The moment the alternative finance space has been waiting for has arrived.
As of 6th April 2016, peer-to-peer loans will be eligible for investment via the newly formed “Innovative Finance ISA”. Furthermore, Chancellor George Osborne has also launched a public consultation, as part of today's Budget, on whether to extend the list of ISA eligible investments to include “debt securities” (mini-bonds, presumably) and equity crowdfunding offerings.
The key item in the Chancellor’s red briefcase was the government’s long awaited response to the consultation on rendering peer-to-peer loans as ISA eligible – a consultation which ran from October to November 2014. The response document included a summary of the Treasury’s key takeaways from the consultation, which ultimately attracted 81 formal responses (42 from “interested organisations”, 39 from individuals). The document also outlined the government’s final decision on how the P2P ISA is destined to take shape. The main point, of course, is that we at last have a firm arrival date: 6th April 2016. But onto the mechanics…
In response to the recommendations of a list of respondents that includes most of the UK’s major players, the government will enact three focal policy changes.
A third ISA (the “Innovative Finance ISA”) has been created to accommodate peer-to-peer loans. The naming decision in particular comes as something of a shock. Whilst a third ISA type felt inevitable, those in the know were reasonably convinced that it would be referred to as the “Lending ISA”, or “LISA”. We suspect the “Innovative Finance” tag was ultimately settled upon to allow for greater flexibility, which makes sense in light of the newly launched consultation into bringing “debt securities” and equity crowdfunding into the fold.
Existing ISA rules have been modified regarding the legal ownership of any investments held within the Innovative Finance ISA. This change is designed to accommodate the established peer-to-peer lending model. In short, the consultation revealed a desire on the part of the P2P platforms to act as ISA managers. The consultation sought to discover whether respondents could identify any risks in the fact that P2P platforms do not have legal ownership of the loans that they originate. 81% of respondents found no such risk. Consequentially, the government is allowing peer-to-peer platforms to become ISA managers without having to legally own or co-own the loans that will be held within the ISAs that they manage.
Finally, ISA rules relating to withdrawals and transferability have been adapted for the Innovative Finance ISA. Owing to the illiquid nature of P2P loans, it has been decided that investors are not required to be able to withdraw any non-cash investments from the Innovative Finance ISA within 30 days. However, this shouldn’t stop platforms that can facilitate withdrawals via their own secondary market mechanisms from doing so. Rules around withdrawals will be a matter for the agreed terms and conditions of a given account, rather than dictated by ISA rules. The existing ISA requirement – that investors should be able to withdraw cash investments within 30 days – will also apply to any cash held within an Innovative Finance ISA.
Some other interesting tidbits were buried within the response document. The government will proceed with its proposal to make advising on P2P loans a regulated activity. For the time being, peer-to-peer investments will remain outside of FSCS coverage, but perhaps not forever. The FCA will review the regulatory framework in 2016 and will at that stage consider once more whether P2P ought to be sheltered beneath the FSCS umbrella.
Those are but a few of the highlights from an extremly thorough government response, which you can access in full by following this link.
This is truly a landmark occasion for the UK’s peer-to-peer lending space – the culmination of a journey that began way back in March 2014. We’ve fielded a whole host of impassioned responses from leading market figures, and have provided a roundup below.
“The introduction of the Innovative Finance ISA is great news for hard-pressed investors suffering from pitiful interest rates offered by cash ISAs but put off by the risk and complexity of stocks and shares ISAs.
The new ISA will offer investors a much needed middle ground between low yield cash and high risk investments - by including their RateSetter investment in an ISA, a higher-rate taxpayer could save around £350 in tax and a basic rate taxpayer around £175.
Today’s announcement provides a welcome boost for investor choice and will help reinvigorate the ISA market.”
"The inclusion of peer-to-peer lending within ISAs is a pivotal moment for our industry. Not only will it give investors a better deal, but it will help even more small businesses access the finance they need to grow, which in turn helps the economy. Everyone wins.
