THE PEER-TO-PEER lending sector’s tax wrapper, the Innovative Finance ISA (IFISA), is coming up to its third birthday and its first full tax year with all the major players.
It got off to a slow start in the 2016/2017 tax year before a boom in subscriptions in 2017/2018 and will be hoping for third time lucky as the end of the ISA season approaches.
Here is how the product has evolved.
Back in the days when parliament had a Spring Budget rather than just a statement, the red book promised that “ISA eligibility will be extended to P2P loans, and all restrictions around the maturity dates of securities held within ISAs will be removed.”
It followed months of lobbying to expand the ISA tax wrapper to P2P lending, with platforms such as Lending Works proposing the idea of a Lending ISA.
A consultation was launched the following December.
P2P regulation moved from the Office of Fair Trading to the Financial Conduct Authority and it was announced that firms would need to operate under full regulatory permissions by April 2016, while existing firms were granted interim permissions to continue operating while their applications were considered.
Platforms required full authorisation before applying for ISA manager status to offer an IFISA.
The government announced that the IFISA tax wrapper would be introduced from April 2016, with crowd bonds allowed in the product from November of the same year.
This was the first tax year that investors could hold P2P loans in an IFISA, but few platforms were ready due to a hold-up in the regulatory process.
Large P2P lenders such as RateSetter and Zopa both previewed how their IFISAs would look in February 2016, but were unable to launch as they were still awaiting full FCA permissions.
Newer P2P lending platforms were at an advantage as their applications were processed faster.
Among the first platforms to launch an IFISA were business lenders Crowdstacker, and Crowd2Fund, followed by crowd bonds platform Abundance in November 2016.
A new year brought a swathe of IFISA launches.
LandlordInvest became the first P2P lender to launch a property-backed IFISA in January.
Two of the most well known P2P brands – Lending Works and Landbay – entered the market in February 2017.
Lending Works hit its £1m limit in just 24 hours, showing just how much demand for the tax wrapper existed.
The first tax year of the IFISA ended with no sign of the ‘big three’ – Zopa, Funding Circle and RateSetter – getting full authorisation to launch their products.
The news many had been waiting for finally arrived, as Zopa and Funding Circle received full FCA authorisation.
Zopa launched its IFISA, initially only to existing investors, in June 2017 before widening to new investors in January 2018.
The first ISA stats came out since the launch of the IFISA, revealing a comparatively low uptake of the product, blamed on the absence of the big players from the market.
It was described by some as a damp squib.
Initial HMRC figures suggested 2,000 investors put £17m in to the tax-free wrapper, but this was queried by both Crowdstacket and Abundance who said their subscriptions were each in double figures.
The number was later revised to £36m of subscriptions across 5,000 accounts for the 2016/2017 tax year.
Funding Circle entered the IFISA market, with a staged roll-out initially to existing investors. It was opened to new investors in April 2018.
The last of the ‘big three’ – RateSetter – launched its IFISA after receiving full FCA authorisation in October 2017.
HMRC’s ISA figures this year made for much more interesting reading.
There were £290m of subscriptions in the IFISA across 31,000 accounts in the 2017/2018 tax year, 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.
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 and RateSetter has received £175m.
Self-regulatory industry body the Peer-to-Peer Finance Association said in July 2018 that its members had attracted more than £300m since launching their IFISAs across various tax years.
P2P platforms have been stepping up their marketing efforts as we get towards the end of the first tax year with all of the main players in the market offering the tax wrapper.
Investors also have an option of automatically spreading their funds across several lenders through an IFISA launched by P2P analysis firm and investment manager Orca that was launched in February.
However, a tax issue had emerged that could impact some IFISA providers.
HMRC has warned P2P lenders that they shouldn’t be using e-money providers to hold IFISA money.
An alert from the taxman – which applies to all ISA managers – said it was aware that some providers are using e-money and e-wallet firms to receive and hold investor subscriptions pending investment.
However, the alert warns that this is against the ISA regulations as cash must be held by a regulated deposit taker.
With just days to go until the end of the tax year, many will be hoping that momentum gained last year after just a few months of the big players being in the IFISA market can soar now that they have been in it for a full tax period.