Advisers and ISAs

Will financial advisers drive the next phase of growth for the Innovative Finance ISA? Hannah Smith reports

THE INNOVATIVE Finance ISA (IFISA) has been slow out of the starting blocks since its 2016 launch. But with growing investor awareness of the product, it is finally gaining traction, boasting £1bn in assets under management last year. To get to the next stage of growth, the IFISA could use the support of financial advisers, but research suggests they haven’t embraced P2P as warmly as the industry might have liked.

Intelligent Partnership, which provides research to advisers on the alternative investment sector, will soon publish a survey of more than 50 advisers on their perceptions of P2P and the IFISA. The findings, seen by Peer2Peer Finance News, reveal that less than 20 per cent of advisers feel ‘very familiar’ with P2P, while 15 per cent had not heard of the IFISA at all.

Advisers are not obliged to consider P2P lending in their recommendations to clients, but P2P is undeniably a growing part of the investing landscape and some are taking an interest. “We know that there is a core audience of advisers that do use P2P, there is interest in it, but advisers do see hurdles,” says Intelligent Partnership’s research manager Lisa Best. “They think it is too risky or too difficult because it doesn’t fit into their standard risk profiling and due diligence box.”

She noted that the new Financial Conduct Authority (FCA) rules, which prevent retail investors putting more than 10 per cent of their investable assets in P2P, will present an opportunity for advisers. Around 43 per cent of independent financial advisers (IFA) surveyed said they expected their use of alternative finance to increase over the next two years.

No press is bad press

But there are some factors that have been putting them off, such as recent negative headlines for the industry. An FCA risk warning, a couple of firm failures and a mini-bond marketing ban have reflected badly on the IFISA. Intelligent Partnership asked IFAs if the failures of Lendy and London Capital & Finance had affected their view of alternative finance, and almost half said it had made them more cautious on the space.

Following the FCA’s retail marketing ban on mini-bonds, investment platform AJ Bell called for the IFISA to be scrapped “for the safety of savers”. Best thinks it is unfortunate that the mini-bonds scandal has engulfed the IFISA too: “The IFISA has been unfairly targeted through all this – it’s a shame it has been tarred the way it has as it can be a tax-efficient savings method which brings additional investor protections, but there are risks attached and those risks need to be considered.”

Read more: Three reasons Lendy’s collapse shouldn’t put you off investing in P2P loans

But, she adds, even negative publicity could have a positive effect in the end because it raises awareness of the sector. “No publicity is bad publicity,” she asserts. “On that basis, if the failures have raised awareness of the IFISA and new legislation means advisers become more comfortable with P2P, then those advisers worth their salt that do recommend P2P should seriously consider the tax advantages of putting it in an IFISA wrapper.”

Tighter regulation of P2P, meanwhile, could boost advisers’ confidence in the sector by making it more transparent and improving its reputation. But some advisers have also raised concerns the changes could slow growth in the sector, increase product costs and reduce returns.

The bigger picture To understand some IFAs’ reticence to embrace P2P, you need to look at the wider context in which advisers are operating. The failures of firms such as Harlequin, Keydata and Arch Cru are still painful memories for some advisers, while they remain under pressure to prove the suitability of every recommendation, and are naturally risk averse with their clients’ wealth.

“Some IFAs have been burnt by more esoteric investments in the past, so they are reticent to jump on the latest bandwagon,” comments Jake Wombwell-Povey, founder and chief commercial officer at Goji, a platform technology provider which offers IFISA administration. “It may give your client an extra one or two per cent return and a small element of diversification, but the advice risk is very high so would an adviser say you should stay in strategic bonds or stick your neck out?”

He thinks that there are “absolutely lots of benefits” to P2P, including the fact that it is uncorrelated to mainstream investments. However, he also notes that advisers must consider many other factors when making their investment decisions.

An untested concept?

