Five years after the launch of the Innovative Finance ISA, the options for retail investors are scarce. Michael Lloyd investigates…
When the Innovative Finance ISA (IFISA) launched in April 2016, it was supposed to represent a way for the average retail investor to access the inflation-beating returns of peer-to-peer lending. But five years later the tax wrapper appears to be slowly squeezing out these lenders.
Exclusive research by Peer2Peer Finance News has found that only 36 (40 per cent) of all authorised IFISA providers are open to retail investment during the current tax year.
Some of these IFISA offerings are from bond providers which have IFISA accounts available for deposits, but with no loans or bonds expected to be added before 5 April, there will be no way for new investors to make use of their IFISA allowance during this financial year.
Overall, the IFISA market is experiencing an underwhelming ISA season with 50 per cent of IFISA providers currently closed to retail investment, while three platforms have opted to pause their IFISA offerings as a result of the pandemic.
The three that are out of action this year include some of the biggest IFISA providers: Zopa, which has closed new IFISA sign-ups due to a lack of new loans; Funding Circle and LendingCrowd, which have both paused retail lending while lending under the coronavirus business interruption loan scheme.
Last year, RateSetter was the largest IFISA provider on the market. But this year it is also closed to new retail investment, following Metro Bank’s acquisition of the platform and its P2P portfolio.
On top of fewer IFISAs being available, it’s also worrying that more than a third of the 36 available IFISAS, whose providers disclosed their minimum amount, have a minimum investment of £1,000 or more.
Six require a minimum investment of £1,000, one £2,500, two have a £10,000 minimum and two have minimum investments of between £15,000 to £20,000.
This suggests there is a disproportionate number of IFISAs aimed at high-net-worth (HNW) individuals and effectively creating a barrier to entry for retail investors.
According to rules from the Financial Conduct Authority (FCA), retail P2P investors that have not received regulated advice must agree not to place more than 10 per cent of their net investible portfolio into investments in the sector.
This means that in order to invest £1,000 in a P2P IFISA, the average investor would need to be working with investible assets of at least £10,000, which rules out many retail investors.
The latest ISA data from HMRC found that in the 2017/18 tax year the largest proportion (44 per cent) of taxpayers saved between £1 and £2,499 into some sort of ISA. Separately, a Finder survey from May 2020 calculated that the average Brit can afford to set aside just £6,756.81 per year in savings and investments.
Retail lenders with less than £1,000 to invest only have 23 IFISAs to choose from. Six require £10 or less, four providers accept £50 or less, 10 require £100, one requires at least £250 and two have a minimum of £500.
This shortage of affordable IFISAs could be indicative of a wider trend where IFISAs are no longer viewed as a product for everyday investors but as a HNW tax wrapper.
“A lot of the platforms that do have an IFISA have a smaller starting point than us (our minimum investment is £1,000) and thus attract a lot more smaller investors,” says Yann Murciano, chief executive of Blend Network.
“We have a lot more HNWs and family offices as investors, and even the retail ones we have are investing in their pension rather than an ISA. So, it’s not something we are considering to launch right now. Maybe in the future.”
According to some retail-focused IFISA providers, confidence in the IFISA market is at a low point, and this may go some way towards explaining the dearth of retail-friendly products in the current tax year.
“The general confidence in P2P products is quite low now,” says Filip Karadaghi, co-founder and chief executive of LandlordInvest.
“If you sell ice cream you probably market yourself in the summer, not the winter because more people eat it then. It’s the same with the ISA product, confidence is slowing, so it’s better to wait until it picks up.
“Confidence would pick up this tax year but it will not return to the levels seen prior to Covid-19 until next year.”
However, it is easy to understand this lack of confidence from a retail perspective. One of the key difficulties that Peer2Peer Finance News experienced while conducting this research was the lack of easily-available information. Some IFISA providers were unclear on their website whether or not their IFISA was still open to investment. Over the phone, a number of company representatives were unsure of the existence of their platform’s IFISA, and did not know the minimum investment amount.
If everyday investors find it difficult to find information on a provider’s IFISA they could easily be deterred.
HMRC is also unclear. The government department, which issues ISA permissions to firms that have received authorisation from the FCA, has a list of authorised ISA managers on its website.
The list, which was last updated on 22 January 2021, still contains collapsed P2P lending platforms Lendy and FundingSecure, which could concern any potential investors searching through it for suitable opportunities.
“HMRC undertakes periodic reviews of the ISA manager list and if a manager is no longer approved to offer ISAs it will be removed from the list,” says a spokesperson from HMRC.
“However, inclusion in the list is not an HMRC endorsement and potential investors may wish to take independent advice if they’re in any doubt about the suitability of the ISA manager or of a particular ISA.”
However, while this is shaping up to be a disappointing season for the IFISA market, it’s not all doom and gloom.
Most platforms believe that IFISA inflows will pick up after the pandemic and Peer2Peer Finance News is aware of a handful that have delayed their IFISA launch solely because of Covid-19.
In the meantime, some are improving their IFISA offering to stand out more and attract new lenders.
JustUs plans to introduce IFISA-eligible owner-occupied residential mortgages at the end of the second quarter, while its sister company Moneybrain is launching an auto-invest simplified IFISA.
Simple Crowdfunding is looking to extend its product range for IFISAs, and Rebuildingsociety is looking to collaborate with firms for referrals to the platform’s IFISA.
When the pandemic is behind us and the economy recovers, there will be plenty of retail money in search of a tax-friendly home. The IFISA managers which have remained open will be able to boast of their consistent track record, while the others can take note of the latest investor trends, and come back next year with a stronger, wider range of retail-friendly products.
Editor’s note: IFISA provider The House Crowd fell into administration after this feature went to press for the March magazine, so there are now only 36 providers open to retail investment this tax year. Octopus Choice announced its permanent closure after going to press, so this has also been updated in the online version.