Peer-to-peer lending: should you invest in an innovative finance ISA?

There are just a few weeks left to make the most of the £20,000 ISA stipend for 2021/22. But with a crackdown on peer-to-peer lending and fewer players in the market, should you still consider them?

Each adult receives an ISA allowance of £20,000 per year. This is the maximum that can be saved or invested in an ISA with tax-free returns.

You can save the whole £20,000 in a single ISA or split it between different types of ISAs, such as a cash ISA, stock and equity ISA and an innovative financing ISA (IFISA).

An IFISA is a type of ISA where you pay no tax on the interest generated from peer-to-peer (P2P) lending.

P2P lending works by connecting investors – who are ready to lend – with borrowers, who can be individuals, businesses or property developers.

They attract investors who are willing to take more risk with their money for higher interest rates than typical savings accounts.

However, due to their growth in a low interest rate environment, they are increasingly under the spotlight by the city’s regulator, the Financial Conduct Authority (FCA).

In 2019, it imposed stricter rules on P2P platforms to protect less experienced investors.

Under these rules, “inexperienced investors” are limited to investing 10% of their assets in P2P. So if you have £20,000 to invest in an ISA this year, that means you can only invest £2,000 in an IFISA.

Under marketing rules imposed by the regulator, P2P platforms can only target wealthy or sophisticated investors with P2P investment agreements, including ISAs.

It’s up to the P2P platform to assess whether an investor is ‘wealthy’ or ‘sophisticated’, but most people won’t fall into that category.

Which companies offer IFISAs?

Those who choose to invest in an IFISA would previously have turned to the big players in the P2P market: Funding Circle, Ratesetter and Zopa.

But all three companies recently exited the market. Funding Circle is the latest to announce that it is permanently closing its peer-to-peer business to retail investors. Appraiser closed its loan portfolio after being acquired by Metro Bank and Zopa shut down its P2P business to focus on being a digital bank.

Back in 2019, land bay also removed from the retail P2P sector, returning all funds to investors.

So, without these big players in the market, is it still a good idea to have an IFISA as part of your ISA exam? On the plus side, the rates offered are undoubtedly attractive.

Kuflink offers a five-year IFISA with a “target return” of 7%. The money is lent to borrowers seeking short-term bridge financing for residential and commercial real estate investments. The loans are secured by UK assets.

However, a disclaimer on Kuflink’s site explains: “Securing investments against UK ownership does not guarantee that your investments will be reimbursed and returns may be delayed.”

EasyMoney offers IFISA target returns of 5.02% for people wishing to invest their entire £20,000 allocation in its Tax-Free Premium Plus IFISA, which is backed by UK ownership. It says investors can request to withdraw their money at any time, but the fine print warns that instant access is not guaranteed.

Other companies offering IFISAs include Assetz Capital, which offers P2P loans to SMEs and property developers. Its fast access IFISA pays 3.75%, but it admits that access to your money is not guaranteed.

Another option is CrowdProperty which offers returns of up to 8%, backed by charges against UK property.

If you want your IFISA money loaned to consumers, not real estate investors, there aren’t many options now that Zopa and Ratesetter are gone. Pretty much the only option is Fund Ourselves which offers IFISA returns of up to 15%.

This may sound great, but keep in mind that the higher the rates offered on an IFISA, the riskier the borrower is likely to be and the more likely they are to default on their payments.

Fund Ourselves offers payday loans to people with bad credit with typical rates of 505% APR. These borrowers will be desperate and at high risk of defaulting on their loans.

Is your money safe with a P2P lender?

If your money is invested in a cash ISA with a bank or building society, it will be protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person per institution.

If you have a stock and equity ISA, you will be protected by the FSCS if your ISA provider goes bankrupt, but you won’t be immune to the ups and downs of the stock market – so your ISA could lose money. the money.

It is a similar configuration with the IFISAs. P2P platforms are obligated to protect their assets from investors’ money, so if a P2P platform goes bankrupt, investors should still receive their investment returns provided the loans do not default. However, if borrowers do not repay, there is no protection in place and you could lose some or all of your money.

What are the experts saying?

James Andrews, personal finance editor at money.co.uk, warns investors need to be absolutely sure what they are getting into with an IFISA.

He says, “These accounts are not savings accounts. Not only are returns not guaranteed, but you could also lose some or all of the money you invest in it. Worse still, they are also not covered by the Financial Services Compensation Scheme (FSCS), which means no protection is guaranteed if your supplier goes bankrupt.

“The problems of the past two years have plagued the industry – seeing providers such as Funding Secure go bankrupt, other platforms struggling to find money for people looking to withdraw from their investments and the platform -original P2P form Zopa has decided to stop offering peer-to-peer investments at all, so while the returns may look attractive, make sure you’re prepared to take some risk before transferring any of your money in an IFISA.

Darren Cooke, Certified Financial Planner at Red Circle, is also concerned about IFISAs. He says no ordinary investor should ever have invested in P2P.

“They were often mismarketed as low-risk or secure investments paying fixed rates of return and resembling higher-interest bank accounts in some cases,” he says, “They were nowhere near that in many cases.If a company cannot obtain capital from a bank, there is a reason, and that reason is a higher risk of default.

Majorie T. Leonard