Innovative Finance ISA Pros and Cons (IFISA)

This is a follow on article from this– so read that first before continuing below. I’ve copy/pasted one section below:

Innovative Finance ISA’s (IFISAs)- This enables you to invest in slightly “off piste” investment options like peer to peer finance etc, and keep the interest tax free

Pros: Can keep interest/returns from P2P (and other IFISA offered products) tax free, year on year.

Cons: Lots of the newer IFISA products haven’t been properly tested in adverse market conditions. P2P has had a lot of bad press recently. It maybe very difficult to get your money out (quickly or at all)

Introduction:

IFISA’s are quite a new feature from the UK Government- only launched back in April 2016- though there really weren’t many providers back then at all. Now though- there are tens of providers- and not all are in the peer to peer space as well.

Unlike cash ISA’s- your money is not guaranteed at all- either the returns, or the capital itself. In fact, you could even think that they are even more risky than investing in the stock market as you are relying on not just only the company that you have placed your money with- but also to the people you have loaned you money to as well. So, in effect, you are an extra step away from your money.

Pros:

IFISA’s seem to fill a gap in-between Cash ISAs that have (currently) very low interest rates- think 1%, and S&S ISAs which (long term) return approx 6%. IFISA providers tend to publish rates between 3-6% (And some even higher than this). Most IFISA providers are pretty up front with how much of a return you are likely to get from their platform. Just remember that this “headline” rate is pretty much the maximum rate that you could possibly get without any defaults or any other issues.

They don’t involve the normal banks that cash ISAs do- some people don’t trust banks, especially if they have previously been hit with overdraft charges etc. Bank accounts tend to need credit checks etc- though IFISA providers should still be doing the standard Know Your Customer (KYC) checks to prevent money laundering

You can help people/companies that wouldn’t be able to get loans/lending from normal sources like banks. There are ethical IFISA providers such as Tridos Bank & Abundance Investment if you want to ensure that your investments have good ethical basis.

Cons:

Analysing the risk of what your IFISA is invested in can be very difficult. Usually the IFISA provider will allow you to diversify your investment into multiple loans in order to spread the risk. This can make it even more difficult to try and assess the risk of your capital. Then you have the platform risk added on top- there have been a number of platform failures in the past 2 years. Whilst the FCA has authorised some firms- they do not hold FSCS protection once your money is loaned out.

Losses within IFISA’s cannot be offset against capital profits- this is due to the fact that it’s already within a tax-wrapper. This “feature” of the IFISA might be enough to put you totally off- if you have other capital gains.

	IFISA	Non-IFISA
Investment size	£10,000	£10,000
Loss	£2,000	£2,000
Offset against capital profits	£0	£2,000
End amount	£8,000	£10,000

Example if you had 20% defaults within an IFISA- and outside of one

Getting your money out of your IFISA might also be very difficult. Some providers do provide routes/ability to withdraw monies earlier than the deal/loan length that you originally signed up for. However, not all do, and there have been platforms that promised this “under normal conditions”- fundingcircle is currently taking over 6 months currently! This is very different to selling index funds which can be complete in hours at the very most!.

The returns that are advertised are certainly not guaranteed- so whilst your provider might say that you will get 6%- they will almost certainly say “up to 6%”. Some of the IFISA providers have been around for sometime now- like Zopa have been around since 2005- so they have a good idea of their default rates. However, loans and the people/companies that are taking these loans are consistently changing- which means that the default rate will also be changing. As an investor- you don’t see any of the data in regards to the likely default rate etc, so you are trusting the provider to give you estimates & keep you updated.

There are also possibly currency losses as well if you choose a platform that isn’t based in pounds- or your home currency. You can hedge against these if required- but as ISA’s tend to be a 5+ year investment, this is likely to be uneconomical to do so. So this is another risk you need to weigh up before you choose to invest.

