‘IFISAs aren’t the only ISAs that carry risks for investors’
Proplend chief executive Brian Bartaby has highlighted misconceptions about the risks of investing in Innovative Finance ISAs (IFISAs) versus other types of ISA.
He said some media reports claim only IFISAs carry the risk of the investor losing money because they are not covered by the Financial Services Compensation Scheme (FSCS), but this is not strictly accurate.
“A common theme seems to be stating that the key difference between IFISAs and other ISAs (cash and stocks and shares) are that IFISAs are not covered by FSCS,” Bartaby wrote in a post on LinkedIn.
Read more: Where should you put your IFISA money this ISA season?
“They then follow up stating [that] if the borrower you lent money to via an IFISA defaults on their loan, you may receive only part or none of your money back. This is factually correct, but it’s not related to whether the IFISA is FSCS backed or not.”
He said that while stocks and shares ISAs are covered by FSCS, that does not cover an investor if they purchase a share, it goes down in value and they make a trading loss.
“ISA eligible stocks and shares investments go up and down in value all day every day,” he added. “Some ISA eligible stocks and shares have seen their value drop nearly 90 per cent in the past financial year but FSCS doesn’t cover those investors’ losses.”
FSCS does not cover investors for trading or investment losses in either stocks and shares ISAs or IFISAs, he said.
Read more: How liquid are IFISAs?
Bartaby’s comments come after the City regulator tightened its rules on the promotion of high-risk investment products to consumers, including P2P lending.
Platforms now have to put stronger risk warnings on their websites, telling consumers that P2P is a high-risk investment and they should not invest unless they are prepared to lose money.
Investor incentives have been banned and platforms had to introduce stronger appropriateness tests.
Read more: ISA season: Savings rates versus IFISAs