The following article is taken from Investor Chronicle where Intelligent Partnership was featured in. Click on this link to read the full article.

Peer-to-peer (P2P) lending, whereby platforms bring together people looking for a loan and investors looking for a decent rate of interest, is growing in popularity. And on 6 April this year the government introduced a new category of individual saving account (Isa) to allow investors to hold the money they have lent money via P2P platforms within this wrapper, and so receive tax-free interest on their loans. The investment scope of the Innovative Finance Isa (Ifisa) was further broadened as of 1 November, so investors can also hold crowd-funded debt securities such as bonds within it.

This means investors can in theory split their annual Isa allowance – which for the current tax year is £15,240 – across three categories: cash, stocks and shares, and innovative finance. They could also transfer their existing cash and stocks-and-shares Isas into an Ifisa.

The main attraction of opening an Ifisa is the rates on offer via P2P lending, with platforms advertising returns of about between 3 and 5 per cent. But an Ifisa should be seen as an investment rather than savings account because it is a much riskier proposition than cash. As you are lending money out, there is always the risk of borrower default and the prospect you could lose your money. Furthermore, peer-to-peer loans within an Ifisa are not protected by the Financial Services Compensation Scheme (FSCS) – unlike cash or regulated investments such as unit trusts and open-ended investment companies (Oeics). With investments, for example, the FSCS will cover up to £50,000 per person per company for claims against companies declared in default since 1 January 2010. And for cash deposits it will pay out £75,000 per person per firm for claims against firms declared in default since 3 July 2015.

“By investing in an Innovative Finance Isa people can benefit from high interest rates and receive their interest tax-free,” says Patrick Connolly, certified financial planner at Chase de Vere. “This could be a significant benefit in a low interest rate environment, especially for those who are already utilising their personal savings allowance.”

Under the personal savings allowance, basic-rate taxpayers will be able to earn £1,000 interest a year with no tax and higher-rate taxpayers will be able to earn £500 interest with no tax, from cash savings, certain bond investments and peer-to-peer loans.

“Those prepared to accept the risks could consider peer-to-peer, but at most it should only account for a small proportion of a portfolio which should be far more heavily focused on other assets such as equities, fixed-interest and property, and some cash savings, which are protected by the FSCS,” adds Mr Connolly.

Because peer-to-peer loans are not covered by FSCS protection, Mr Connolly does not currently recommend the Ifisa to his clients and he isn’t alone among financial advisers, you know that in these cases Things were great, until they weren’t. Research conducted in March by Met Life ahead of the Ifisa launch found just 12 per cent of financial advisers would invest their own money in it.

However, for those who understand and are capable of taking the risks, the Ifisa could be attractive, says Julia Groves, partner and head of crowdfunding at Downing.

She says: “I think the Ifisa will be a very popular addition whether it’s for an investor who wants to diversify their portfolio, take a bit of a risk with their money to beat the returns they can get on savings, or have something that’s uncorrelated and asset-backed.”

Ifisa investment options:

There are two main assets that you can hold within the Ifisa – peer-to-peer loans or crowd-funded bonds and debentures.

Different platforms offer loans to specific types of borrowers. For example, Funding Circle only deals with businesses, Landbay focuses on the buy-to-let sector, while Zopa and Lending Works facilitate personal loans to individuals. Other platforms, such as RateSetter, take a broad-brush approach by lending to individuals, businesses and property developers.

Since the start of this month bonds issued by charities and crowd-funded debt securities issued by companies, known as crowd bonds, have been eligible for inclusion in the Ifisa. Crowd bonds allow investors to lend to UK businesses via bonds predominantly secured against the company’s operational assets, arguably making them lower risk than unsecured P2P loans.

But you cannot shelter shares gained through equity crowdfunding platforms in an Ifisa. As equity crowdfunding allows individuals to invest in early-stage unlisted companies in exchange for shares, it is generally a much riskier investment choice.

“Online equity crowdfunding is excluded from the Ifisa, which is probably right because that’s a very risky activity, but some of these debt-based securities can be good investments for certain investors,” says Daniel Kiernan, research director at Intelligent Partnership.

He particularly likes the crowd-funded debt securities offered by Abundance. This platform allows investors to invest directly in projects, often within the renewable energy sector via debentures over a term of 15 to 20 years. It advertises interest return rates of 6 to 9 per cent.

Ifisa providers

Abundance is one of only a small number of providers currently offering the Ifisa, so investors have a very limited choice. This is because many P2P lending platforms are still in the process of getting the full authorisation they need to offer the Ifisa from the Financial Conduct Authority (FCA). The P2P industry has been regulated by the FCA since April 2014, but providers were only given interim permissions, not full authorisation. However when previous Chancellor George Osborne first announced the Ifisa in 2015, he stipulated that companies would need full FCA authorisation to offer it.

Seventeen companies are authorised to offer the Ifisa. But only one of the eight members of the peer2peer Finance Association have authorisation, and these include some of the UK’s largest lenders, such as Zopa and Funding Circle.

Following its recent authorisation, Lending Works expects to start offering its Ifisa – which will feature personal P2P loans – in January 2017.

One of the main reasons the authorisation process has taken longer than many platforms expected is due to the various complexities and range of business models within the sector.

Nick Harding, chief executive officer of Lending Works, says: “Many people think peer-to-peer lending is a small, niche sector, but actually it touches almost every area of finance including property, small-to-medium enterprises and invoice financing, so actually it’s very, very broad as a sector.”

Ms Groves’ firm, Downing, has received FCA authorisation and is planning to launch an Ifisa offering crowd bonds in January 2017.

“As the industry has evolved lots of different things have been developed, for sensible reasons, but there is a lack of clarity about what is covered by P2P regulation and what is leaning into bank- or fund-like activity,” she says. “The really simple pure P2P platforms are getting authorised. [It’s taking longer] for providers that have slightly more sophisticated or evolved models where they maybe have institutional money or provision funds. A more sophisticated model means you have to apply for additional permissions.”