The HMRC publishes ISA statistics every August, relating to the previous tax year. The alternative lending industry cry success immediately after any Innovative Finance ISA (IFISA) figures are released, while mainstream financial media have reported the arrival of the IFISA as a damp squib. Prior to the launch of the IFISA GoCompare guesstimated that demand for the IFISA would exceed two million accounts per year.
With this context we’re keen to investigate the success of the IFISA.
Below are the HMRC figures that have been released covering the past two tax years.
With respect to the size of the peer to peer lending (P2P) market, IFISA data presented by the HMRC is low (£4.2bn was invested through UK P2P platforms in 2017, calendar year). Although this £4.2bn figure includes institutional capital, the amount of funds held within ISAs is still likely to be significantly lower than the amount of funds held within general investment accounts.
This HMRC data cannot, however, be relied upon to paint a complete picture of the uptake of the IFISA due to the following reasons:
- HMRC statistics do not account for ISA transfers
- Investors can only subscribe new money to one IFISA per year. For investors with multiple P2P accounts, only one can be wrapped in an IFISA.
- P2P platforms launched their ISAs sporadically, between April 2016 and May 18
It’s important to dig deeper to evaluate the success of the IFISA.
With the exception of P2P lender, Lendy, all major P2P platforms have now launched an IFISA – most notably Zopa, RateSetter and Funding Circle, who collectively occupy an 80% market share were late to launch their respective IFISAs. We’ve counted at least 36 IFISA products being available on the market as shown on the Orca IFISA Tracker.
Regulatory delays meant the launch of IFISAs by P2P platforms spanned across the past 30 months. ISA investing is heavily seasonal around the tax-year-end so platforms who have marketed their ISA over two tax years have seen a significant benefit in terms of IFISA traction.
Crowdstacker and Crowd2Fund were first to market, gaining traction from early adopters. When Lending Works launched its IFISA in February 2017 it hit its £1m borrower demand limit within 24 hours of launch due to ‘unbelievable demand’.
Although investors may only subscribe new ISA money (£20,000 limit across all ISA types) to one IFISA in a given tax year, they can open multiple IFISAs and transfer old money into multiple IFISAs in the same tax year. The importance of ISA transfers was highlighted in a PeertoPeer Finance News article stating that a third of all IFISA money comes from ISA transfers. Lending Works has reported an ISA transfer as high as £154,000 in May 17, while Landbay stated average ISA transfers are £39,000.
Consistent with investor feedback that Orca has received, it is likely that existing P2P investors favour investing through an ISA in the long term and are likely to convert non-ISA accounts with new subscription money as time passes; essentially, opening one IFISA per year and slowly converting non-ISA accounts across. It’s important to note that investors are further taking advantage of the personal tax allowance, where they are not required to pay tax on upto £1,000 of interest earned. A £20,000 investment, yielding 5%, would still fit within this limit.
The Funding Circle IPO prospectus showed that the average account size of ISAs is roughly double that of general investment accounts. Furthermore, the average account balance has risen considerably quicker.
Source: Funding Circle IPO registration document
The IFISA has not grown to GoCompare’s estimated 2 million accounts, however the user benefit of the IFISA is clear. One hypothesis is that growth in the IFISA has largely come from existing P2P investors converting their non- ISA accounts. Although this is good, it would be great to see that ‘wall’ of new investors enter the market.
One major issue is that investors are not able to hold multiple direct P2P investments within one IFISA. This means building a diversified portfolio is difficult for mainstream investors. This clears a space for an aggregator such as Orca to offer an IFISA that allows investors to invest across multiple P2P investments. Watch this space…