Introduction
As I’m sure everyone will be aware, the UK Government has announced plans to introduce a new Innovative Finance ISA (IFISA) this year. Draft legislation has recently been released to support the consultation process. The IFISA will be available through fully authorised peer-to-peer (P2P) lending platforms from April 6th. Unfortunately, the positions of the FCA and HMRC on interim authorised firms mean most platforms will be waiting a little longer than hoped to go live.
For the uninitiated few, the IFISA will mean that P2P loans - specifically those that are 36(h) compliant - are eligible for the tax-free ISA wrapper. This aims to make peer-to-peer financing more appealing to would-be retail investors. P2P platforms have already voiced universal support for the IFISA, as have many parties outside of the industry.
This third ISA variety has been proposed by the Government with the express intention to "increase choice for ISA investors”. In its current form, however, I fear it won’t have the game-changing effect many had hoped.
The exposure and credibility that the ISA regime brings to the P2P industry will be significant, but it won’t enable the more than 300 existing ISA managers to participate in the industry.
Goji has written to HMRC to express concern that the practical application of the proposed IFISA rules will not enable the policy intentions.
Issues with the current proposition
I preface my opinion by expressing unwavering support for the IFISA and the move to open up the industry to new investment regimes. It is another great example of the work government is doing to support innovation and fintech.
If executed effectively, the IFISA will encourage new investors to enter the P2P market. It will also provide a vote of support for Britain’s P2P industry and give the UK economy a welcome boost.
Unfortunately, I believe the legislation in its current form will struggle to make any significant difference to the investments market.
Many IFAs have already stated their reluctance to meaningfully consider the P2P market, potentially due to investment scandals such as ArchCru and Keydata. With this in mind, the industry can ill afford for this legislation to fall short.
While the current proposition is unlikely to do enough to change the minds of IFAs, there are some easy remedies. Although I heartily applaud the Government’s intentions, without these remedies the proposed legislation will tie the concept’s hands and burden the industry.
These legislative handcuffs are the stipulation that an investor may only invest in an IFISA directly through P2P platforms and not via their existing ISA managers. They also can only invest in a single provider, and not across multiple platforms under one wrapper. Only allowing individual access to the IFISA through a single P2P provider will stifle investor uptake. It will limit choice and an investor’s ability to diversify.
The legislation must be amended to enable new distribution channels such as investment platforms, many of whom are already tried and tested ISA managers. This will open up the industry, guaranteeing the product's success and uptake. These platforms don’t operate P2P lending services themselves. Instead, they make loans available that can be entered into through various P2P platforms.
Advantages of allowing investor platforms
There are a plethora of reasons to open up IFISA legislation to investment platforms. Firstly, it will encourage choice and therefore competition between P2P platforms, to the benefit of both consumers and the industry at large.
These platforms will also allow consumers to compare offerings from P2P platforms and build a sophisticated P2P portfolio that best suits their investment strategy and needs. As a consequence, this will improve the ease and accessibility of the industry.
The inclusion of investment platforms in the IFISA legislation will allow consumers to spread their investment risk across a balanced IFISA portfolio with varied risk ratings. A well-balanced portfolio not only reduces platform dependency, and hence failure risk should a platform go under, but also it better aligns new IFISAs with the current ISA regime.
These proposed changes to the incoming legislation will also help to foster innovation across the P2P lending sector as investors are more likely to spread their investments over a range of platforms. This is likely to include niche platforms that focus on a specific sector of the lending market. These smaller platforms would otherwise be crowded out by larger players if an IFISA is only available via a single platform.
Ultimately, Goji’s position is that opening up the industry will encourage retail investors to invest greater amounts more easily, to the benefit of the industry and the borrowers it serves.
Adapt or perish
While the IFISA was fantastic news in 2015, legislative detail has dampened excitement in 2016. This same legislation may completely restrict any potential benefit by 2017 if it is not amended.
Without wishing to sound overly dramatic, a famous quotation from H. G. Wells sums up my feelings on the IFISA rather succinctly: ‘Adapt or perish, now as ever, is nature’s inexorable imperative’.
While there are the bare bones of a brilliant idea, the Government must continue to consult on the proposed legislation with industry experts to ensure success. Goji has been working closely with a number of third party ISA managers to achieve this goal and help build industry infrastructure for the long term. Without an openness to adaptation, the IFISA’s chances of living up to market expectation are incredibly limited.
While I know we say this every year, 2016 has the potential to be a landmark year for the P2P industry. Full authorisations, ISAs and a potential interest rate increase will all help to establish industry credibility. However, this potential will only be met if the industry pulls together and strengthens the innovation we have seen already. All those involved in P2P lending must work proactively with regulators to bring together a better financial system for both the industry and the customers it serves.
