ISA season has been and gone with less fanfare than ever before. But amid the pandemic panic, stock market crashes and plummeting interest rates, there has been a quiet winner… Innovative Finance ISAs. Michael Lloyd reports
Just a year ago, Innovative Finance ISAs (IFISA) were suffering from a serious lack of name recognition. According to one survey, conducted by The House Crowd in early 2019, a massive 87 per cent of young adults had never heard of an IFISA.
Six months earlier, a similar survey by Oaksmore ISA found that only six per cent of adults knew what an IFISA was. What a difference a global pandemic makes. As the 2020 ISA season began, Covid-19 arrived to tank the stock markets and push the Bank of England into reducing the base rate to (another) historic low of 0.1 per cent.
This has had a knock-on impact on the value of stocks and shares ISA portfolios, and cash ISA savings. Suddenly, the idea of fixed returns in a tax-free wrapper seems like the answer to a lot of people’s portfolio problems. Amidst the economic uncertainty caused by the coronavirus pandemic, platforms such as RateSetter, CrowdProperty and Rebuildingsociety have announced rising IFISA inflows this year.
In fact, Rebuildingsociety is now predicting that even more IFISA business is set to come from directors’ loans. “People are not using their IFISA allowance but have invested in their business,” says Daniel Rajkumar, founder and chief executive of Rebuildingsociety.
“Many have director loans in their company but don’t pay interest because it’s not tax efficient, but it can be if they wrap that around the ISA.” Rajkumar adds that the introduction of stringent new marketing restrictions last December have not had an impact on his platform’s IFISA inflows, further underlining the growing popularity of the product among retail investors.
Under the new rules, platforms can only communicate ‘direct-offer financial promotions’ to high-net-worth or sophisticated investors, those receiving regulated financial advice or restricted investors, meaning everyday investors who pledge to put no more than 10 per cent of their portfolio in peer-to-peer lending.
Rajkumar says this has no real effect as the industry has been around a while, which has led to a deep pool of sophisticated investors. Some platform executives have even stated that December’s regulations have been positive for P2P and IFISAs, by raising standards and confidence in the sector. With increased confidence in the market and current stock market volatility, insiders argue, there is a strong case for investors to diversify their portfolios in P2P and IFISAs.
“This is a moment when this asset class can prove its worth in a diversified portfolio and demonstrating good outcomes can put P2P on the map,” says a RateSetter spokesperson. Meanwhile, Andrew Holgate, chief executive of fintech consultancy Equitivo, added that there is always a case for investors to diversify into IFISAs regardless of the economic times.
“There is always a case for diversity,” he asserts. “Every lender should look to diversify as widely as possible. Even when you have a strong understanding of the risks of lending, diversity helps to minimise the risk of choosing the one bad investment. It shouldn’t matter if the economic times are good or bad, diversify as much as you can.”
As well as investors diversifying into IFISAs, there may also be a trend of money coming from stocks and shares towards IFISAs, at trend that has been witnessed by CrowdProperty and by Rebuildingsociety’s Rajkumar. However, there are still a few challenges for IFISA providers in the current market.
Liquidity is an often-cited reason for investor caution, while the lack of Financial Services Compensation Scheme (FSCS) protection has made independent financial advisers (IFAs) reluctant to recommend IFISAs to their clients.
And while IFISA inflows appear to be up overall, the likes of LendingCrowd, Ablrate and Money&Co have all seen a drop in IFISA inflows over the past few months. “Not only was the effect of bad press for the sector, market uncertainty, regulation and Covid-19 noticeable but many providers also decreased customer acquisition spend against this backdrop, which further impacted new gains,” a LendingCrowd spokesperson says.
Money&Co’s chief executive, Nicola Horlick, attributes the platform’s decline in inflows to the current climate being a worrying time for investors. “Investors are nervous about the economy, so I’ve been ensuring our loans have proper security and making it clear what that security is,” she says. “Investors have to be very careful and make sure they do their research and due diligence.
“If you can identify platforms like us which have done their due diligence properly, IFISAs are a way of making a decent income.” However, Carl Davies, chief operating officer at The House Crowd, suspects that the ongoing pandemic affects all types of ISAs, not just IFISAs, adding that “uncertainty means people probably need to stay liquid.”
The liquidity issue is not exactly news to P2P veterans. But due to the coronavirus crisis, investors want even more liquid investments because they want to know that they can access their cash quickly if they need it.
As a result, many platforms have seen an increase in the amount of activity on their secondary markets, with many investors looking to sell their loans in a short space of time. “A lot of investors are pulling out of long-term investments to have more liquid accessible investments that generate an income and don’t take too long to diversify,” says Rajkumar.
“I think a lot more people will be looking for alternatives and wanting their investments to earn an income if they are taking a risk, maybe those who weren’t comfortable with that in the past will start to become more comfortable with it.”
David Bradley-Ward, chief executive of Ablrate, warns that the lack of the FSCS safety net could play into the idea of IFISAs being a riskier investment option. He argues that interest rates have been low for so long that if anyone were to move savings around, they would have done it by now.
Although there is more regulation and confidence in the industry now, the lack of IFA money continues to cause concern for IFISA providers, who believe that everyday investors are being deprived of the relatively stable returns that P2P lending can offer.
Bradley-Ward puts the lack of IFA attention down to the fact that advisers don’t want to be in a position where they have to advise on individual loans, while Mike Bristow, founder and chief executive of CrowdProperty, says they don’t fully understand the market and its advantages.
But despite the current challenging market and lack of IFA attention, platforms predict a bright future for IFISAs. Ant Beddows, chief financial officer of Propio, sees a huge opportunity for the sector to grow by providing much needed funding to small- and medium-sized businesses, helping in the recovery from Covid-19.
On the investor side, The House Crowd’s Davies predicts a bigger-than-normal rush towards tax-efficient products during next year’s ISA season, as people try to find ways of rebuilding the losses they suffered this year. The consensus is therefore that the sector will come out of this challenging time to reach the light at the end of the tunnel.
“IFISAs are a great proposition so the future is very strong,” says Bristow. The 2020 ISA season is now behind us, but IFISA awareness is clearly growing. For a four-year-old investment product, that is no mean feat.