It’s been nearly two years since the government announced the introduction of the innovative finance Isa (IF Isa) as a tax-free wrapper for investing in such products as peer-to-peer (P2P) loans or equity crowdfunding. The-then chancellor, George Osborne, announced them in the 2015 Budget, and they were supposed to be available to savers from April 2106, but none had come to market by the launch date. There has been a small amount of progress since, but it’s been slow and choice is limited.
The state of the market
Before offering an IF Isa, each provider is vetted by both the Financial Conduct Authority (FCA), the UK financial services regulator, and HM Revenue & Customs (HMRC). At the time of writing, just 30 providers had been approved. Most of those are not likely to be available to the broader public, being hedge funds, private wealth managers and the like.
Surprisingly, the list doesn’t yet include many of the bigger players. There’s no Zopa – the granddaddy of P2P lending – no RateSetter, Funding Circle, Seedrs or ThinCats. Given that together Zopa, Funding Circle and RateSetter account for more than 40% of the market, these are startling omissions. The Peer-to-Peer Finance Association is concerned by the delay, saying the FCA has been sitting on applications for more than 18 months, according to the FT.
Many platforms are intending to offer IF Isas as soon as they can. Zopa says it is awaiting approval and its IF Isa is “ready to go”. RateSetter is “working with the FCA to secure full authorisation”, while Funding Circle is “working closely” with the FCA. Other platforms hoping to have IF Isas available before the 5 April deadline for the end of this tax year include the UK Bond Network and Folk2Folk. That said, since many people will have used up their Isa allowance this year, the providers’ focus must now be on the 2017/2018 tax year. Right now, there are just seven IF Isas available to invest in and it seems unlikely that will change much before April.
Abundance Investment allows you to invest in renewable energy projects, and aims to produce a return of 6%-9%. Abundance pays a rate of 2% on the uninvested cash in your Isa, but only until 31 May 2017. There are no fees to investors, and the minimum investment is £5. There are currently no new projects on the platform to invest in – you’re limited to what existing investors want to sell.
Crowd2Fund, Crowdstacker and LendingCrowd offer P2P loans to small businesses. Crowd2Fund claims an estimated return of 8.7% before fees (of 1%) and bad debts. Crowdstacker offers a return of up to 7%, with no fees. LendingCrowd offers a target rate of 6%: it has a minimum investment of £1,000 and a 1% withdrawal fee.
Finally, Landbay, LandlordInvest and Lending Works all offer property-based investments. Landbay offers an expected return of 3.75% with no fees and a minimum investment of £5,000. LandlordInvest offers “up to 12%” with a minimum of £100. Lending Works offers up to 4.5% over five years, with a minimum investment of £10.
Understand the risks of IF Isas
These investments are much less liquid than cash Isas, or even than a traditional stocks and shares Isa. Many investments are for a fixed period of time, and getting your money out before the loans mature could prove tricky. There are limited “secondary markets” for selling your investments. Many platforms will offer to match you with an incoming investor, but this is not guaranteed.
Risks are also much greater than with cash. While there have been no high-profile cases of investors losing money through P2P lending yet, if the economy turns down and borrowers find it difficult to repay loans, investors will start to lose money. Some platforms run their own “provision funds” that aim to cover losses, but these could be depleted in tough times. In contrast to a cash Isa, where up to £85,000 is protected under the Financial Services Compensation Scheme (FSCS), you have no protection with P2P products.
However, there is one further way to invest in alternative finance within an Isa: buying an alternative-finance investment trust that you can hold in a normal stocks and shares Isa. Options include the UK’s Funding Circle SME Income Fund (LSE: FCIF), the US-focused P2P Global Investments (LSE: P2P) and VPC Speciality Lending Investments (LSE: VSL). Liquidity is better with these listed funds, which can be bought and sold on the stockmarket as required, but there’s no FSCS guarantee and they could see losses in an economic downturn.