Innovative Finance ISA (IFISA) inflows hit the £1bn barrier this year, cementing the wrapper’s place in the ISA landscape. But could tougher regulations and platform defaults stall the IFISA’s upward trajectory? Kathryn Gaw reports
WE ARE ALL FAMILIAR with the story of the Innovative Finance ISA (IFISA). After getting off to a muted start in 2016, with just a handful of platforms authorised to offer the tax-free wrapper, its popularity has grown substantially.
This September, it was confirmed that IFISA deposits had hit the £1bn milestone, with Peer-to-Peer Finance Association chair Paul Smee heralding the product as “a major landmark in the development of the UK alternative finance landscape.”
But just as IFISA investing appeared to be entering the mainstream, the bad press began. Just days before the end of the 2018/19 tax year, the Financial Conduct Authority (FCA) warned investors that they should be careful to make sure they understand the risks before putting money into the “high risk” IFISA. Since then, the high-profile closures of IFISA authorised platforms Lendy and FundingSecure have created even more negative headlines.
However, the declining popularity of cash ISAs and ongoing stocks and shares volatility are encouraging investors to seek out alternative ways to protect their money in a tax-free wrapper.
Furthermore, the P2P industry has been making efforts to educate the investor community about the diverse range of business models, so that all platforms are not tarred with the same brush.
RateSetter believes that it is the leading provider of the IFISA with more than £275m in its ISA pot at the time of writing – representing one third of the platform’s investors. A RateSetter spokesperson told Peer2Peer Finance News that the platform has received “very positive” feedback from its IFISA investors, adding that “we look forward to continuing our strong rate of growth.”
The FCA has introduced new rules for the P2P sector, designed to protect retail investors. From 9 December, platforms must carry out appropriateness tests and self-certification questionnaires on all new customers. Questions have been raised on how this will impact IFISA inflows this ISA season – the period leading up to the end of the tax year when people clamour to make the most of their tax-free allowance.
“The new regulations mean that the P2P industry is a well-regulated sector in which people can have confidence,” says the RateSetter spokesperson. “In fact, one could argue that people can invest in P2P with more confidence than ever before. The regulations confirm that P2P lending is becoming an established investment and a logical component of everyone’s investment portfolio.”
Kayne Osbourne, compliance manager at FinTech Compliance, agrees that IFISA inflows are unlikely to be negatively impacted by the new rules.
“In fact, we think that higher standards will only increase the likelihood that financial advisers recommend P2P platforms to their clients,” he comments. Mike Bristow, chief executive and co-founder of P2P property lender CrowdProperty, said the firm has seen very strong demand for its IFISA product for almost two years now and expects the upward trajectory to continue.
“We expect another recordbreaking ISA season, both before the end of this tax year as people look to use up their annual allowance, as well as a strong start to next year as we always see many lenders looking to get their ISA allowance working for them as soon as possible in the new tax year,” he adds. However, others were a little more cautious.
“With new regulations following the bad press, I think momentum is going to take a hit,” says Neil Faulkner, managing director of the P2P analysis firm 4th Way. “There needs to be another period of calm, so that investors can again see through the fog to the fact there are actually stable returns to be had, and platforms need to learn to handle the conflicting signal offered by the FCA in its new regulations.”
Regardless of headwinds, the array of IFISAs on the market is certainly growing. According to HMRC data, there were 97 authorised IFISA managers in the UK by November 2019 – up from just 12 authorised providers in November 2016. At The Investing and Saving Alliance (Tisa), the IFISA has been hailed as a long-term diversification tool for tax-conscious investors. The investment and savings trade body’s technical policy director Jeffrey Mushens believes that the wider availability of IFISAs has “provided a welcome boost” for the P2P sector at large.
“The growth in the number of IFISA providers authorised by the regulator has stimulated competition in the sector and offered more choice to the investor,” says Mushens. “In time we hope that investors will increasingly consider the P2P sector on its merits alongside other mainstream risk asset classes.”
In order to capitalise on the mainstreaming of the IFISA, P2P platforms may benefit from comparing IFISA portfolios with stocks and shares ISA portfolios, in terms of the returns that may be on offer and the risk involved. Stock market volatility now dates back several years and this economic uncertainty is likely to continue for some time. Meanwhile, most IFISA providers have been able to keep their default rate below two per cent, while delivering returns of between three and 12 per cent per annum, tax free.
“The vast majority of investors are investing safely and most have made highly satisfactory returns every year since 2005,” says 4th Way’s Faulkner. “This contrasts “with the stock market, which has seen four down years over the period – meaning the average investor lost money.” Meanwhile, Charlie Taylor, head of property-backed P2P platform Octopus Choice, has noticed another emerging trend that may point towards future uptake of IFISAs.
Octopus Choice is one of the few P2P platforms which works closely with the financial adviser community and their IFISA feedback has been resoundingly positive. “Generally, we find that our customers, whether direct investors or financial advisers, are really impressed with how quick and easy it is to open an IFISA,” says Taylor. “Based on previous experience, often with banks, they assume that opening a new ISA or transferring an existing ISA into Choice is going to be a slow and painful process. But it really doesn’t have to be.” Rather than the overnight sensation that would transform the P2P industry, the IFISA seems to have simply sown the seeds for the industry’s long-term growth. If platforms can prove that they are lending responsibly and making investors aware of the risks involved, there is no reason why IFISA providers can’t take a significant share of the £700bn+ ISA market.
“It’s often the case that we overestimate the effect of innovation in the short run, but underestimate it in the long run,” says Taylor. “I think that definitely applies with the IFISA and, while demand has perhaps not been as strong as some thought, the opportunity for future growth is still significant.”
While recent bad press may have a short-term effect on IFISA inflows, the wrapper still has a significant role to play in the future of the P2P sector. As more IFISA products are launched and more IFISA investors build up their own track records, P2P lending will eventually become a standard piece of every diversified investment portfolio. Add to that the safety net of the new P2P regulations and any IFISA growing pains may soon be a thing of the past.