Chancellor George Osborne certainly put the cat amongst the IFAs’ pigeons when he announced in his July Budget the introduction of an Innovative Finance ISA that will include P2P loans.
If you take into account the new tax allowance ceiling on investment income (now £1,000 a year), you end up with a very attractive proposition for retail investors – certainly when compared with the return on bank or building society deposits, with or without ISA benefits. A tax free 1% doesn’t sound great when compared with 5% or upwards. Some commentators are already heralding this development as sounding the death knell of Cash ISAs.
Of course, it should be pointed out that banks and building society deposits are protected by the Financial Services Compensation Scheme (FSCS) whereas P2P loans that go bad will not qualify, but some investors looking for a better return on their money may see that as a risk worth taking.
Either way, although Innovative Finance ISAs will not be available until the next tax year (April 6, 2016), it is going to be difficult for IFAs who have so far shunned Alternative Finance offerings, to carry on pretending they don’t exist. Their denial becomes even harder to sustain in the face of Mr Osborne’s simultaneous announcement that there is to be a public consultation on whether the ISA umbrella should be extended even further to take in equity crowdfunding investments.
What is clear is that the IFA community’s historic resistance to Alternative Finance is beginning to crumble. Some still argue that FCA compliance rules prevent them from advising clients on crowdlending and crowdfunding. Others suggest that such investments defy proper risk assessment because they have no historic track record. Others point to the fact that the market hasn't been properly tested in a downturn.
However, as has been pointed out in this blog before, the FCA does not prevent IFAs giving advice on Alternative Finance products, but merely insists that investors are made aware of the risks and that all the cautions and caveats are well documented in advance. There is also plenty of data available on the leading platforms about default rates and risk adjusted returns to aid risk assessment. The market hasn’t been tested in a downturn, but wasn't it started in one?
A more practical explanation for the IFA community’s reluctance to join the party is that the average adviser simply does not possess the relevant knowledge to advise and that the time it might take to achieve professional proficiency would result in fees that could neutralise any investment return. The other fundamental truth is that IFAs and some P2P platforms are simply not geared up to deal with each other; IFAs can’t invest on a client’s behalf – they still have to do that for themselves online.
However, according to one IFA we spoke to: “Most advisers have simply not got their heads around Alternative Finance – it’s outside of their comfort zone. They fall back on the risk argument, but, if you have a client putting 20 quid in a Triple ‘A’ rated loan from Zopa, are they really facing that much of a risk?”
Our contact went on to say: “At some point IFAs will have to face up to the fact that they are operating in a new world. Their fees may have to go up to cover the cost of acquiring the necessary knowledge, but the investment returns on offer for their clients are a lot higher. With the introduction of the new ISA, this is only going to go one way - it will be impossible for IFAs to exclude Alternative Finance. They will have to find a way.”
So it seems there might be hope yet.
If the IFA community does throw its weight behind Alternative Finance, the result could be very dramatic indeed. The last official figures from the Government showed that in 2013-14 alone, £57 billion was subscribed to Adult ISAs, with just under £40 billion represented by Cash ISAs. The current total market value of all ISAs was stated as £460 billion.
If you’re looking for perspective, just remember how excited everyone was at the forecast from independent research charity NESTA that the Alternative Finance Industry as a whole could hit the £4.4 billion valuation mark this year.
Commenting on the Chancellor’s statement, Ryan Weeks, editor of Altfi News, summed it up when he said: “The moment the alternative finance space has been waiting for has arrived.”
Let’s hope that the IFA community uses its considerable influence to help their clients make the right choices. In light of all the recent publicity given to the new ISAs, investors are likely to take the plunge anyway, with or without their guidance. Surely it would be better to play a useful part in the process than simply watch from the dubious comfort of the side lines.