IFISAs: The golden ticket
IFISAs represent a golden opportunity for retail investors to earn inflation-busting returns. But is the tax wrapper moving away from its retail roots? Michael Lloyd investigates…
ISA season is coming, and investors are looking at their options. Used wisely, ISA investments have the power to combat the effects of rising inflation. In fact, even the notoriously conservative City regulator has been encouraging savers to invest their money to avoid losing value in real terms.
Cash ISAs are producing near-record low returns with the average return during the 2020/2021 tax year coming in at 0.63 per cent, according to Moneyfacts. Meanwhile, inflation is at 5.5 per cent and rising, which means that £1,000 placed into a cash ISA paying 0.63 per cent would have a spending power of just £950.95 within a year.
Stocks and shares ISAs are known for their volatility, with returns dependent on a strong economy. After two years of a global pandemic, disrupted supply chains, and multiple lockdowns, stock market returns have been even more unpredictable than usual.
So, usher in the Innovative Finance ISA (IFISA), an alternative investment option that has provided inflation-beating returns since its 2016 launch and is not showing signs of slowing down.
Exclusive research by Peer2Peer Finance News has found that IFISAs returned more than nine per cent per annum in both 2019 and 2020. In 2018 the average return was 8.73 per cent.
While it is too soon to calculate average returns for the current tax year, our research showed that target returns have stayed largely on track.
Across every IFISA which is open to investors for the 2021/22 financial year, we found that the average target return ranges from a minimum of 6.38 per cent to a maximum average of 8.7 per cent.
Read more: The P2P lenders replacing Zopa and Funding Circle this ISA season
These figures demonstrate the remarkable resilience and consistency of the peer-to-peer lending sector, particularly when P2P investments are held inside an IFISA wrapper.
“P2P lending has provided much more reliable net returns than the stock market after investing costs every single year, whereas the stock market has lost investors’ money after costs in one out of every three years,” says Neil Faulkner, managing director of P2P ratings and research firm 4thWay.
Against this backdrop of stagnating cash ISA returns and stocks and shares volatility, it is not surprising that IFISA providers are reporting a rise in inflows in the current tax year as investors flock towards those investment options that have continued to perform during the pandemic.
As expected, IFISA providers saw a drop in inflows during the 2020/2021 tax year as many consumers panicked and withdrew their money during Covid.
But since then, the IFISA market has been booming, and many P2P lending platforms have reported a rise during the current tax year, with some even reporting record-breaking figures.
“New IFISAs opened in the current tax year have surpassed all IFISAs opened in the previous tax year,” says Lauren Renda, operations finance manager at ArchOver.
“There has been a substantial decrease of ISAs being opened since the beginning of the pandemic, but I think the fact we have two months left in the current tax year and we have beaten 2020/21 figures shows that the impact of coronavirus is starting to wane.”
Innovation is rife among fintechs and IFISA providers have been quick to adapt to emerging trends and to anticipate future client needs.
Several providers are planning changes in some form, or simply ramping up their marketing this ISA season.
P2P property lending platform Invest & Fund says that it is opening up its IFISA to new customers for the first time.
“Given the high demand for our IFISA we have been passive in promoting it to date and have kept it exclusively for existing clients,” a spokesperson says.
Read more: Where can you invest in IFISA-wrapped retail bonds?
“We are now offering our IFISA to new Invest & Fund platform lenders and have opened it up to lenders seeking transfers from other platforms. We are making it clear we are delighted to welcome new customers looking to transfer their investments.”
Bruce Davis, managing director of Abundance, says the crowd bonds platform launched its first municipal investment available as an IFISA in October 2021, and plans to introduce more this year.
“It’s a low-risk option for people investing in an IFISA,” he says. “There should be two more launching in the next two months.”
Simple Crowdfunding has added some new products to its ISA-eligible investment opportunities, while Crowdstacker has recently launched property development loans which are available to invest in using the ISA wrapper.
Kuflink has made changes to its select invest IFISA, which launched in April 2021, and introduced a wallet system which allows transfers between a lender’s general wallet, previous ISA wallet and current ISA wallet.
“Our newly launched select invest IFISA product will also be able to pay monthly interest in the coming weeks and can now be sold on the secondary market,” says Narinder Khattoare, chief executive of the P2P property platform.
This innovation is a sign that IFISA managers are optimistic about the future. But what does that future look like for the retail investors for whom the IFISA was created?
Peer2Peer Finance News analysis has found that as well as delivering consistent, inflation-beating returns, another trend is emerging in the world of the IFISA. Several platforms have begun to increase their minimum investment threshold, and millions of retail investors risk being priced out of the market.
In 2020, Brits saved more money than usual, with Finder.com estimating that the average person was able to set aside £6,756.81 over the course of the year.
In December 2019, the Financial Conduct Authority (FCA) introduced tougher investor marketing restrictions on the P2P sector. Under the new rules, investors had to be categorised as high-net-worth individuals (HNWIs), sophisticated investors, those receiving certified financial advice or restricted retail investors. Restricted retail investors were told to put no more than 10 per cent of their investment portfolio into P2P.
Read more: In fashion! The best P2P lending platforms for your IFISA
With this in mind, the average Brit could have invested no more than £675.68 into an IFISA during the 2020/21 tax year.
