invest in our people and our businesses.
The value of consumer choice
The thinking behind the 'One ISA' isn't completely wide of the mark. In the last five years, the ISA framework has broadened to include not only the IFISA, but also the Help to Buy ISA and the Lifetime ISA. Furthermore, the idea of a care ISA geared towards social care planning has been strongly mooted. It is therefore understandable that concerns could be raised about the rapid increase in the number of ISA account types.
Yet while the pace of change could be argued, we strongly believe in providing consumers with choice. Of course, each asset class within an ISA must earn its keep; demonstrating sustainability over a period of time, offering transparency, and being subject to sufficient levels of regulation.
But in a world where interest rates remain in the gutter, and storm clouds are gathering on global markets, investors are rightly being provided with another way of growing their money. And as more and more people reap the rewards, so too will the IFISA establish itself as a stalwart within the ISA family.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
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