After much anticipation the new Innovative Finance ISA goes live today and will, for the first time, allow peer-to-peer lending investments to be held within the ISA wrapper. But will IFISA investors be able to take full advantage of the new allowance on day one?
Today is the culmination of a process that first began in the Budget of March 2014, when George Osborne, the Chancellor of the Exchequer, announced that the government was considering the addition of alternative finance to the list of ISA qualifying investments.
“The list of qualifying investments for ISAs will be extended to include peer-to-peer loans,” he said in 2014. “The government will continue to explore further extending the list to include debt securities offered via crowdfunding platforms.”
One year later (July 2015), the Chancellor finally announced a new kind of ISA – the Innovative Finance ISA (IFSA) – making it possible to invest through peer-to-peer platforms with the underlying assets shielded within a tax exempt wrapper.
Investors now have a valid alternative to the existing options of the Cash ISAs and Stocks and Shares ISAs. Today the maximum allowance of deposited funds is £15,240 but this will rise to £20,000 from April 2017, as announced in the Budget 2016. Investors can spread this allowance among the three available ISAs or put all of their allowance into just one of these products. However, it’s worth noting that although the basic principles of ISAs apply to the IFISA, new rules have been introduced to accommodate the specific nature of peer-to-peer investments.
One issue relates to transfers of existing peer-to-peer investments into an ISA wrapper. At the moment, it’s not possible to transfer existing peer-to-peer loans into an IFISA. After a long debate during the consultation process the government legislation eventually ruled against these kinds of transfers, at least for the time being. However it is worth highlighting that investors are allowed to transfer their existing ISA money into an IFISA. If they already have money in a Cash ISA there will be nothing stopping them from transferring it into a new IFISA.
A further issue relates to multi-platform investments. After an initial prohibition, a legislative amendment from the Treasury – issued 14 March – appears to have opened up the possibility of multi-platform IFISA investments. In other words, investors can hold IFISA investments across two or more platforms.
This allows aggregator platforms, like Goji, to give investors access to multiple platforms under a single umbrella. However to do this the aggregator platform would require full FCA permissioning, as would any underlying P2P platform that they were to allocate investor monies to.
And this brings us on to the most pressing issue that is acting as a dampener to the excitement that todays changes should bring. As reported in many previous stories, before a P2P platform can offer its own ISA, it must be fully authorised by the Financial Conduct Authority (FCA). Deadline day for the submission of full authorisation applications fell on 30 October last year. At that time, we spoke to every peer-to-peer lending platform in the Liberum AltFi Volume Index UK (LAVI UK) to learn more about their application processes. A clear trend emerged: each and every platform was still waiting for FCA approval.
With a colossal weight of applications to sift through, we were suspicious about the ability of the UK regulator to authorize every platform before today. On March 31st, the FCA published a statement, confirming that only 8 companies had been fully authorised at that time, with a further 86 firms awaiting a decision – 44 of which were holders of interim permissions. So which are these fortunate platforms that have already achieved full authorisation? Surprisingly, we learned that they do not include the “big three” – Zopa, RateSetter and Funding Circle – who are still waiting for full authorization. Equally the list does not include Goji. From what we gather, the platforms that are already authorised are companies at the smaller end of the P2P spectrum, certainly in terms of loans originated to date, such as Crowd2Fund, Funding Tree and Crowdstacker.
“We look forward to be able to offer our ISA products shortly after the successful completion of the FCA approval process. We believe the introduction of the new ISA will help make peer-to-peer lending a normal and mainstream activity. That said, we are also excited that from today our lenders will be able to earn tax free interest as part of their Personal Savings Allowance on their lending through Zopa.”
“We’re continuing to work closely with the FCA in order to become fully authorised as soon as possible.”
“In the meantime, 6 April marks the launch of the Personal Savings Allowance (PSA), which allows up to £1,000 of tax-free interest for basic rate taxpayers and £500 for higher rate taxpayers. This provides a significant tax advantage for RateSetter investors and makes the sector even more attractive.”
“Our FCA authorisation process is progressing well and we’re looking forward to offering the Funding Circle ISA to customers as soon as we’re authorised. This will not be available on the first day of the new tax year as our review is still ongoing, however we continue to work closely with the FCA as it completes its review.
"In the meantime, we are pleased that there are other ways for investors to earn tax-free returns. Investors can buy shares in the Funding Circle SME Income Fund through a Stocks & Shares ISA or Self Invested Personal Pension, as well as take advantage of the personal savings allowance.”
The FCA delay is probably due both to the large amount of applications and to the diligent approach the regulator is adopting to the screening platforms. Has this cautious approach inadvertently given a first-mover advantage to the platforms that were authorised first? According to Jake Wombwell-Povey, Co-founder and CEO of Goji, this is indeed the case. Wombwell-Povey weighed in:
"Many P2P platforms are not able offer the new IFISA on the day that it comes into being. Although it's easy to point the finger at the FCA for failing to authorise P2P platforms in time for IFISA go-live, it is more important that the regulator takes a diligent approach to discharging its duty of consumer protection. […] That said, the FCA's cautious approach has inadvertently given a clear advantage for the platforms that were authorised first. Moving forward, the industry will benefit from clear guidance from the FCA on the outcome and timings of further authorisations.”
However, industry insiders seem to be confident about the ultimate success of this new ISA option. Louise Beaumont, Head of Marketing & Public Affairs at GLI Finance, concluded:
"The launch of the Innovative Finance ISA is a watershed moment for the alternative finance industry and is a further indication that the industry is increasingly becoming part of the mainstream financial services sector. The IFISA will provide a new option for millions of savers looking for returns in the current low-interest rate environment.”
Lastly, a final word on investors’ appetite for the new IFISA. As reported in March, just 12% of 107 surveyed specialist investment and retirement advisers would invest their own money through an IFISA wrapper, according to MetLife Europe Limited – a financial services company based in Dublin with a significant presence in the UK. According to MetLife, the major fear among those polled appears to be that the launch of the IFISA will encourage the use of peer-to-peer investments for the purpose of retirement savings – an eventuality that 31% of advisers are concerned about. Broadly speaking, there appears to be a certain level of uncertainty amongst financial advisers when it comes to the new IFISA and those doubts appear to be, at least in part, a product of a lack of education.
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