Innovative Finance ISA: The Future is Bright
Last week, the UK’s largest peer to peer lending (P2P) platform, Funding Circle, launched its Innovative Finance ISA (IFISA) to existing customers. The Funding Circle ISA is a landmark milestone for the platform, who recently surpassed £3 billion lent to businesses, according to Orca Analytics. With Zopa launching its IFISA earlier this summer and RateSetter announcing a February date for its launch, the “big three” P2P platforms – who account for almost 2/3 of the market by loan volumes – could all have IFISAs open to investors* by the end of the 2017-18 financial year. What’s more, the statistics being published in the press suggest the IFISA is on the brink of its watershed: RateSetter expects to raise £500 million in its first tax year and Funding Circle foresees “billions” being raised through its Funding Circle ISA.
Below we take a look back at the rise of the Innovative Finance ISA which has largely been under fire from the media since launching in April 2016, but now seems destined for a bright future.
*Zopa ISA and Funding Circle ISA are available to existing platform customers only, at present. The RateSetter ISA is expected to be open to existing customers at launch next year as well. These are short term access restrictions according to the P2P platforms.
Innovative Finance ISA was considered a “damp squib” at launch
The Innovative Finance ISA launched in April 2016. By the end of the 2016 calendar year, only two notable P2P lending platforms had IFISAs on the market: Crowdstacker and Crowd2Fund. The “lack of uptake” was heavily criticised by the media, and unjust questions asked of the regulator with respect to the delays to IFISAs entering the market; P2P platforms are required to gain full FCA authorisation in order to offer an ISA product; the majority were operating under interim permissions awaiting full authorisation by the start of 2017.
The dearth of IFISA products on the market was compounded by HMRC statistics released in August 2017, where it was unveiled that only 2,000 IF ISA accounts were opened in the 2016-17 tax year, equating to £17m of collective subscriptions. In the chart below, we can see (barely) that the Innovative Finance ISA sits atop the 2016-17 column where Cash ISA displays £39.2bn and Stocks & Shares, £22.3bn, respectfully.
Chart 1: Amount subscribed to Adult ISAs during the year, HMRC
An unfair perception?
The important point to draw attention to here is the date range. The stats were fairly damning, especially for an asset class which saw £3.2bn lent in 2016, and as much by Q3 2017 (at time of publishing the 2017 year-to-date UK market total lent stands at £4bn). However, there were only a handful of P2P platforms offering IF ISAs by the end of the 2016-17 tax year.
See table below highlighting the number of P2P platforms offering ISAs prior to the 2017-18 tax year starting.
|Lending Works||February 2017|
|Money & Co||March 2017|
Furthermore, when comparing against the cash ISA, it’s clear that, while the IF ISA is a minnow in comparison, the former ISA product has suffered a significant fall from previous tax year’s recordings: cash ISA amounts fell 33% from £58.7bn in 2015-16 tax year. This is a reflection of poor sentiment towards cash and also perhaps a reflection of the new Personal Savings Allowance which enables basic rate taxpayers to earn up to £1,000 in savings income tax-free; perhaps reducing the tax advantage of the ISA.
Innovative Finance ISA landscape is looking healthy
The IFISA market looks much better than it did at the turn of 2017. Now, investors can gain exposure to consumer-debt, business-debt or property-debt, shielding their returns in a tax-efficient ISA, and, depending on the investor’s preferred strategy, they can select a platform that offers a passive “auto-bid” or active “manual bid” strategy – Octopus Choice and Lending Works are the largest “autobid” lenders after Funding Circle and Zopa (whose respective ISAs are closed to new investors just now). This level of choice was not available until the 2017-18 tax year.
At the time of writing, there are 20 P2P lending platforms with Innovative Finance ISAs launched on the market, as recorded on the Orca Analytics ‘IF ISA Tracker’ page. This figure derives from monitoring the HMRC ISA authorised managers register and also communication from the platforms. At present, the total number of investment providers eligible to offer an IFISA by the HMRC stands at 61 (majority are investment managers not “P2P” platforms).
The future is bright for the Innovative Finance ISA
The question has forever been, “when will the biggest players launch an Innovative Finance ISA?”. Once the “big three” of Funding Circle, Zopa and RateSetter launch their ISA products, we’ll be able to accurately judge the popularity and long-term viability of the IFISA. Well, that’s perhaps unfair on the more modest sized platforms who have IFISAs on the market, such as Lending Works, who surpassed £1m worth of ISA subscriptions within 24 hours of launch and had to temporarily shutdown access, earlier this year. But, in reality, it is probably a fair representation of broad-market sentiment.
Now, however, we are seeing early effects of a major IFISA coming onto the market. Zopa, the second largest P2P lender and the first of the “big three” to launch its ISA product (summer 2017) has been closed to new investors since the start of 2017, but has originated 1/3 more capital this year than 2016 (£1bn 2017 v £688m 2016), and has seen strong appetite from its customer-base for the Zopa ISA; more than half of new investments have been through the ISA since its launch, according to Zopa’s CEO, Jaidev Janardana. More excitingly, Zopa expects to open its doors to new investors this month (December 2017).
Funding Circle, who launched the Funding Circle ISA to existing customers on 30th November had a sign up within 15 minutes, and expects “hundreds of millions of pounds” to be raised through the Funding Circle ISA, according to CEO Samir Desai in the FT.
RateSetter predicts £500m raised through the RateSetter ISA in its first tax year, once launched (anticipated February 2018).
Assetz Capital, one of the largest P2P lenders having originated £388m worth of loans, expects to launch its Assetz Capital ISA in the next couple of weeks (before end calendar year).
ThinCats, a manual-bid platform that provides exposure to business loans and has lent over £260m, has delayed its ISA launch but had it slated for December 2017.
Below we can see details of major P2P lending platforms ISA products, including their respective launch dates and customer availability.
|Platform||Launched / Expected Launch||Min. Investment||Interest Rate Range||Customer Availability|
|Zopa||June 2017||£1,000||3.7% - 4.5%||Existing customers only (available to new customers soon)|
|Funding Circle||November 2017||£1,000||4.8% - 7.5%||Existing customers only (currently)|
|Assetz Capital||December 2017 (expected)||£1||3.75% - 15.5%*||Existing and new customers|
|ThinCats||January 2018 (expected)**||£1,000||7% - 8.5%||Existing customers and registered interest users|
*All Assetz Capital products, including the manual bid product, will be eligible for the platform’s IFISA at launch. After launch, the manual bid product will not be eligible.
**ThinCats ISA was slated for launch by the end of 2017, however it is understood that customers who have registered interest in the ISA will be contacted in early 2018 with further information.
With hundreds of billions of pounds languishing in cash ISAs and a 33% drop in new money cash ISA subscriptions from 2015-16 to 2016-17, an Innovative Finance ISA may be a compelling alternative for investors. It’s important to remember that peer to peer lending is not a savings product, it is a credit asset which carries heightened risks, such as borrower default with no Financial Services Compensation Scheme coverage. Weighing P2P investments – held within a tax efficient IF ISA – within a diversified portfolio is encouraged. Having started very slowly, maybe 2018 will be the IFISA’s year? It’s looking promising.