While the familiarity of the ISA structure might have made P2P look more appealing to retail investors, not all IFAs have been swayed by the tax-efficient wrapper. “The ISA wrapper doesn’t really make any difference to my perception of P2P,” says Carl Roberts, managing director and chartered financial planner at RTS Financial Planning. “The biggest problem with P2P is the lack of investor protection and the fact it’s a concept that is untried and tested during a severe market downturn like 2008. I still feel there is also a lack of transparency when it comes to the underlying investments.

With so many providers popping up over the last few years, you wonder whether the FCA is on top of them all. “At the end of the day, the returns offered for the lower end of the risk scale just make you think ‘why bother’ and why not just put your money in ‘normal’ bank savings accounts or invest in equity funds?”

Tim Morris, an IFA at Russell & Co, says he would not recommend the IFISA because it could potentially “open the floodgates to unregulated investments that ‘a guy down the pub’ would likely be promoting. “If ever there should be a very clear risk warning and ‘caveat emptor’ applied, this is it,” he adds.

“Well done to the FCA on finally tightening up the rules, although I still think they need to do more.” Ricky Chan, director and chartered financial planner at IFS Wealth, has concerns around the lack of Financial Services Compensation Scheme protection for P2P investments, and potential risks including a lack of liquidity, plus the fact it is still a relatively new asset class. “Clients interested in this can do their own research and do this direct, which is why greater FCA protection is needed,” he says.

Platforms develop IFA portals

To overcome some of these misgivings, P2P platforms such as RateSetter and Proplend are actively courting IFAs through adviser portals on their platforms and Intelligent Partnership predicts more will follow suit. Alexa McAlister, director of wealth investments at RateSetter, says the platform is attracting more and more advisers.

“The level of interest among advisers has been growing recently, particularly those who are looking for a product to deliver steady and consistent returns,” she explains. “We already have advised money investing with RateSetter and we have exciting plans to broaden access to more advisers.” Octopus Choice serves advised clients as a significant part of its business, with more than 1,000 advisers registered on its platform.

The platform’s head Charlie Taylor said he welcomes increased regulation of the sector as it may boost its appeal. “My hope is that greater transparency across the sector will give investors more confidence when selecting a P2P platform, whether in an IFISA or otherwise,” he comments.

Although Octopus Choice is predicting lower IFISA sales across the industry as a whole in the upcoming ISA season, the firm is expecting sales through its own channels to grow. “I’d expect IFISA uptake to be lower than last year across the market,” says Taylor.

“Marketing for IFISAs will be scrutinised much more closely, and I would imagine that many platforms will spend less too. However, because Octopus is predominantly focused on advised clients, we are less reliant on direct-to-consumer marketing, so we expect to see some growth in IFISA inflows.”

A push for better engagement

One thing the P2P industry is really good at is engagement, and this could drive the future success of the IFISA, even with some of the headwinds it faces. Wombwell-Povey noted that the IFISA has proven popular as something separate from cash, equities and bonds, which meets different investor needs.

“There is now close to £1bn in IFISAs, and there are more P2P loans and bonds held in ISAs than there are government bonds,” he says. “That tells you that retail investors are engaging more with P2P than they are with gilts.”

With the right risk controls in place, and proper education about P2P lending, there’s no reason why people shouldn’t invest in it through an IFISA, he argues, adding the industry is up to the challenge. “I don’t think P2P can ever be accused of not engaging with investors,” he says. Best, too, predicts that P2P platforms will step up their efforts to engage advisers and overcome their objections, while bridging the education gap on the IFISA.

“More advisers will engage, slowly, as more platforms reach out to them once the FCA’s 10 per cent rule bites,” she states. “Hopefully new regulations will provide advisers with greater comfort about what actually goes on in P2P as it can seem a bit of a black box.

All of that is quite positive for the adviser marketplace, but it could be a slow burn, it could take some time for engagement on both sides to really kick in.” No doubt P2P platforms will be working hard to engage the adviser community as they look to drive growth in the coming ISA season and beyond.