George Osborne first announced that ISA eligibility would be extended to include peer-to-peer loans in March of this year. But it’s been a while since we’ve heard anything on the ISA front. The Treasury was reportedly poised to launch a consultation back in June – but it seems to have taken up until now to get the cogs turning. The newly launched consultation will supposedly bring the peer-to-peer ISA to life within 6 to 12 months.
At the time of the first hints of a consultation, there were three potential methods on the table for creating the P2P ISA. A stocks and shares ISA that invests solely in peer-to-peer loans, offered by the platforms. Platforms providing full stocks and shares ISAs – capable of housing P2P investments alongside shares and funds. Or finally a new type of ISA that caters specifically for the peer-to-peer platforms. The consultation will look to get to the bottom of this issue.
Financial Secretary to the Treasury David Gauke commented:
“We want to support savers at all stages of their life and make sure they have greater flexibility and choice over how they invest and access their savings.
“P2P lending is an exciting, innovative new sector and it’s right that investors who want to lend money via P2P platforms should be able to hold these loans in their Isa alongside more traditional investments.”
As expected, a number of key figures within the UK market have weighed in on the consultation. Zopa Founder and CEO Giles Andrews was the first to react:
"Peer-to-peer ISAs will be a game changer for millions of hard working Brits, and a major shakeup for the UK banking sector.The government consultation is a positive step forward, to help define how P2P lending is included and we would welcome a third ISA for P2P. Whatever the outcome, it's certain that UK savers will earn over three times more interest; tax free, than from the disappointing low returns currently available from high street banks."
"Inclusion of peer-to-peer lending within ISAs will be another stamp of credibility on our sector. 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. It's a win, win win.
"Our research found that 41% of investors said they would invest more in peer-to-peer lending if it was included within ISAs. One in ten people said they would transfer their existing stocks and shares into peer-to-peer lending. 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.*"
*Independent research by government think tank Nesta last year found that businesses that receive a loan through Funding Circle employ on average 11 people, and see an average increase in employment of 27 per cent after receiving finance.
And finally Rhyian Lewis, Founder and CEO of RateSetter, responded to the news by heaping praise on government for considering a third ISA category:
“This consultation marks a tipping point for the UK P2P market - it is estimated that ISA inclusion will see the sector grow from £2bn to £45bn within the next few years.*
“By allowing the higher rates of interest on offer to be shielded from tax, the inclusion of P2P will breathe new life into ISAs. This public consultation is a particularly welcome one for hard-pressed savers who have been crying out for another option. The appetite is certainly there: research we carried out with Populus earlier this year revealed that two-thirds of people will consider trying P2P when it is ISA-able.
“The government has already agreed that the P2P platforms will be able to act as ISA managers, offering their own product and retaining that direct interaction that has made the industry a success. We are delighted that they are also considering a third ISA category that opens up a new choice to the polarised options of cash or investments – providing that missing link between low returns and high risk.
"Our priority at RateSetter now will be to make sure we are ready. Importantly this won't change our prudent approach to building our business in the best interests of our customers."
*Liberum, April 2014
For all the talk of the increased involvement of institutional capital, it’s the retail space that currently drives volume for the UK P2P sector. ISA inclusion, whenever it happens, will multiply the volume of retail capital at work – and will be a crucial step in propelling the industry further into the mainstream.