When Isas were introduced on 6 April 1999, replacing Personal Equity Plans (Peps) and Tax Exempt Special Savings Accounts (Tessas), the creation of one tax efficient savings account from two different ones seemed simple.
Today it is not so simple, as the rules regarding qualifying investments and account management have changed dramatically and the range of Isa options has increased significantly.
We now have the following:
- Cash Isa
- Help to Buy Isa
- Stocks and Shares Isa
- Innovative Finance Isa
- Junior Isa
- Lifetime Isa
The introduction of the Innovative Finance Isa (IFISA) on 6 April 2016 was the least publicised of all launches, not least because there were few firms actually authorised to offer IFISAs on that date.
By contrast, at the time of writing, there are 30 IFISA plan managers, but not all of them are open for business.
In order for providers to be authorised by Her Majesty’s Revenue & Customs (HMRC) as an Isa plan manager, they must be fully authorised by the Financial Conduct Authority (FCA).
In the case of the IFISA, at the time of the launch, firms were required to be authorised to ‘operate an electronic system in relation to lending’.
What were the rules?
In November 2016 the rules for IFISA qualifying investments were modified to incorporate ‘debt-based securities’.
Investment-based, reward-based and donation-based crowdfunding are not eligible for IFISA investments.
At launch, the IFISA enabled tax efficient loan-based crowdfunding investments, also known as Peer-to-Peer (or P2P) lenders.
However, at that point, the majority of loan-based crowdfunding providers, including the largest and longest-standing in the market, were operating under interim permissions.
Prior to 1 April 2014, firms operating in this market were licensed by the Office of Fair Trading (OFT).
When regulation was transferred to the FCA, firms already operating loan-based crowdfunding platforms could apply for interim permission to continue conducting the activity, which allowed them to remain in the market, authorised but not subject to the full regulatory regime, while their application for full authorisation was in progress.
In contrast, new firms entering the market after April 2014 needed to secure full authorisation from the FCA before operating in this market.
Before looking at the IFISA rules, it’s important to know how loan-based crowdfunding works.
How to review products
With around 60 product providers and many different propositions, it is important to understand which type of investments you are reviewing, and the specific advantages and disadvantages of each, before advising your clients on which are more or less suitable for their investment objectives, risk profile and capacity for loss.
Crowdfunding involves “the crowd”, a large number of individuals, investing capital onto electronic platforms which then distribute funds to borrowers.
The regulator is in no doubt that, in all cases, those placing their money onto these platforms are investors, not lenders, and that this terminology makes clearer the nature of the risks to which the investor could be exposed.