The Innovative Finance ISA may have got off to a slow start, but its potential for the peer-to-peer lending industry is immense. Peer2Peer Finance News delves into the past, present and future of the tax wrapper
THE Innovative Finance ISA (IFISA) has been heralded as the peer-to-peer lending sector’s passport into the mainstream.
Savers and investors may not get the various levels of Financial Services Compensation Scheme protection afforded to traditional products, but the tax wrapper provides an air of respectability to a sector often painted as niche and risky.
But the IFISA got off to a slow start due to the lengthy authorisation process of many major platforms, so what does the future look like for the product and its providers?
The IFISA was first mentioned by George Osborne in his July 2015 Budget. Much fanfare followed, with the sector’s biggest platforms such as Zopa even going as far as detailing the tax-free rates they would offer ahead of the wrapper’s eventual launch in April 2016.
However, regulation of P2P was at the same time being transferred from the Office of Fair Trading to the Financial Conduct Authority (FCA) and no-one could have predicted the arduous authorisation process that followed. This left established players such as Zopa and Funding Circle waiting in the wings as the regulator assessed their hefty business models, meaning that only a handful of platforms were able to launch their IFISAs in April 2016.
Bigger P2P players were therefore absent in the IFISA’s first year and the product garnered just £17m subscriptions and 2,000 accounts in the 2016-17 tax year, a tiny intake compared with 8m cash ISAs and 2.5m stocks and shares ISAs opened in the same year, valued at £39bn and £22bn respectively.
Since then, bigger names like Zopa and Funding Circle have finally received authorisation, potentially attracting more attention – and volumes – to the IFISA market. However, the early providers are feeling confident despite the increasing competition.
One of the first platforms to come to market with an IFISA was Crowdstacker. The secured business loans platform launched in June 2015 so was not on interim permissions – the approvals given to platforms that existed before the FCA took over regulation in April 2014 – so got full authorisation in time to launch its product in April 2016.
The platform attracted £15.6m across 1,548 IFISA accounts in the last tax year, of which £6.5m was transfers.
“Uptake of the Crowdstacker ISA has remained steady since we launched it at the start of the 2016-17 tax year,” says Karteek Patel, chief executive of Crowdstacker. “It has proven very popular with those opening new ISA accounts, but also those transferring money in from other types of ISAs they have opened in previous years.”
Crowdstacker claims to have been the biggest beneficiary of IFISA season, but strangely so does ethical P2P platform Abundance with £10.5m, of which £2.8m was transfers. As our news story indicates, HMRC insists its figures are accurate and says they are based on figures that ISA managers provide when they submit returns to the taxman in June.
Whoever was the biggest player last year, Abundance is pretty confident about its future.
“About 50 per cent of the money invested with Abundance is through an IFISA account,” Bruce Davis, co-founder of Abundance, explains. “We expect to raise £40m to 50m in the 2017-18 tax year, up by 100 per cent on the previous year, so hope for continued strong investment flows from ISA customers to support that.”
The disparity over the reported numbers isn’t the only issue that P2P firms would like HMRC to address.
There have also been calls for the taxman to handle how IFISA repairs – where investors go over their allowance – is handled, as well as questions regarding defaults and what happens following the death of an investor.
Goji, which provides administration for several P2P platforms’ IFISA offerings, has been involved in the debates. Jake Wombwell-Povey, chief executive of Goji, says there hasn’t been any feedback from HMRC yet.
But while the taxman ponders this, Wombwell-Povey says P2P lenders will have other challenges to face, such as providing liquidity for any IFISA transfers as well as preparing for competition from bigger players.
“Undoubtedly competition will increase, but P2P is still very much a new, growth market and attracting new investors will be where the battle lies,” he explains. “Equally, different lending platforms appeal to different types of investors so not all platforms are competing like for like, especially for existing investors.
“There are hundreds of billions of pounds sat in cash ISAs earning close to nothing. Goji has seen with its own ISA administration platform that around 80 per cent of transfers have come from cash ISAs.
