New Isa could flop as advisers plan to steer clear

New Isa could flop as advisers plan to steer clear

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.