My Experiences:

I started to dabble in IFISA’s way back in 2017 just after they were announced by the government. It took about a year before any of the providers that I was interested in opened up their IFISA offerings. One of the very first to do so (in my memory) was Zopa. They were, back in 2017, one of the biggest P2P providers- having been around since 2008 odd, and in fact I had a small balance with them since about 2009/2010.

Zopa:

My experience of Zopa is a pretty good one- the defaults have almost always stayed within their predictions. They have continued to change their product however- a big change from picking the people you want to loan to- to a very opaque process that involves picking from 3 different “levels” of product. There was quite a lot of discussion/feedback once Zopa had done this- but I actually think, long term, it’s done Zopa a massive favour. No longer can you lend huge amounts of money to a single person- you are forced to let Zopa manage the risk and divide the investment into much smaller chunks- usually just £10. This meant the defaults were split over a much wider number of investors- however, the amount a single investor would lose to defaults would actually decrease (if averages are all fair and all).

Zopa continues to innovate and change their product offering- a months ago I was offered the opportunity to test out their fixed saver product. It was only a trial, but I’m sure this product will be coming shortly. They also continue to make noise about a current account

Funding Secure:

Uffff, where do I even start with this one? Now in administration, I wish I’d never even heard of this outfit. It seems that the directors didn’t have a clue about what they were doing- allowing borrowers to continually make up excuses- rolling loans again and again. Basically written off all the money I had invested here- luckily it wasn’t that much- but do hope that I end up with at least something from the administration process

Assetzcapital:

I’ve held an account here for sometime- but only moved some of the funds into their IFISA in 2017. They replicated their “standard” accounts into the IFISA wrapper, so that was so comfort- rather than learning about new products etc. Overall, I’ve been pretty happy with how Assetzcapital has been run- though the withdrawal of the “green” & “great british” accounts means that you now either have to make manual loan decisions- or accept the lower 90 day accounts. This 90 day account is currently paying 5.75% though- and they generally have bonuses throughout the year as well. I have recently tested the withdrawal within the 90 day account and it was exactly on time with no issues at all.

PropertyMoose:

*Sigh* another P2P opportunity that hasn’t gone quiet as planned. Whilst not exactly in administration- their old owners/website has totally disappeared and has been acquired by another outfit. Previously offering the possibly of owning property with an investment of just £100- and returns of 5% + capital appreciation of property as well. Unfortunately this was just not realised by the team- property is rather difficult to manage, who knew! The idea was Property Moose would handle all the hard bits- buying properties, getting work done, and getting tenants in. Then, you would get the rent for the next 3/5 years, and at the end of this time, choose if you wanted to sell, or continue renting it out. Numerous losses on many of the properties meant a change of terms and conditions for investors- which still didn’t make it a profitable business.

Since it’s been taken on by a new company- it does seem like it’s making much better progress. Mainly this seems because it’s been driven by a single entity- using “at scale economies”. The end goal seems to register this as a REIT and get listed on the stock market- at least then it would be much easier to buy/sell out. I’m hopeful about this- but still wish I’d never put any investment into this if this was going to be the outcome.

Kuflink:

This is a pretty recent one for me- I got suckered into their bonus scheme (£50 bonus to deposit £500?- that’s a 10% return!), and then their refer a friend scheme was basically the same again. There have been some late payers for me, but everything seems to be accruing still- so this is definitely a wait and see for me at the moment.
If you want to try this yourself- use my referral link and you will also get a bonus.

Overall:

P2P is not for everybody, but I do think that it has it’s place within a mixed portfolio of assets. I’m currently withdrawing out of most of my P2P accounts and instead putting it into S&S- mostly because I understand better how these work than when I started with P2P. Though S&S are way more volatile, P2P has burnt me just a few too many times- though I do like the idea of fixed rate returns, I don’t think that they can be maintained over a long period. Most of the P2P providers mentioned here as still not profitable yet- surely at some point the investors in these platforms are going to expect their money back!