Innovative Finance ISA: 'the big flood will come next year'
The chairman of Glentham Capital and CEO of peer-to-peer lending platform Money&Co. spoke fervently about the industry and the opportunity it presents investors to gain attractive, risk-adjusted interest rates. At the Cisi financial planning conference this week (4th Oct) Nicola Horlick referenced the Innovative Finance ISA as being the catalyst which could see P2P being adopted by the mainstream.
Why the P2P lending “flood”?
I think the pricing is to do with the lack of supply. I don’t see that changing. I don’t see banks rushing back into SME lending. It is about supply and demand. There is not much supply of debt available to small and medium-sized enterprises (SMEs).
Many observers may put the rise in popularity for an asset class such as peer-to-peer lending down to the high-yields the products provide, weighted against a high degree of risk. Horlick dismissed this unsophisticated observation, as there is inherently greater complexity to the products in comparison and the returns are an output of structured, secure debt lending. This, combined with a lack of lending to businesses, has allowed peer-to-peer lending UK to thrive amongst retail investors and SME borrowers (as well as other borrower types).
Innovative Finance ISA will encourage investment
Introduced April 6th of this year, the Innovative Finance ISA (IFISA) was touted as the Big Bang equivalent for peer-to-peer lending UK, propelling the industry into a mainstream asset class. Well, it didn’t quite achieve this off the bat, but it is certainly getting there.The IFISA allows retail investors to hold their peer-to-peer investments in a tax-efficient ISA wrapper, similar to a Stocks & Shares one where interest earned is sheltered from the tax-man! The Innovative Finance ISA will prove extremely effective in encouraging savers and investors to adopt an alternative investment such as P2P lending and achieve the best interest rates available without the volatility of the stock market. Horlick believes:
The big flood is going to come next year because very soon the big platforms will get approved and they will be able to offer the ISA.
She goes on to compound the benefits of the tax-efficient wrapper that will shield investments returning an industry average 5.5% p.a by saying:
We (Money&Co.) have an average gross yield of 9.1 per cent and we take a fee of 1 per cent. If you wrap that in an ISA that looks pretty attractive and the ISA allowance is rising again.
The ISA allowance will rise to £20,000 as of April 2017; an increase of almost £5,000 for savers to store in their ISA products.
Since its implementation earlier this year, there has only been a couple of platforms capable of offering the Innovative Finance ISA. A large queue has formed at the Financial Conduct Authority HQ, with P2P lending platforms awaiting authorisation, thus allowing them to offer IFISAs. This has meant big players like Zopa, Funding Circle and RateSetter are still not able to provide IFISAs!
This manual loan selection platform has seen almost half of recent investment across the platform come through their Crowdstacker IFISA according to CEO, Karteek Patel. Investors can invest in two asset-secured SME loans, currently.
Interest rate: 7% p.a
Security: all-asset debenture
Term: 3 years
Min. investment: £500
Account options: GIA, IFISA, SIPP, SSAS
Interest rate: 6.39% p.a (Max.)
Security: asset secured 70% LTV
Term: 12, 18 or 36 months
Min. investment: £1,000
Account options: GIA, IFISA, SIPP
Crowd2Fund has a multitude of investment products available including equities, bonds and P2P lending to UK SME businesses. This innovative platform allows investors to create a portfolio of investments through a sophisticated, self-directed investment strategy process. Investors can invest in opportunities ranging from Food & Drink to IT & Telecoms.
Interest rate: 8.7% APR
Security: personal guarantee
Term: 1-5 years
Min. investment: £250
Account options: GIA and IFISA
Horlick's optimism belies the media attention the IFISA has received over the past few months, as no new providers have launched the tax-efficient wrapper since April 6th . Her confidence, however, is not misplaced as the regulator works carefully to authorise platforms. This will enable them to apply for ISA manager status, paving the way for the Innovative Finance ISA. 2017 will be a very telling year for the P2P ISA product.