“I think many platforms will be judging success by their own standards and will be looking to secure substantial assets under management relative to their own loan book and obviously that is important in balancing the supply and demand of a platform.”
In February, Lending Works became the first larger platform to launch an IFISA. It closed its product temporarily after just 24 hours due to “unbelievable demand” from investors, which saw around £1.5m transferred into the product.
“We didn’t want to take in £10m and leave the money waiting to be matched, or lower rates or credit criteria to lend the money out,” Matthew Powell, director at Lending Works, told Peer2Peer Finance
News at the time.
The platform ended up attracting £9m in the last tax year. Meanwhile, fellow Peer-to-Peer Finance Association member Landbay – which launched its IFISA later in February – saw £1.5m come in between February and April alone.
Rather than worrying about competition, Landbay’s Julian Cork insists it will be positive for the sector once more big platforms launch their own products.
“As and when fellow platforms open up new IFISAs, this will create additional awareness for the product which in turn will drive increased takeup,” Cork says.
“We are still at the innovator stage of the adoption curve, so there is huge potential for us in the ISA market, and plenty of space for multiple players to address the appropriate risk/return profile of our investors.”
This was sentiment shared by others including Crowdstacker. “There are hundreds of ISA opportunities, not just the IFISA, already marketed by very large providers, some very small providers, and those in between,” Patel says.
“Each offers their own advantages. There’s no doubt an ISA is a great way for people to save and
invest in a tax-efficient way, so the breadth of choice can only be a good thing for investors seeking to diversify the ways in which they grow their money.”
Abundance’s Davis also highlights the various offerings in the P2P space, from business, property and personal loan platforms, compared with a traditional ISA.
“It is a very diverse sector with each platform offering different products and benefits,” he adds.
“Unlike the high street banks, we don’t all sell the same vanilla choices. Investors need to shop around for the products which suit their needs.”
Big three platforms Zopa and Funding Circle have taken a different approach to other platforms before launching, as they anticipate strong demand from investors.
But, while there may be appetite from investors, can the demand be met on the borrower side in the P2P market?
Landbay again is not concerned. “We operate in a £35bn to £40bn market,” Cork says. “Within the buy-to-let sector, we operate at the specialist end which, following regulatory changes, will be less well served by incumbents.
“Landbay has strong origination volumes via our intermediary partners and our fully scalable platform is ready to meet increased demand. It’s also worth bearing in mind that buy-to-let loans are typically much longer tenure than some other asset classes within UK P2P, so we don’t need to originate nearly as often as some of our peers.”
Crowdstacker’s Patel puts it more simply. “Businesses will always need to borrow, and investors will always want to invest,” he asserts.
“Platforms just have to continue to bring together both parties in a mutually beneficial manner. “Whether they use P2P loans, bonds, or loan notes, all can be held in an IFISA. The key is to offer the right structure to suit the borrowing business, whilst also offering the best investment options for investors.”
The IFISA of course isn’t the only route that P2P investors can use to gain tax-free income. There is already the personal savings allowance of £1,000 – or £500 for higher-rate taxpayers – and the option to put P2P loans in a self-invested personal pension.
Wombwell-Povey says all these choices form part of the decision-making process for investors.
“The benefit of those allowances and tax wrappers all depends on the investor’s personal tax position,” he explains. “For example, they may already have insufficient personal savings allowance, such as if they are an additional or higher-rate tax payer with rainy day savings, have large cash ISAs earning little interest or have maxed out their lifetime allowance on a pension – all of those scenarios make an IFISA potentially attractive.
“It comes down to financial planning 101 in a way – what are the investor’s wealth objectives, what is their risk profile, what are the tax wrappers available to them…then we can start to think about asset allocation.”
The IFISA may have got off to a slow start but it looks like the investor will only benefit from the extra choice, through whatever means they invest, as momentum gathers pace.
This feature appeared in the November edition of Peer2Peer Finance News – now available to read online!