The Innovative Finance ISA has been boosted by the ‘big three’ lenders unveiling their tax-free products, but are they now helping or hindering the competition?
THE MAJORITY OF peer-to-peer lenders now offer tax-free earnings through the Innovative Finance ISA (IFISA) but the early days of the tax wrapper were not so easy due to the absence of many of the industry’s big brands.
The ‘big three’ of Funding Circle, Zopa and RateSetter had not yet entered the IFISA market in the product’s first tax year and uptake showed just how much they were missed.
The IFISA attracted just £36m of subscriptions across 5,000 accounts for the 2016/2017 tax year, a relatively low amount that was attributed to a lack of mainstream awareness of the products on offer.
This was not through want of trying among the biggest platforms.
Zopa and RateSetter previewed details of their IFISA products in February 2016, ahead of the April 2016 IFISA launch date.
But they were unable to bring those products to market due to an unexpectedly long regulatory process. Zopa was the first of the ‘big three’ to gain full authorisation from the Financial Conduct Authority (FCA) in May 2017, followed by Funding Circle later that month and RateSetter in October that year.
Platforms subsequently had to gain ISA manager status from HMRC, although this was a simpler process.
Read more: Navigating the ISA market
The difference was clear once these players launched their IFISAs for the 2017/2018 tax year when £290m of subscriptions in the IFISA were recorded across 31,000 accounts, a 705.5 per cent increase on the previous year.
Much of the intake is thought to have come from the ‘big three,’ although those platforms have only released data that covers the 2017/2018 and 2018/2019 tax years combined, so it is difficult to make a clear comparison.
In August 2018, when the official ISA statistics for 2017/2018 were released, Zopa said that it had attracted more than £150m since launching its IFISA in June 2017, while Funding Circle said that it had taken more than £120m since November 2017.
RateSetter revealed last month that its IFISA has attracted £170m since it went live in February 2018.
The big players insist they are helping everyone and that the competition is against cash and stocks and shares ISAs rather than with each other.
“The initial success of the IFISA proves there’s clearly plenty of demand amongst investors for an alternative to the lower-yielding cash ISA and the highly volatile stocks and shares ISA,” Natasha Wear, head of investment products for Zopa, said.
“As the popularity of the IFISA continues to grow and elevate the P2P asset class into the mainstream, even more customers will rightly demand a simple experience without the disappointment of introductory-only rates that disappear or hidden fees – making it even easier for customers to make their money work harder.”
Mario Lupori, chief investments officer at RateSetter, suggests the entry of the ‘big three’ adds authenticity to the product.
“If there was going to be a new football league that had the major clubs in it, that would add validation,” he explains.
“If you only had the championship players it wouldn’t be taken quite as seriously. “It helps that RateSetter, Funding Circle and Zopa are performing strongly and are in the market helping everyone.”
Neil Faulkner, founder of P2P analysis firm 4th Way, supports this sentiment, claiming the entry of the ‘big three’ boosted overall investor confidence in the market.
“There were just a couple of IFISAs from providers available for a long time and we received queries from many investors asking when other IFISAs from large providers were finally going to arrive,” he explains.
“They were all waiting and they had to wait, since they couldn’t squash all their cash into a few small IFISAs.
“I sensed the beginnings of some suspicion in the final few months before larger IFISAs started to arrive, so the eventual release of many more IFISAs from bigger brands was a boost to investor confidence.”
There is also some agreement among the so-called ‘championship platforms’ that the big brands have helped the product grow in popularity.
“The entry of Zopa, Funding Circle and RateSetter definitely helps raise awareness,” Frazer Fearnhead, founder of P2P property lender The House Crowd, says.
“The IFISA definitely got off to a slower start than people were anticipating.
“The general level of awareness will be helped as more companies start to offer it but it will just take a while for people to get used to it.”
However, there are concerns that more could be done among the main players to use their weight to help boost knowledge and wider take-up of the IFISA.
“The sector needs to do more to promote the benefits of ISA investors diversifying into P2P and crowdfunding assets,” Bruce Davis, managing director of renewables crowd bonds platform Abundance, says.
“The big P2P lenders have been cautious in their roll-out of the IFISA, focusing on existing customers first, so we will see whether they have a positive impact by investing in spreading the word about the IFISA when the main ISA marketing season begins in earnest in February and March.”
Brian Bartaby, chief executive of P2P property platform Proplend, agrees that larger platforms are too focused on their existing users and need to help raise awareness among the unconverted.
“The larger providers are not doing much beyond upselling to their existing lenders, i.e. an already converted audience so no real growth in the market,” he explains.
“Its almost as if we are still a dirty secret and not a real ISA, primarily as capital is at risk.
“Capital is at risk across the stocks and shares ISA and I think that the market will see a lot of volatility in 2019. With cash ISAs, investors will not lose ‘physical cash’ but the value of their cash is eroding in real terms due to inflation. This should also have a capital at risk notification.”
Bartaby urges regulators and the government to help the industry in the same way they have supported reforms in the pensions market.
“The IFISA needs wider exposure from regulators, HMRC and the whole industry rather every platform doing their own little bit of marketing,” he says.
“Most existing lenders are just waiting to see which platform puts out the best cashback offer and then they will join up to that.
“Think back to the exposure that the industry and regulator put towards Pension Wise and pension freedoms.”
There are of course things smaller players can do to set themselves apart and help promote the IFISA brand.
Faulkner says genuine differentiation is key for smaller players to stand out.
“Every platform we speak to says ‘we are different and not like the rest,’ but the fact is that a growing proportion of them are very similar,” he explains.
“Newer and smaller players should do their research to ensure that they genuinely have something different to offer so that they can sustain this difference until they have reached critical mass.
“They might do this by looking for unexplored borrower segments, which will be easier than looking at new technology or new credit-enhancement ideas such as reserve funds, first loss and insurance.”
Another area where small players could set themselves apart is the financial adviser market, which even the ‘big three’ has struggled to crack.
Sam Handfield-Jones, chief product officer at Octopus Choice, said the property P2P lending platform does not see the likes of Zopa as competition, as the advisers recommending its product are not looking at those types of providers.
“It doesn’t impact our business model, but more traffic and press coverage is good for everyone,” he adds.
Meanwhile, other platforms such as asset-backed lenders Ablrate and JustUs are utilising blockchain technology within their offerings, which could be a differentiating factor to attract investors.
Ablrate is in the process of building a blockchain-powered secondary market, while JustUs is using its P2P platform’s technology to launch a crypto-token to help facilitate faster global payments.
The token will be underpinned by purchases of assets such as property and loans on the JustUs platform, which will help maintain its value.
However platforms set themselves apart, RateSetter’s Lupori argues there are plenty of funds to go around, especially as the whole ISA market is worth £608bn.
“There is more than enough for all of us to go after,” he says.
“The amount already in the IFISA is a drop in the ocean compared with what is already out there.”
As we approach the first ISA season where all of the ‘big three’ will have had a product on offer from the start of the tax year, it seems there is still plenty to play for across the whole IFISA market.
This article featured in the February edition of Peer2Peer Finance News, now available to read online.