Give Innovative Finance ISAs a chance

  • According to official statistics from HMRC, only 2,000 Innovative Finance ISAs (IFISAs), with a total value of £17m (averaging out at £8.5k per head), were opened by consumers during 2016-17. Given that the total value of adult ISAs was put at £585billion at the end of the 2016-17 tax year – split 54:46 between Stocks and Shares ISAs and Cash ISAs respectively – it is hardly surprising that the IFISA numbers were greeted with derision by large sections of the media.

    Bearing in mind the previous Chancellor of the Exchequer, George Osborne, announced the impending introduction of IFISAs back in 2015, the numbers probably don’t make for impressive reading – until you consider the circumstances. The first fact is that, despite all the fanfare surrounding the prospect of 7%+ returns net of tax from P2P loans, compared with the bank/building society equivalent of only 1%+, only a handful of minor P2P platforms had received the necessary FCA authorisation enabling them to provide IFISAs during that tax year.

    The sector’s biggest players, who may have been able to make more of the opportunity – outfits like Funding Circle and Zopa – weren’t granted full authorisation until May this year, in other words after the 2016-17 tax year had closed. Both now have IFISA products coming down the track. Another giant, RateSetter, is still waiting for the green light from the FCA and remains stuck in the sidings.

    So, up until now, and certainly in the 2016-17 tax year, it was left to relative minnows, without bulky marketing budgets, to take the first pioneer steps into this new market area. According to AltFi Data, there are now around 30 IFISA providers with the number rising.

    However, there is another big factor at play – the total lack of support for IFISAs, and indeed for P2P loans in general, from an IFA community with a deeply rooted distrust of the whole alternative finance project. Asked why that is, many IFAs cite the fact that the P2P sector has not been through a recession – not the sector’s fault, but largely true. Mention is also made of lack of readily available due diligence data for P2P loans, accompanied by dark (often unsubstantiated) murmurings of rising loan defaults. Risk analysis remains an uncomfortable topic to explore.

    That said, IFAs are, of course, governed by the Retail Distribution Review that came into force in 2013 and which holds them accountable for giving bad advice to their clients. Because of the clamour for yield in this era of low interest rates, the high returns available through P2P loans – enhanced even further by IFISA tax wrappers – have come to the attention of their clients who naturally would like a slice of the pie. With high returns, comes the possibility of higher risk – that word again.

    The IFA community is perfectly placed to grasp the nettle and provide the right advice – it should not be left to the financial press. Journalists are not qualified for the job, nor do they take the consequences of their advice.

    Surely, it is only a question of time before the big players bring their big marketing guns to bear on consumers and, once that happens, the polite enquiries about possible P2P returns will turn into demands. Risk is a factor, but even the most demanding client must accept that this is part of the price for higher rewards.

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