The IFISA is growing up. Kathryn Gaw investigates the evolution of the tax-free wrapper and what this means for platforms and investors…
WHEN THE Innovative Finance ISA (IFISA) first launched, it was hailed as a game changer for the then-nascent peer-to-peer lending sector. With this shiny new tax-free investment product, surely retail investors would be quick to realise the benefits of P2P lending?
Fast forward four years and P2P lending is an established part of the investment landscape, with more than £1bn invested in IFISA accounts. But the role of the IFISA has changed.
The introduction of new regulations last year and an influx of institutional investment means that platforms are no longer reliant on large numbers of retail investors to grow their brand. ThinCats and Landbay have both stopped accepting new retail investment and are focusing solely on institutional investors going forward.
Landbay closed its IFISA in December 2019 and refunded all of its IFISA investors; while a ThinCats representative told Peer2Peer Finance News that “no new IFISAs can be opened and we cannot accept any ISA transfers from other ISA managers.”
Other platforms have repositioned their IFISA offerings as a tax-efficient add-on, rather than their star product. LandlordInvest’s managing director Filip Karadaghi told Peer2Peer Finance News that his IFISA is “not the priority that it once was”, as the P2P property platform focuses on institutional funds.
“We were one of the first platforms to offer the IFISA,” he says. “But now it is less of a strategic goal. We are looking to attract institutional funds, although we will still offer our IFISA product to retail investors.”
Meanwhile, Paul Sonabend, commercial director of Relendex, predicted that this ISA season will see “less IFISA joiners than could have been anticipated,” although he added that the quality of IFISA investors will be better as they now have a better understanding of the product.
Just because the IFISA is no longer the focus of platforms’ attention, doesn’t mean it is becoming less important. Instead, the IFISA’s rapid evolution is a sign of maturity in the P2P sector. No longer are platforms racing to win over new retail investors – now they have an established user base of loyal investors.
Furthermore, as the P2P sector has begun to attract a range of different types of investors – both retail and institutional investors, as well as independent financial advisers (IFAs), sophisticated investors, and high-net-worth individuals (HNWIs) – this has naturally led to a shift in the way that the IFISA is used and marketed.
Lisa Best, research manager at Intelligent Partnership, believes that the IFISA is a “no brainer” for sophisticated investors, HNWIs and advised investors.
“If you put £50,000 into P2P lending because you decide that it works for you as a sophisticated investor or because your IFA told you, then there is no reason why the first £20,000 shouldn’t be invested in an IFISA,” she says.
This may explain why so many platforms have been courting the adviser community of late.
RateSetter and Proplend have both launched dedicated portals for financial advisers, while Octopus Choice has been almost exclusively targeting the IFA market since it launched in 2016. However, in off-record conversations, several industry experts have told Peer2Peer Finance News that there is still a sense of mistrust between the adviser community and P2P platforms.
Some platforms feel that they have survived thus far without substantial IFA money, so why should they spend time and money chasing them? Meanwhile, most IFAs take a conservative approach to portfolio management and are in no rush to add a relatively new asset class to their portfolios.
The IFISA may prove to be the perfect way to introduce the IFA community to the world of P2P. A regulated, tax-free product which offers inflation-beating returns is an easy sell to any type of investor. And as Best points out: “It’s not like IFISAs are the very first ISAs that have risk attached to them. Stocks and shares ISAs can have much higher risks attached.”
Another selling point for IFISA newcomers is the fact that the P2P sector has just adopted some sweeping regulatory changes, including marketing restrictions and appropriateness tests for investors. While it’s no secret that most platforms found it a challenge to apply these new regulations within their existing business model, the benefits are already being seen.
“The new regulations give further comfort to potential investors that the P2P market is approved by the Financial Conduct Authority (FCA) and HMRC,” says Stuart Law, chief executive of Assetz Capital.
“The FCA confirmation that 10 per cent of all retail investors’ assets could be invested in P2P means that more than £50bn of the £500bn of ISA money could still move over to P2P in due course.
“Given that the IFISA is still a relatively new element of the ISA offering from HMRC, we don’t see any negative effect on the horizon as savvy investors are still looking to maximise their returns with ISAs outside of the traditional cash and stocks and shares versions.”
Sonabend says that the regulatory changes will mean that Relendex’s marketing approach will be evolving.
“Our lenders appreciate the ability to be able to take advantage of the IFISA as part of their investment strategy,” he says.
“We are confident that once the public realises that those companies that have survived the regulatory changes are soundly run and providing consistently superior returns, the IFISA will come into its own.
“We certainly anticipate that it will be not only relevant but also a play a vital part in the democratisation of savings.”
This democratisation will likely lead to an even more diverse investor base, where HNWIs and students can invest on the same terms, accessing the same tax-free benefits through the same P2P platform.
“We’ve seen some companies bringing in people who invest a small amount and accumulate a small amount in their IFISA accounts,” says Best.
“Younger investors like the look of P2P. They like that it’s sort of alternative and they can choose where their investment goes. It’s still an interesting route, especially because it's online. I think that’s a potentially important audience, especially when it comes to the treatment of inter-generational wealth and the passing down of money through inheritance.”
This diverse demographic can already be seen in the minimum investments set by different platforms. EasyMoney has set a minimum investment threshold of £10,000 for its IFISA account – a clear signal that their products were intended for a sophisticated and/or institutional investor base.
By contrast, Assetz Capital has a minimum threshold of just £1 – a reflection of its commitment to retail investors. “We are targeting savvy retail and up,” explains Law. “People who are looking to get a better balance of risk/reward and avoid capital erosion on their funds in traditional investment/savings offerings.”
Karadaghi describes the IFISA as being “as relevant as ever” and adds that it is now “just an extension of what we do – it just adds a tax-free element.”
This repositioning of the IFISA as just one cog in the P2P machine lends an element of familiarity to the tax-free wrapper, which tracks with the evolving role of the IFISA – and of P2P lending in general – over the past few years. A FTSE investor is not attracted to the stock market because of the existence of the stocks and shares ISA – that is simply a useful tax-efficient bonus.
A few years ago, the IFISA may have been held up as a beacon to attract newcomers to the P2P market, but now it is the P2P market that attracts investors of all stripes, and the existence of the IFISA is almost taken for granted.
In the four years since the IFISA first launched, the P2P sector has grown, diversified and tightened up its regulations, opening the door to a whole new wave of investors and advocates along the way.
P2P lending is not just for retail investors, nor institutional investors. It is for everyone – from the very wealthy to the novice investor, and everyone in between. And while the IFISA may have been initially viewed as a way to attract more retail investors to the sector, it has now proven to be as versatile as a stocks and shares ISA – a simple tax shelter for existing and emerging investors who don’t need to be convinced of the benefits of P2P lending.
March 24, 2020