Is an Isa the right wrapper for P2P lending?

Emma Ann Hughes

Emma Ann Hughes

Earlier this week Lord Adair Turner said he strongly suspected the losses on peer to peer lending which will emerge within the next five to 10 years will make “the worst bankers look like absolute lending geniuses”.

His comments came just as P2P lenders started to unveil details of their Innovative Finance Isas and just days after the FSA’s successor, the Financial Conduct Authority, came out with plans for how these products should be sold.

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The regulator proposed advisers should not be able to charge commission on P2P lending agreements.

Consumers looking to use the incoming Innovative Finance Isa for certain P2P lending agreements should receive information on issues, including the potential tax disadvantages of the loan not being repaid.

It also proposed to “add further guidance on the information firms should provide to consumers, which will apply when P2P agreements are to be held in an Innovative Finance Isa wrapper”.

As FTAdviser has regularly reported in recent months, some advisers have concerns about this fledgling sector.

Fewer than one in five financial advisers would invest, or have already invested, their own money into P2P lending schemes, research from Yorkshire Building Society showed. Their poll of 101 financial advisers last May also found that over 80 per cent believe customers do not understand P2P lending rules.

I think advisers may be right to have concerns about the Innovative Finance Isa, but let me make myself clear; I am not slating such lending or the new Isas.

In response to Lord Turner’s comments, Christine Farnish, independent chairman of the Peer to Peer Finance Association, pointed out since the industry began, default on loans are low, measuring between 2 to 3 per cent.

She said members of her association only lend to creditworthy consumers and established small- and medium-sized enterprises. “Strict credit underwriting rules apply to all our members and this should not be confused with higher-risk forms of crowdfunding or lending to sub-prime customers.”

I agree with Ms Farnish, but I wonder whether putting this type of borrowing inside an Isa wrapper is the equivalent of putting a jet plane’s engine inside the body of a Robin Reliant?

It reminds me of a trip to the park last summer.

One of my friend’s children wanted a Magnum ice cream. Once the child finished it she was handed the wrapper and realised it wasn’t your usual Magnum ice cream - it was champagne flavoured.

I fear her look of horror as she realised her five-year-old had been devouring bubbly (albeit at 0.5 per cent and only in the coating of the ice cream) may be replicated by the faces of Innovative Isa investors if P2P is put to a severe test and default rates increase.