Peer-to-Peer Lending (P2P) is becoming an even more attractive investment option with the introduction of the new Innovative Finance ISA (IFISA). The ‘Peer-to-Peer ISA’, as some are calling it, will encourage existing P2P investors, who may have only tested the waters with small deposits, to invest more with a government policy adding some relative comfort. Novice, or new, P2P investors may be enticed by the tax efficiency provided by the Innovative Finance ISA on their yearly allowance. Encouraging signs for peer-to-peer lending, but how is the industry, and indeed the platforms, preparing for this big move?
‘The Innovative Finance ISA dedicated to peer-to-peer lending, is a game changer for millions of Brits who have suffered from poor returns since the financial crash. It signals that P2P lending has become a mainstream way for people to invest for their futures.’
Giles Andrews, Zopa Founder and CEO
What is an ISA?
An ISA, or Individual Savings Account, is an account that gives tax relief on interest earned up to a certain amount of saved or invested funds. This means one does not pay tax on the interest they earn. ISAs are sometimes referred to as ISA wrappers.
The HMRC has set out basic rules that govern ISAs. Each year a new allowance of money is allocated, which can be held in an existing or new ISA. From, April – April, 2015/2016, the maximum allowance of deposited funds is set at £15,240, effectively providing tax relief on any interest earned from these funds. It is important to note that ISA allowances can be accumulated over the years – built up – and spread amongst ISAs however the holder deems appropriate. Funds can also be transferred between ISAs, but there has been adaptation to fit the IFISA, as is explained further below. Also, we must be aware, once funds are withdrawn from an ISA the account holder loses the allowance and associated tax relief, for example:
£10k invested – £5k withdrawn – £5,240 max. can be invested to achieve £15,240 allowance.
There are two ISA types currently available and people are free to allocate their allowance between the two ISA types:
Cash ISA: Savers do not pay tax on the interest earned on the cash saved in this account. This is unlike a normal Savings Account, which is taxed 20%.
Stocks & Shares ISA: Invest in funds, bonds and shares in companies within this account. Like cash, if an investor invests outside an ISA it is their obligation to declare and pay their tax on interest earned.
Innovative Finance ISA (IFISA) headlines
It was announced in the summer of 2015 that ISAs are to be revamped and the good news is the changes are positive for peer-to-peer lending. After a period of applied pressure and eventual consultation, the Government announced the Innovative Finance ISA in their Summer 2015 budget. Here are the headlines from the announcement:
- 6th April 2016, IFISA arrives
- £15,240 allowance to be spread between the three available ISAs. Account holder chooses the spread
- Peer-to-peer platforms can act as ISA Providers, sometimes known as ISA Plan Managers without legally owning or co-owning the loans
- ISA transfers and withdrawals adapted to fit illiquid nature of P2P (Explained below)
How does the IFISA work?
The basic rules of ISAs apply for the IFISA. However, new rules have been introduced to accommodate the different nature of peer-to-peer investments. These rules and guidelines are yet to be determined but largely relate to transferring between ISAs and withdrawing from an IFISA.
ISA transfer adaptation for IFISA
Currently, the ISA allowance can be split between different ISAs, and this is set to continue.
There are, however, some nuances in P2P lending that add some complexity to the situation. Generally, peer-to-peer platforms offer early access to an investor’s money, however it is dependent on new investors (lenders) coming to the platform and buying the loan. The illiquid nature of peer-to-peer investments creates problems when transferring between ISAs. ISA standards have been adapted to accommodate the lack of liquidity in the peer-to-peer lending industry: invested funds, including interest earned, can’t simply be extracted on a whim.
With Cash and Stocks & Shares ISAs, the ISA provider must facilitate the withdrawal of cash within 30 days. As P2P products are considered relatively illiquid the 30-day withdrawal timeline has been elevated for the new IFISA, so that a new P2P investor can be sourced to purchase the loan, transforming the asset to cash so it can be transferred.
Innovative Finance ISA providers
Presently, an investor may only open an IFISA with a P2P platform, and not an existing ISA manager. Some investment platforms, like Stockbroker stalwart Tilney Bestinvest, have declared that they will not be offering the Innovative Finance ISA anyway, but how are other investment platforms gearing up for this change? That remains to be seen.
Also, and to be absolutely clear, if a P2P investor takes out an IFISA with a platform, Zopa for example, they will not be able to hold other P2P investments in the same account.
Impact on FinTech
With the introduction of the Innovative Finance ISA in April 2016, financial media outlets are being outspoken about the affect (good and bad) that it will have on peer-to-peer lending and FinTech more generally.
The FT published stats gathered by Consumer Intelligence in 2015 relating to ISA and the changes in regulation, here are their findings:
- 1 in 5 of 1,020 UK adults say they will save in an ISA henceforth
- 89% claim they will seek to take advantage of the changes in regulation
- 405,000 new peer-to-peer investors expected with introduction of IFISA
On the other side of the coin, we have the reluctance of some existing ISA providers and investment manager giants to offer the IFISA amongst their product set (regardless of the current restriction on who can offer the IFISA). Several in the industry still view peer-to-peer lending as a risky asset class. The more versed will be aware that peer-to-peer lending allows investors to ‘do it yourself’ perhaps eliminating the need for an Advisor? The assessment is still fair, P2P lending is a young industry and requires an educated approach.
However, with the government on-board and the FCA imposing their will effectively, the industry is growing in confidence as are its early adopters.