With the industry’s largest lenders now offering the Innovative Finance ISA, surely the tax wrapper will cement its status in the mainstream investment space this year? We provide an update on the product’s process
IT IS hoped that the 2017-18 tax year will mark a watershed moment for the Innovative Finance ISA (IFISA). The product was first mooted by former Chancellor George Osborne back in 2015, enabling investors to enjoy tax-free earnings on P2P investments, akin to a stocks and shares ISA.
“The ISA is the flagship savings vehicle for the government,” says Nick Harding, chief executive of Lending Works, which was the first Peer-to-Peer Finance Association member to offer the IFISA.
“There is a huge amount of cash and investments tied up in ISAs, so we feel it is a positive thing to be a part of that. It signifies the government’s belief in the credibility of P2P lending and the platforms that operate within it.”
Estimates from P2P lenders for this tax year suggest IFISA inflows have been strong so far, following a slow start for the savings vehicle. While the wrapper was officially launched in April 2016, many larger platforms were delayed in getting their products to market as they were awaiting the required regulatory permissions.
As a result, the 2016-17 tax year proved to be a damp squib, with only £17m of IFISA subscriptions spread over 2,000 accounts, according to HMRC. While these figures have been contested by the industry, it is still clear that IFISA uptake paled in comparison to stocks and shares ISAs which attracted £22bn, while £39bn flowed into cash ISAs.
This time last year, only four of the 31 major P2P lenders had received full authorisation, according to Orca, a P2P research and analysis company. Today, 29 have regulatory approval and 22 have actually launched IFISAs.
Stuart Law, chief executive of Assetz Capital, expects to see total IFISA inflows of £100m across the sector over the course of this tax year, while other industry estimates have put the figure nearer £1bn. Law’s platform, which provides P2P business loans, launched its flexible IFISA in December 2017 and has so far seen significant demand.
“Over the next two to three months, we would expect to bring in as much as the industry brought in during the 2016-17 tax year,” predicts Law. “Ballpark, I would not be surprised if we had about £20m plus within our ISAs by the end of this tax year.”
One year on from the launch of Assetz Capital’s IFISA, the chief executive hopes inflows could total £50m. While the average IFISA account size stood at £8,000 during the 2016-17 tax year, Law suspects the amount typically invested into Assetz Capital’s IFISA will “comfortably exceed” this.
So far, the platform has seen a large number of ISA transfers from previous years, with forums suggesting a large proportion has come from cash ISAs. A sizeable chunk of existing investors have also transferred from standard accounts into the IFISA in order to take advantage of the tax benefits.
“If our customers have their money in a Quick Access account they can transfer into an ISA in a minute or so,” Law adds.
Assetz Capital’s forums indicate that some customers who transferred out of standard accounts have moved into lower-risk loans within the IFISA. They are happy to settle for a lower interest rate because of the tax savings they receive from the IFISA. Law said the platform has been able to accommodate IFISA inflows because it originates £20m to £30m of new loan facilities each month.
Other platforms have had issues matching an influx of new money with supply of loans. Just 24 hours after launching its IFISA last February, Lending Works closed access to the product temporarily after it attracted “unbelievable demand” from investors.
Over the remaining two months of the 2016-17 tax year, Lending Works’ IFISA brought in £9m. Harding estimates the platform could attract around £30m of IFISA money during this tax year. At the moment, 48 per cent of Lending Works’ outstanding loans are funded by IFISAs.
“Of new loans that are funded each month, 59 per cent are funded by an ISA and therefore 41 per cent by a classic account,” Harding says.
A closer look at Lending Works’ IFISA inflows shows that 50 per cent have come from existing ISA transfers.
Balancing supply and demand represents a major challenge for any P2P lender. If the number of lenders increases substantially, loan origination needs to match up and platforms must ensure that credit quality is not compromised in any way.
After its initial challenge managing supply and demand, Harding says normal activity has resumed on the Lending Works platform.
Zopa, the UK’s oldest P2P platform, is more than aware of the supply-demand challenge. It had a waiting list for new investors for 10 months, to avoid lengthy waiting times while funds were being lent out. Its IFISA, which launched in June, was only available to existing investors until last month.
Funding Circle also chose a staggered roll-out of its IFISA, starting with existing investors in November, to manage demand. A spokesperson for the platform previously told Peer2Peer Finance News that it expects to attract “hundreds of millions” into the savings product in 2018.
Fellow ‘big three’ lender RateSetter launched its IFISA this month, initially targeting existing investors. The lender anticipates that close to £500m could be channelled into its IFISA during the next tax year. This measured approach by the three largest P2P lenders underscores their commitment to managing inflows.
While this should be viewed positively, industry figures suggest the IFISA will only begin to move into the mainstream once the big three offer IFISAs to new investors – a development that will ultimately raise awareness.
“Until they open up their IFISAs to new customers, we are not going to be able to measure the popularity of the IFISA to the broader retail investor market,” asserts Jordan Stodart, co-founder of Orca. “This is because it remains siloed to existing P2P customers.
“Zopa, RateSetter and Funding Circle account for 69 per cent of the market in terms of loan volumes. That is quite a hefty chunk.”
This underscores a major obstacle for P2P lenders: namely, a lack of awareness about the benefits of the IFISA amongst the general public. For example, a survey by Crowdstacker found that only five per cent of 2,000 active investors understood what an IFISA was. This helps to explain why the majority of IFISA subscriptions have so far come from existing and active P2P investors.
“I don’t think any education has really started yet to convert new people,” states Law.
Michael Lynn, chief executive of property platform Relendex, notes that most small platforms do not have significant marketing budgets. This makes it harder for them to publicise the benefits of IFISAs.
“We will embark on our own [PR] campaign to try and increase awareness, but we can’t do it alone,” says Lynn.
“The sector collectively needs to co-operate to make that happen.”
A lack of support for P2P lending is similarly evident amongst the financial adviser community. After carrying out research with advisers last year, Orca identified a lack of understanding about how P2P loans can be used within client portfolios.
“The big issue for a financial adviser is they are not going to produce the level of due diligence on a product that is not on-boarded onto their daily business,” Stodart says.
While financial advice firm Chase de Vere recognises the attractive interest rates that can be accessed tax-free via IFISAs, it says investors must be aware of the potential risks to capital and lack of protection from the Financial Services Compensation Scheme.
“We have seen very little client interest in the IFISA,” reveals Patrick Connolly, a certified financial planner at the firm. “These aren’t products which we actively recommend to clients and, at the same time, we’ve had very few clients approaching us about them either.”
While IFISA inflows are likely to grow significantly compared to the previous tax year, Assetz Capital’s Law says it is important to think about the long-term picture. In his opinion, two milestones need to happen before the IFISA moves into the mainstream. The first will be when 25 per cent of P2P platforms’ loan books come from IFISA money. And the second will be when IFISAs account for five to 10 per cent of total ISA subscriptions.
“In the future, I would not be surprised to see more than half of our P2P industry funded from ISAs in terms of retail money,” he adds.
Lending Works’ Harding agrees that the P2P industry must be prepared to play the long game before the IFISA gains traction amongst the public.
“The industry needs to show that it is credible and robust through recessionary cycles – all of the stuff you want to see as an investor,” he comments. “Over time, I think the industry will fulfil its long-term potential.”
This article featured in the February edition of Peer2Peer Finance News, which is now available to read online.