More work to be done on IFISA reform

Kuflink has called for more work to be done to improve access to the Innovative Finance ISA (IFISA), as new rules broaden the scope of the tax-efficient investment wrapper.

From 5 April 2024, IFISA legislation has been changed to allow investors to open more than one IFISA with a new provider per year, in a reversal of the previous rule. Investments in open-ended property funds and Long-Term Asset Funds (LTAFs) have also now been added to the IFISA remit.

Narinder Khattoare (pictured), chief executive of Kuflink, has welcomed the newly-adopted changes to the IFISA offering, but believes that there is still a lot of untapped potential in the IFISA market.

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“Its good to see that the ISA has been extended and that investors get more of a tax efficient wrapper to put into their savings,” said Khattoare.

“But we think there is more that needs to be done in the alternative space to encourage investment. Most people still don’t know about the alternatives to cash ISAs, where rates are still quite low.

“By comparison, property-backed IFISAs target much higher rates, and the investments are secured.”

Kuflink has offered a property-backed IFISA since 2017, and has had more than £92m invested with zero losses to date. At present, the platform is offering a two year IFISA with returns of up to 10.06 per cent; a three year IFISA with returns of up to 8.66 per cent; and a five year IFISA with returns of up to 8.05 per cent.

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The platform’s investors have been effusive in their praise of Kuflink online, with more than 1,000 users giving the platform an ‘excellent’ score on TrustPilot.

“Our investors like that they can see where their money is diversified, across which loans and locations across the UK,” says Khattoare.

“We provide a personal service unlike some of our competitors, so they always have a person they can talk to as and when they need to. We also have a high street presence so people can come in and talk to us in our office.”

Kuflink’s IFISA has evolved over the years as regulation and legislation has changed, but the security element has remained the same.

“The only thing that has changed with us is the number of years people can lock their money away for,” says Khattoare.

“Pooled auto-investments can now range from two, three and five years, while our select IFISA wrapper allows investors to put money into individual deals.”

Yet despite the clear opportunities and growth of the IFISA market, a lack of government support and ongoing marketing restrictions have kept IFISA investment volumes relatively low across the UK.

During the 2021/22 tax year (the most recently-available data) just £144m was invested into IFISAs, and just 17,000 new accounts
were opened. This compares with 7.1 million cash ISA accounts, and 3.9 million stocks and shares ISAs.

Khattoare is among those industry leaders who believes that the IFISA should be much more popular among discerning investors by now, many of whom have never heard of the product.

“There needs to be more IFISA education and awareness from the nationals,” he says.

“Peoples’ default mode is to use a tier 1 or tier 2 bank but get lower returns. Most people are reluctant to go outside of these banks due to a lack of knowledge and awareness.

“The government could do more if they really wanted to help the alternative sector and UK-based businesses by bringing out a bigger ISA wrapper in the alternative space so investors can diversify their savings from the high street banks.”

According to research by Alternative Credit Investor, the average IFISA has returned an average of between seven and nine per cent each year since the tax-wrapper was launched in 2016. This is a remarkably consistent record when compared with stocks and shares ISAs, and considerably higher than the average returns offered by cash ISAs.

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Khattoare says that Kuflink will never be the platform offering the highest returns on IFISAs because its priority is risk management, and minimising the possibility of borrower defaults. This strategy has clearly paid off to date.

“Our rates are obviously dependent on the Bank of England’s Monetary Policy Committee decisions and market conditions, but there is also an element of what our competitors are doing,” says Khattoare.

“We are never going to be the lender that charges the highest rates to borrowers or offers the highest return to investors, but we have a good track record with people providing very good feedback via TrustPilot and we listen to feedback from all of our investors.

“Our investors have told us that they like our rates, they like the offer of auto and select accounts, and they are very satisfied with our terms.”

However, Khattoare still sees limitations around the IFISA market. He points out that the process of transferring ISAs is still very slow, while the £20,000 annual ISA investment limit is too low.

“If I were chancellor, I would up the wrapper amount significantly so more people could save in a more tax efficient way,” says Khattoare, adding that the ideal ISA limit should be closer to £35,000 rather than the current £20,000.

“I feel that more people would take advantage of the ISA and diversify more of their funds if there was a higher limit,” he adds.

“The transfer process should be digitalised and that’s something I would make mandatory across the sector within the next 18 months.”

This year, Khattoare does not expect to see much of an increase in IFISA inflows, although this may change if the updated IFISA rules grab the attention of the media and the wider investment community. With the addition of open-ended property funds and LTAFs, more brokers are expected to look at the IFISA for the first time, and this could lead to an influx of interest in the tax wrapper.

As one of the earliest IFISA managers, Kuflink has a long and impressive track record of delivering IFISA returns, but Khattoare is aware that the current limitations of the IFISA market could hinder future growth.

“It’s harder for newer investors to get in due to the marketing restrictions required to stay compliant with the Financial Conduct Authority,” he says.

“This market can only significantly grow if some of the mainstream press pick it up and the government pushes this more – I just don’t see either of those things happening any time soon.”