InvestmentsMay 9 2017

What you need to know about the IFISA

  • To understand what an IFISA is
  • To learn how it differs from other Isas.
  • To gain an understanding of how to advise on the IFISA
  • To understand what an IFISA is
  • To learn how it differs from other Isas.
  • To gain an understanding of how to advise on the IFISA
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CPD
Approx.30min
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CPD
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CPD
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What you need to know about the IFISA
It’s important to understand the type of security held, and where the crowdfunding investor ranks in the order of repayments should things go wrong.

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. 

The capital invested onto the platform is lent to borrowers. This loan may be in the form of Consumer Credit Act regulated loans to consumers, for car purchase or home improvements, or to individuals for property development or residential or buy-to-let mortgage lending, or to businesses as small business loans or for larger capital projects. 

Much is made of whether the loans to which investors apply their capital are secured or unsecured. However, there is a more important issue for investors and their advisers to understand. 

Some business models aggregate the capital of hundreds of investors to provide pools of capital to fund unsecured personal loans. The terms of these loans, as with any other personal loan application, depend on loan purpose and the credit history of the borrowers.

The various options are visible on web aggregator services and are often cheaper than other personal loans currently available in the market, as the electronic interface and automated processing takes many traditional business costs out of the equation. 

Such loans are regulated under the Consumer Credit Act and borrowers are, as with any other personal loan, committed to pay an agreed sum each month for a set term, comprising a fixed rate of interest and return of capital.

If that borrower defaults on their loan then the provider will take action to ensure repayment, although the loan account may be beyond repair and eventually written off. 

Providers who receive their share of interest and capital repayment behind individual investors are typically bearing a larger share of the project’s risk.

Compare this with the situation where an investor’s capital is applied to one project where interest is due during the term of the loan and capital only repaid at the end of the agreement.

As with all other forms of debt-based investing, it’s important to understand the type of security held, and where the crowdfunding investor ranks in the order of repayments should things go wrong.

While there may be security, you need to ask whether this is over fixed or floating assets and whether any other lender has a prior charge on those assets. 

Pooling

Where capital is applied to a pool of borrowers, as with other forms of pooled investments, the failure of one account will have a smaller effect on the outcome of one individual’s investment.

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