Innovative Finance ISA: The challenge for 2018
The start of the new tax year - almost exactly eight months ago - brought about of a flurry of activity in the alternative finance space. Having met the necessary regulatory requirements, like us, many players launched their own ISA wrappers amid great fanfare, enabling investors to shelter their peer-to-peer returns from taxation. So how has the scheme been performing?
Some unnerving commentary from the former boss of the then-Financial Services Authority threatened to derail the IFISA’s momentum ahead of the new tax year in 2016. Lord Adair Turner said that losses on P2P lending will “make the worst bankers look like absolute lending geniuses” - a statement met with disappointment and then staunch opposition by the targeted platforms.
Despite the continued growth of peer-to-peer lending – with the business lending portion having grown by 36 per cent this year – a great deal of awareness still needs to be raised. Lord Turner’s comments from his position of authority may have dampened sentiment towards what is a compelling option for investors and savers alike.
What’s more, many platforms had to wait an unusually long time to receive the full authorisation that they require from the FCA to offer an IFISA. The regulator blamed a backlog of work on the delays, scuppering launch plans for several P2P providers at the beginning of both the 2016/17 and 2017/18 tax years.
Naturally, this resulted in a slow take-up among investors who were actually unable to access the product in any large quantity. In its first year the product collected what some considered a “tiny intake” with just £17m of subscriptions and 2,000 accounts in the 2016-17 tax year. This seemed significantly low considering the 8m cash ISAs and 2.5m stocks and shares ISAs which were opened in the same year. However, these figures are disputed and may only include new ISA money, not existing ISA money transferred in from existing ISA providers. The discrepancies are discussed in an article from P2P Finance News and we will offer more insight into this as and when we have it.
It also appears that the understanding of the IFISA is still surprisingly low in the investor community. One report stated that 50% of investors had never heard of it. In the same study it showed that only one per cent of those surveyed said they were planning to invest in an IFISA.
With all the other ISA options, as well as the patchy launch of the different IFISAs now available on the market, investors were leaving their money in cash ISAs where they sat earning little.
On the other side, some well-established peer-to-peer lending platforms saw significant uptake on the day their IFISA offering was launched. One such platform had to temporarily close the product down after only 24 hours due to “unbelievable demand”; another lender stated that IFISAs make up 30% of their investments.
The challenge for the IFISA in 2018
In its first proper year of operation, the progress of the IFISA has been promising. Despite some obstacles, the wrapper’s potential is huge – with interest rate rises unlikely to have any significant impact on savings and a 33% drop in the amount subscribed to Cash ISAs this year, the peer-to-peer ISA provides an interesting alternative both for savers and investors, albeit a much more risky one.
The FCA’s post-implementation review of the P2P sector was due at the end of this year, but it has been pushed back into 2018 thanks to other pressing issues, such as Brexit and the snap election. We now keenly await their findings to gauge the true effect of the IFISA on the P2P space and investing more generally.
8th December 2017
By Izzy Werffeli