The Summer Budget 2015 will introduce a National Living wage, in addition to cutting benefits and increasing the Nil Rate Band. However, possibly the most exciting development from the Summer Budget 2015 was the introduction of the “Innovative Finance” ISA (IFISA).
The Chancellor stated “The Government will introduce the Innovative Finance ISA, for loans arranged via a peer-to-peer platform, from 6 April 2016 and has published a public consultation on whether to extend the list of ISA eligible investments to include debt securities and equity offered via a crowdfunding platform”. The inclusion of peer-to-peer loans in ISAs has huge implications for the alternative finance sector.
The details
The plan for peer-to-peer loans (with a chance for equity and debt securities to be included later) to be held within an ISA was first introduced in the Budget 2014, but a consultation wasn’t launched until October 2014. The response from the Treasury recommended three main policy changes,
The first was the creation of a third, separate ISA. Currently ISAs can be split into two categories: a cash ISA or stocks and share ISA. There were debates about whether peer-to-peer loans would form part of the stocks and shares ISA but a new ISA has been created to accommodate peer-to-peer loans, however the annual allowance across all three will remain at £15,000.
The second policy change was to existing ISA rules that does not require platforms to legally own or co-own the loans, in order to enable peer-to-peer platforms to act as ISA managers.
Lastly, present regulations require cash or stocks and shares ISAs to allow investors to withdraw their money within 30 days. This will not apply to “Innovative Finance” ISAs, and withdraw timings will be determined in the terms and agreement section of each ISA.
Peer-to-peer lending has increased substantially in the past several years, with a cumulative total of almost £4 billion according to the Liberum AltFi Volume Index UK. With the Financial Conduct Authority (FCA) finding that the funds held in easy access savings accounts in 2013 earned a rate equal to, or even less than, the Bank of England base rate of 0.5%, attractive returns of above 5% will now become essentially tax-free, many investors may start to consider peer-to-peer investments. Investors can also benefit from the launch of the new Personal Savings Allowance of £1,000 (£500 for higher rate tax payers).
Some Considerations
Even though peer-to-peer lending is seen as riskier than mainstream investments, the FCA has already taken authorisation over peer-to-peer platforms, with firms operating under interim permissions at the moment, and due to become fully regulated in the coming months.
We encourage financial institutions to begin talking to their borrowers that have important loan covenants tied to revenue, operating income, or net income to see whether it would be appropriate to modify any of those covenants to reflect the impact of ASC 606 changes.
You can read up on all the FCA regulations for peer-to-peer platforms in PS14/4, which can be downloaded here.
In summary, regulations include:
- Contingency plans in place that will continue to allow loan repayments in the event of a platform meltdown
- The ability for investors to cancel a loan without penalty and reason within 14 business days if firms do not provide access to a secondary market
- Minimum prudential requirements
- Client money rules
- And reporting their financial position, client money holdings, complaints and loans arranged to the FCA
It is also important to note that investments in peer-to-peer loans are not covered by the Financial Services Compensation Scheme (FSCS). However, there is still a chance the FCA will include peer-to-peer lending in the future with the FCA due to review the regulatory framework in 2016, but for now investors simply must be aware that their capital is at risk.
With a large class of current ISA investors that are risk averse and have little capacity for loss and the inherent risk that peer-to-peer loans bear, advisers must tread with caution and keep the best interest of their clients in mind before suggesting peer-to-peer loans through an ISA.