There has been a lot of speculation about the future of the Innovative Finance ISA (IF ISA) after it was mixed up in the unlisted bond debacle of London Capital and Finance (LCF).
Most recently, it’s been reported that both the FCA and the FSCS have grave concerns about the tax wrapper and what can be held in it.
Four of the officers of LCF are currently under investigation by the Serious Fraud Office, and while not yet convicted of anything, this is obviously alarming. We don’t yet know what issues are being looked at. But we do know that, according to LCF’s marketing, their bond was eligible to be held within an IF ISA, when, in reality, it was not.
Another reality is that LCF was both FCA authorised and HMRC approved as an IF ISA manager. So it is perhaps worth asking if the problem here is not with the IF ISA wrapper, but the lack of oversight by those two bodies, whose authorisation and approval would surely have given investors greater confidence in investing with LCF.
An IF ISA is certainly not a risk free savings vehicle, but it didn’t set this precedent. Stocks and shares ISAs have been around for years and the risks attached to them include those derived from shares listed on junior exchanges such as AIM. So, for some time, ISAs have been both investing and savings vehicles.
In the case of the IF ISA, as well as the same tax benefits as a cash ISA, it offers other important advantages, namely a number of consumer protections that are required for IF ISA qualification. Only peer to peer (P2P) lending products and unlisted corporate bonds or loan notes can be held within an IF ISA. But to be eligible, a P2P loan must be authorised by a fully FCA authorised platform, while a bond or loan must be facilitated by a party with the FCA permission to arrange deals in investments and it must be transferable. Not only does this represent scrutinisation by a party that has been judged by the FCA as responsible and worthy of its authorisation, but it gives some opportunity for liquidity.
The point that’s being missed here is that, with or without the IF ISA, unlisted corporate bonds and P2P investments will continue to happen. But, the IF ISA, if properly regulated, offers an incentive to product providers to build more consumer protections into their offers as well as a way for investors to identify those with greater oversight and, in theory, better protections for them.
It’s also important to bear in mind that neither P2P nor the IF ISA are akin to savings accounts, in that they inherently involve some risk. Yet, at a time when P2P regulations are being tightened and clarity of information and disclosure are now at a premium, where is the sense in throwing the baby out with the bathwater?
With the right firms being allowed to run these alternative finance investments and IF ISAs, why can’t the IF ISA become a similar kitemark to advance assurance in the world of Enterprise Investment Schemes? If you invest outside offers that qualify for them, while there are no guarantees, you may well be taking greater risk than you need to.