IFISA special report: Hidden treasures
Innovative Finance ISAs offer stellar returns away from the stock market, yet it has never been more difficult for retail investors to source and invest in the tax wrapper. Kathryn Gaw investigates…
For retail investors, the Innovative Finance ISA (IFISA) offers the best way to maximise peer-to-peer lending and crowdfunding returns. Yet accessing comprehensive information on the IFISA market is confusing to say the least.
Stringent regulations around marketing to retail investors have made it difficult for lenders to advertise the benefits of their IFISA products – including the market-beating returns that a diversified IFISA portfolio can deliver. Thus awareness of the IFISA among retail investors is still relatively low.
Even when a retail investor chooses to investigate the market, it can be difficult to know where to begin.
HMRC maintains a list of all ISA permissions, which provides a glimpse of the market in its current form. But this list doesn’t tell the whole story of the IFISA market.
Read more: Folk2Folk: Investors need to “get switched on” to the IFISA
For instance, it doesn’t include those P2P platforms which are using a principal company or a Platform as a Service (PaaS) to manage their IFISAs. This means that IFISA providers such as CrowdProperty – one of the largest P2P platforms in the UK – and Sourced Capital, winner of the Peer2Peer Finance Awards IFISA Provider of the Year award, are not on HMRC’s list.
Furthermore, not every company has chosen to use its IFISA permissions. Peer2Peer Finance News is aware of several share-dealing and boutique investment platforms which have maintained their IFISA permissions for the past few years while mulling a launch. At least two of these companies are planning to formally enter the IFISA market this year.
And then there are the companies which no longer operate in the retail investor space, for one reason or another.
For IFISA-curious investors, HMRC’s ISA list could raise more questions than answers.
Technically, there are 67 IFISA providers on the market, at least according to HMRC. But a closer look at the data finds that in fact, six of these companies are either in administration or winding down, leaving just 61 IFISA providers.
Of these 61, five (ArchOver, Assetz Capital, Fluro, Funding Circle and Lending Crowd) have left the retail P2P lending market and as such, their IFISAs are no longer available for investment. This leaves 56 IFISA providers.
Another 13 have not yet launched an IFISA product, despite holding IFISA permissions. This leaves 43 IFISA providers.
Read more: How liquid are IFISAs?
Six of the remaining 43 IFISA providers do not offer IFISAs of their own, but instead use their IFISA permissions as part of their PaaS offering.
That means that among the 67 IFISA providers listed by HMRC, just 37 are currently offering their own IFISA products to retail investors.
But even this figure does not tell the whole story. The average retail investor may struggle to afford the £10,000 minimum investment required by seven of these 37 available IFISAs. Another – Bramdean Asset Management – has a £1,000 minimum investment threshold but requires evidence that investors have £50,000 of investible wealth. This leaves just 29 platforms on the HMRC list which are actually available to the average retail investor.
However, this list does not include those IFISA providers who operate as appointed representatives of principal firms, or who use PaaS companies to manage their IFISAs. When these IFISA providers are factored in, the total number of IFISAs available to retail investors jumps to 41.
That’s a lot of research just to find out which IFISAs are available for investment.
Yet, for those investors who are prepared to put in the work, the rewards are clear.
As at the end of February 2023, a fully diversified IFISA portfolio which is spread across all 41 available IFISA providers would return an average of 8.83 per cent, according to the target returns stated for the 2022/23 tax year.
By comparison, at the end of February 2022, 39 IFISAs were open to retail investors, targeting average returns of 7.75 per cent.
Historical research by Peer2Peer Finance News has found that actual IFISA returns over the past five years have been remarkably consistent. By the end of the calendar year 2021, average IFISA yields were at 7.8 per cent, compared to nine per cent in both 2020 and 2019, and 8.73 per cent in 2018. This proves the stability of the asset class, even during times of extraordinary economic volatility.
So what can P2P platforms and other IFISA providers do to spread awareness of the IFISA and help more investors realise the benefits of the least well known ISA?
“It’s the responsibility of all stakeholders in the industry including the press, to promote the benefits of the IFISA, as we all want an industry that people trust,” says Filip Karadaghi, managing director of LandlordInvest.
“This would also lead to higher institutional participation and higher funding volumes through platforms.”
As it stands, it seems that in the current tax year, the majority of IFISA investments are being made by seasoned P2P investors who are transferring their existing funds from one platform to another.
The departure of former IFISA heavyweights such as Assetz Capital and Funding Circle has left millions of pounds of IFISA money in search of a new home, and platforms such as EasyMoney, Folk2Folk, Kuflink and Crowdstacker have all benefitted from the transferral of these funds.
Read more: ISA season: Where to find the highest IFISA returns
“Our IFISA inflows have been pretty steady compared with last year,” says Chris Brown, head of lending and operations at Unbolted. “We have seen a lot coming in from Lending Works [now renamed Fluro] and Funding Circle.”
Meanwhile, LandlordInvest’s Karadaghi said that his platform has seen “lots of transfers from other IFISA providers”.
“Mostly current customers but a few new ones too,” he added. “But ISA season is just starting and it tends to heat up in March.”
Crowdstacker’s Karteek Patel said that he has seen a “small increase” in IFISA inflows, but again noted that this was largely due to the departure of big players such as Funding Circle.
Anecdotally, these comments suggest that the 2022/23 IFISA market is largely made up of pre-existing IFISA funds being moved from one place than another, rather than an influx of new IFISA money. In the current high-inflation environment, many investors are desperate for the sort of returns that IFISAs can offer – if only they knew where to find them.
Some P2P stakeholders are blaming over-regulation for making the IFISA market less accessible to retail investors.
One platform chief told Peer2Peer Finance News that Financial Conduct Authority (FCA) regulations around so-called ‘high-risk’ investments and the new consumer duty have resulted in an IFISA market that is only available to those in the know or those with substantial wealth.
Read more: Investor incentives banned under new rules
“The FCA regulations have made the asset class available to the wealthy only which goes against the whole equitable concept of P2P,” said the platform chief, who spoke on condition of anonymity.
“There is very little we can do to encourage new investors as the new wealth warnings require us to say, ‘don’t invest unless you’re prepared to lose money’.”
Paul Sonabend, managing director of Relendex, believes that over-regulation has created an environment where IFISAs are “almost an irrelevance.”
“Given the FCA gated non-sophisticated retail investors from P2P, the IFISA is almost an irrelevance,” Sonabend said.
“From Relendex’s viewpoint it is a desirable product as our investors appreciate the tax advantages they gain on their ISAs. However, there is no point in marketing IFISAs on their own to retail clients, as most responses would be from ineligible clients.”
Over the past year, some IFISA providers have raised their minimum investment thresholds in response to regulatory requirements, effectively pricing average earners out of the IFISA market. This is a trend which seems set to continue.
During the 2020/21 tax year, more than £72bn was invested in ISA accounts, but IFISA volumes made up less than £1bn of this total amount. Investors are willing and able to invest in stocks and shares ISAs which come with a risk of capital loss, so clearly there is an appetite for taking on some risk in the search for better tax-free returns. The consistent track record of the IFISA should be enough to earn it a place in every diversified investor portfolio, but the message is clearly not reaching these investors.
Platforms may be stymied by regulatory marketing requirements, but Peer2Peer Finance News is not. Share this article along with our other IFISA reporting, and help us get this information in front of the retail investors who need it. Viva la IFISA!