“According to our data, 41% of investors said they would invest more in marketplaces like Funding Circle if it was included within ISAs. One in ten people said they would transfer their existing stocks and shares into a Lending ISA. Additionally, TISA (Tax Incentivised Savings Association) estimates that more than £50 billion is invested in ISAs every year. If just 3% of this money was channelled through marketplaces such as Funding Circle it would create more than £1.5 billion of new lending to businesses annually, leading to approximately 75,000 new jobs.*"
*Previous independent research by government think tank Nesta revealed businesses that receive a loan through Funding Circle employ on average 11 people, and see an average increase in employment of 27% after receiving finance.
“Today’s announcement confirming a third ISA category, the Innovative Finance ISA dedicated to peer-to-peer lending, is a game changer for millions of Brits who have suffered from poor returns since the financial crash. It signals that P2P lending has become a mainstream way for people to invest for their futures.
We are pleased to see that the Chancellor is open to services like Zopa, allowing consumers to side-step the banks for higher returns. With cash ISA rates from banks at rock bottom, this new IFISA will, I believe, provide reliable, predictable and low risk tax free returns that will beat most other asset classes. We expect huge demand for this new type of ISA and see P2P lending through Zopa becoming one of UK’s most popular ways to grow your money.”
Nick Harding, Lending Works’ CEO:
“We are pleased that peer-to-peer lending will be included in the new Innovative Finance ISA from 6 April 2016. However, it’s a shame that the Treasury and the FCA have decided against the creation of a Lending ISA.
“Separating peer-to-peer lending into its own ISA wrapper would have enabled the industry to ensure that both the rewards and the risks of peer-to-peer lending are clearly defined and communicated to our customers. This is what 95% of peer-to-peer lenders were calling for, alongside us and our industry peers*.
“Despite this, the inclusion of peer-to-peer in ISAs should be celebrated. It will enable lending platforms like Lending Works to continually grow, maintain high lending capital volumes, and so be able to offer market-beating interest rates to lenders.
Until banks and building societies are able to provide similarly high-interest, low-fuss investment options, we welcome all government support that incentivises individuals to make peer-to-peer lending a part of a diversified (tax-free) investment portfolio.”
*according to P2P Finance Association, February 2015
Geoff Miller, CEO, GLI Finance:
“We are very pleased with this Summer Budget, which has addressed two of the five key issues we highlighted in our Alternative Finance Manifesto, which we published ahead of the general election. Competition in SME lending is what we have built our business on - SMEs are the backbone of the UK economy, providing almost half of private sector employment, and they deserve fair access to funding to fuel the economic growth from which we will all benefit. We have been campaigning for the introduction of a mandatory referral scheme since 2013, and we expect this to come into effect in early 2016 - meaning that High Street banks will be mandated to refer SMEs to alternative finance providers when they reject their requests for bank finance.”
From Christine Farnish, Chair of the P2PFA:
“We are absolutely delighted by today’s decision. The creation of the Innovative Finance ISA will encourage more people to benefit from the fair deal that P2P lenders offer without getting confused between stocks and shares, P2P lending or cash savings. P2P lending differs significantly from both equity investments and from bank deposits. We urge caution not to rush including riskier forms of crowdfunding as part of this new ISA.”
Money&Co. CEO Nicola Horlick:
“This marks the coming of age of P2P loans as an investible asset class. If the government’s aim is to promote a ‘savings economy’, this is an excellent move for savers as P2P loans offer high yields. It’s also great news for borrowers. In the case of Money&Co., the P2P loans we originate provide funds for small and medium-sized companies (SMEs) that need capital to grow.”
“In the first year of facilitating loans, Money&Co. has provided £6 million in growth capital to our borrowers. Our lenders got an average gross yield of over 8.8 per cent – a fantastic return compared to the relatively tiny yields available on cash ISAs.”
“In this meagre interest rate environment, investors are searching for yield. They are diversifying their portfolios and are increasingly gravitating to towards alternative asset classes, such as peer-to-peer investments, as a result. As such, it’s very encouraging that the government has acted to explore extending ISA eligibility and will enable investors to shelter both debt securities and equity crowdfunding returns from tax via an ISA. With the potential returns on offer through a variety of peer-to-peer platforms, the Innovative Finance ISA is a very exciting opportunity for investors. This also represents an important step for the peer-to-peer industry, with recognition that these platforms and investments can offer attractive risk-adjusted returns compared to other products and asset classes.”