Of the 39 IFISAs open to retail investors this year, 14 have a minimum investment threshold of £1,000 or higher, making them out of reach to a first-time retail investor.
There are concerns that some IFISA managers may be exclusively targeting HNWIs and leaving yield-starved retail investors out in the cold.
Lee Birkett, chief executive of JustUs, is just one industry stakeholder who has noticed this trend. He reveals that 90 per cent of lender capital at his platform comes from the top 10 per cent of investors.
“It’d be the same with anyone else,” he says.
“The uptake of lower ticket investments is diminishing. The days of someone just putting £100 a month away on a P2P platform are probably gone.
“It’s now an asset class for the affluent which is a shame. The average retail investor can invest in the sector but would have to go hunting for it.”
Relendex has stopped marketing its IFISA to retail investors, blaming the 2019 post-implementation review for making it too expensive.
“Competing for ISA funds in ISA season was always costly as every ISA provider is competing for advertising space,” says Paul Sonabend, executive chairman at Relendex.
“However, since December 2019 it has been far more costly as one pays for clicks/eyeballs/readers and if a large proportion of the audience is restricted from investing then that makes it far more expensive to acquire the proportion that can invest. This is not financially viable.”
Yet, others dispute this and point out it is still possible to market to retail investors within the current rules.
“I don’t understand why someone will say that,” says Ben Shaw, chief executive of HNW Lending.
“You use virtually the same marketing and different picture but ultimately in the same format, the regulatory guys look at it once.”
Read more: ISA season: Rising inflation bolsters case for IFISAs
According to Birkett, the move to HNWIs goes hand in hand with proposed regulatory changes.
He says JustUs will not target retail money this year as it will potentially not be cost effective under new proposed regulations.
In January 2022, the FCA published a consultation paper on strengthening financial promotion rules for high-risk investments, including P2P lending.
The regulator is planning to ban the promotion of investor incentives, such as new joiner or refer-a-friend bonuses, to improve risk warnings on ads and to strengthen appropriateness tests by, for example, removing the ease of retakes, which would make it more difficult for providers to market to restricted retail investors.
This is coupled with a Treasury consultation on the financial promotion exemptions for certified HNWIs, sophisticated investors and self-certified sophisticated investors in December 2021.
It proposed amending the criteria for self-certification, suggesting alternative tests and placing a greater degree of responsibility on firms to ensure individuals meet the criteria to be deemed a HNWI or sophisticated investor.
Birkett points out that the time and effort to onboard a customer that invests £100 is the same as that for a lender investing £500,000 so it is not a cost-effective use of resources and thus the platform will not market to retail investors.
Despite this, he adds that the platform will remain open to retail money, retaining its £100 minimum investment threshold.
“We all had a big meeting and won’t target retail money this year at the moment, the reason being the government is being so negative about the IFISA and P2P in general and in this environment it’s a counter-productive use of resources,” Birkett says.
“The new proposals (from the FCA) basically kill the marketing of the retail IFISA. We’re not shutting off to retail, we just won’t be allocating resources and spending money on marketing.”
However, Abundance’s Davis says the FCA’s proposals are “workable”, and he is not seeing it as a step change that will stop providers being able to market their IFISA.
“Besides one or two very specific ideas from the FCA, most proposals are workable and we’re not seeing it as a step change, but we look forward to working with the regulator to make sure what’s implemented is possible,” he says.
Read more: HMRC ramps up ISA audits
“It’s a tightening of the rules but not a massive change. These changes don’t increase those restrictions they just make sure the people that do invest understand the risks. We’re not talking as we did last year about bans on specific products, we’re talking about increasing checks and balances in the process.”
Besides new regulations and the trend towards HNWIs, several platforms have exited the P2P sector and closed to retail investment, leaving fewer IFISA options for the everyday investor.
Over the last year, Zopa and Lending Works have announced their P2P exits, The House Crowd went into administration and Funding Circle’s IFISA currently remains closed to retail investment.
However, as well as closures there have been new entrants. Sourced Capital is resuming its IFISA offering again after becoming directly authorised by the FCA and acquiring Peer Funding, and Lendwise launched its education-backed IFISA in January. Peer2Peer Finance News is aware of at least two other IFISA launches planned for this year.
Seasoned IFISA investors seem keen to keep using the tax wrapper, even if it means shopping around for a new provider. Many P2P platforms have reported transfer-ins from the likes of Zopa and RateSetter, alongside the usual transfers from stocks and shares and cash ISAs.
“We have seen a 10 times (plus) increase in ISA transfer-ins this tax year already,” says Atuksha Poonwassie, managing director of Simple Crowdfunding.
“Investors are looking for a good home for their ISA and we are fortunate to be in a position to provide a viable alternative.”
During the 2019/20 tax year, IFISA deposits officially hit £1bn, with 126,000 accounts across the UK. When the next dataset is released by HMRC, the IFISA market is expected to have grown even larger, with an increasing number of high-value accounts.
When it was launched in 2016, the IFISA was hailed as a solution for jaded savers and investors who wanted to invest in British properties, businesses and consumer loans while making inflation-beating returns. Six years later, the IFISA has done exactly that.
As platforms finesse their offerings and target more HNWIs, lets hope that retail investors aren’t left behind.
Read more: Viva la IFISA! Returns outperform FTSE over four years