Advisers have said they are wary of recommending the new Innovative Finance Isas to clients because the peer-to-peer industry is not currently covered by the Financial Service Compensation Scheme.
The new Isa was given the green light by the government in July and is set to be introduced next April. It will mean loans through P2P platforms can be held within a tax efficient Isa wrapper.
Advisers, however, have told FTAdviser that they are cautious about the new product.
Claire Walsh, chartered financial planner at Brighton-based Aspect 8, said: “I am aware peer to peer has seen a lot of growth in recent years, but as peer to peer isn’t covered by the FSCS I am wary.
“When clients do ask about it and I explain, they mostly say they would rather keep their money in cash deposits or investments, which are covered by FSCS.”
She said the product appeals to those already invested in P2P schemes, adding that the new Isa is likely to attract people who would not seek financial advice and instead will see it as an alternative to cash savings.
“But arguably they are probably people who can least afford the risk,” Ms Walsh warned.
“Overall I don’t want to sound negative about P2P, as I think it is great to see further diversity. Also, the government is looking to extend the FSCS to cover P2P, so I watch the space with interest.”
Jason Hollands, managing director of business development at Tilney Bestinvest, said the firm has no plans to offer an Innovative Finance Isa and also warned that P2P loans are unsecured and not currently covered by the UK’s financial lifeboat scheme.
“P2P is rarely raised by clients and our focus is long-term investments, such as pensions and Isas, rather than cash alternatives,” he said. “The industry is still very young, with the world’s first P2P platform only launched to the public in 2005.”
He argued that no one really knows what the default rate for P2P loans could look like in a stressed economic environment, and suggested the government are perhaps underestimating the risks of bestowing the endorsement of Isa status on what he described as a “very nascent” industry.
“Bear in mind that the alternative investment market had to wait two decades to become permissible for inclusion in Isas. So, for now we are content to not rush into this area but will watch how the market develops.”
Darius McDermott, managing director of Chelsea Financial Services, also said his firm has no plans to offer the new Isa to clients, mainly because it will not be available on platform Cofunds.
He said ideally those who utilise the P2P Isa should be high net worth consumers, because the initiative is “more risky than many may think”, adding that very few of his clients have inquired about the new Isa.
Dan Farrow, director of Chelmsford-based SBN Wealth Management, said he is “steering well clear” of the Innovative Finance Isa, describing the risk as being “off the Richter scale”, as the rising interest rate environment and increasing defaults will be a challenge for the new scheme.
“I have a clientele of HNW investors, but they don’t look to me to get them into non-mainstream assets, they do this independently.”
Mr Farrow said these types of investments attract “yield hungry” and “disaffected” cash savers. “I don’t think it will flop, but it will be niche, and after a few years the market will be dominated by one or two players.”
But Danny Cox, a Chartered financial planner at Hargreaves Lansdown, said his firm is building a cash management marketplace for P2P, which it is aiming to launch next year.
“We haven’t released any other details at this stage,” he said. “It is highly unlikely advisers - and I mean all advisers not just HL advisers - will recommend P2P to their clients until they become more comfortable with the market and the risks.”
He stated that adviser firms are unlikely to have the skills in house to assess the suitability of the platform or do the necessary due diligence, adding that detailed third party research does not yet exist.
Mr Cox said typical Innovative Finance Isa clients are investors looking to diversify a small portion of their portfolio, and suggested money will move from cash into P2P investments as interest rates continue to disappoint.
“P2P is still relatively small but growing pretty fast. Its popularity will increase with the introduction into Isa, as this gives it additional credibility, and with new entrants coming into the market.
The government is currently consulting on whether investments into the new Isa product will include debt securities.
katherine.denham@ft.com
