Regulation Stymies Innovative Finance ISA Providers
As the 2015-6 ISA season draws to a close, those hoping to take early advantage when the Innovative Finance ISA (IFISA) is launched on 6th April may find themselves lacking in choice as only eight of the smaller P2P lenders have been given full regulatory approval to launch the new products.
With just three days to go the UK financial regulator, the Financial Conduct Authority (FCA), has yet to authorise any of the leading peer-to-peer lending platforms to launch an IFISA product by the proposed launch date, and platforms have been unable to set the expectations of their users.
Members of industry trade body the P2P Finance Association, and the largest of the P2P lenders accounting for 90% of the market – Funding Circle, Zopa, RateSetter, Thin Cats, Lendinvest and Lending Works – have all admitted that they will not be in a position to launch at the start of the tax year.
The IFISA has been widely hailed as an inventive addition to the ISA family and recognition of the growth in both P2P lending and equity crowdfunding, but the FCA has confirmed that it is still reviewing 86 applications from would-be product providers, whilst 44 have ‘interim permission’.
‘the FCA has confirmed that it is still reviewing 86 applications from would-be product providers’
P2P lending platforms – which disintermediate the lending process by matching borrowers and lenders – have become increasingly popular in the low interest environment, as it is often possible to achieve interest rates significantly higher than are on offer on the high street, with lenders given the ability to control the level of risk they are exposed to, or spread it across a large number of borrowers.
The regulatory hurdle is as a result of the fact that in order to offer an IFISA, issuers have to be fully regulated, whereas it is possible to operate a P2P lending platform with restricted or no regulation.
Some would-be issuers, possibly out of necessity, are outwardly relaxed about the fact they will miss the April 6th date, pointing to the traditional last minute rush associated with ‘ISA season’; others see the opportunity to take first mover advantage, believing that the typically mass affluent P2P investor is looking for whole year tax benefits and unlikely to be caught running for last orders.
‘the typically mass affluent P2P investor is looking for whole year tax benefits’
Savers can only open an IFISA with one provider rather than splitting what will be a £20,000 annual allowance across several platforms and if investors belong to multiple P2P platforms, it would appear logical that they would open the new account with which ever was first to market.
The eight companies that will be ready for the off – EdAid, Go2Partners, Formax Credit, Crowdstacker, Resolution Compliance, Clasp Investments, Crowd2Fund, and Gracombex – are not yet household names, with activities including property lending and student finance.
There is some chagrin amongst those lenders that will not be ready for the off, and aware of criticism in certain circles, FCA states it had received ‘a lot of applications for firms wanting permission to operate a P2P platform’, adding ‘It is important that applications from firms wishing to be fully authorised are properly considered and that the firms meet rigorous statutory standards’.
The reason that established firms may seemingly have lost out to newer rival stems from the fact that in order to offer an IFISA, the platforms have to be appointed ‘ISA Plan Managers’ by HMRC, which is only granted with full Financial Conduct Authority; some of the issuers have been operating with temporary permissions since previous regulator the Office Of Fair Trading was taken over by the FCA in 2014.
Those contemplating P2P lending should certainly appreciate the sentiment expressed by the FCA, particularly in light of recent comments made by City grandee, Lord Adair Turner.
Turner said that he was concerned that no one was checking the ability of borrowers to repay the money they receive via P2P platforms, predicting that P2P loans could be the source of losses that would ‘make the worst bankers look like absolute lending geniuses’.
In the interim, a number of larger P2P lenders carry announcements of the IFISA on their websites, inviting would-be investors to register their interest in lieu of a product being made available.
Clearly it is important to get the basics right in terms of regulation, particularly in light of the fact that peer-to-peer lenders do not fall under the Financial Services Compensation Scheme (FSCS), which protects your money in the event a firm goes bust.
Kevin Caley, founder and chairman of ThinCats, said ‘2016 is going to be a landmark year for the peer to peer industry. The huge influx of ISA money will more than double the size of the market within a few months and make this unique asset class a must-have component of any well balanced investment portfolio’.