10 April, 2016

Innovative Finance ISA Will Be a Slow Burner

The Innovative Finance ISA (IFISA) is the biggest milestone in peer-to-peer lending since the industry’s formation in 2005. This new ISA will allow retail investors to earn interest from their peer-to-peer investments tax-free up to the annual ISA allowance of £15,240.

Innovative Finance ISA Build Up

There has been a general air of excitement surrounding the P2P industry at the prospect of the IF ISA launching on the 6th April. Many large investment firms, however, ignored the introduction of the IF ISA, claiming they wouldn’t offer an IFISA to their client-base, allowing them to hold risk-adjusted assets. While other firms made it clear that they must take notice of peer-to-peer lending, and will be looking into  a P2P offering in due course. One thing that investors should be remindful of, is that P2P lending is not a savings product, and while the IFISA may sit alongside the cash and stocks & shares ISAs, it is not covered by the Financial Services Compensation Scheme. Investors are risking their capital.

IFISA Launch

Prior to the new ISA product launching on the market, the HMRC consulted with P2P lending platforms in order to determine instructions that would be laid out in the annual ISA Guidelines which are issued to ISA plan managers. Up until April, however, many major P2P lenders were still unsure of what would be included.

The lack of information and uncertainty around how the IFISA will work has left retail investors and the p2P platforms themselves a little confused. The complexity principally lies with the fact P2P lending is a relatively new asset class, where risk-adjusted returns are afforded to investors who, in return, bear the full credit risk of their loans. P2P is not a traditional asset class and there is no FSCS coverage. The regulator must ensure it is diligent in providing authorisation to a P2P platform, to ensure an investor is fully aware of the risks involved, including platform security, defaults, illiquidity and so on.

In saying that, for those who have the risk appetite, holding a P2P asset in a tax-efficient wrapper could be a useful tool for diversification in their portfolio. Finding IFISA choice will be the issue…

Industry Reaction

Needless to say, the 6th of April was a bit of an anti-climax, with the likes of Zopa and RateSetter writing to their investors assuring them their respective IFISA products will be available soon. We spoke with Bruce Davis of Abundance Generation who was satisfied with the interest in the IFISA, expecting to see further IFISAs opened as the months pass. We also spoke with industry news site AltFi’s Ryan Weeks, who had this to say:

The launch of the IFISA – whilst undoubtedly a major milestone in the development of the P2P space – will not change the face of the industry overnight. The vast majority of peer-to-peer lenders have not yet been fully authorised, including the “big three”. As one platform representative said to me, the IFISA is not a “one off” (event) – “it’s a multi-year transition”


The Innovative Finance ISA will be a slow burner. It will take time for the regulator to fully appreciate the disparate and complex nature of P2P, so they must take each platform as it comes. This framework is healthy and the time it will take to authorise the most mainstream platforms will reflect the strict governance P2P lending UK operates within.