PFS urges regulator to look at Isa marketing

PFS urges regulator to look at Isa marketing

The Personal Finance Society has urged the regulator to look at the promotion of Innovative Finance Isas so they will not "exploit behavioural biases" in consumers.

The call was made by the professional body yesterday (September 9) in light of promises made by the Financial Conduct Authority last week to review the products, which allow peer-to-peer lending investments, as part of its response to the failure of mini-bond provider London Capital & Finance.

The PFS urged product providers, advisers and the regulator to make sure the Isas are designed and advertised in a way that will not mislead consumers by promising high returns without them understanding the risks posed.

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Keith Richards, chief executive of the Personal Finance Society, said: "Innovative Finance Isas pose a very old problem – products that promise high and very specific returns, for example, 7.5 per cent, but leave capital at risk.

"People register the high return, but don’t read the warnings about capital at risk. The same was true of split capital investment trusts and precipice bonds in the 2000s.

"Because people see an interest rate in the same format as a deposit account, they don’t realise that their capital is not protected by the Financial Services Compensation Scheme in the same way a deposit account would be."

Mr Richards said behavioural bias tends to mean that the markets reward poor behaviour in the short term but suggested signposting consumers towards professional advisers was a "powerful way" to combat this.

Charles Randell, chairman of the FCA, last week said the FCA had seen "very risky and sometimes fraudulent" investments being accepted into Innovative Finance Isas and warned consumers were confused when "one part of the state encourages an investment, while another public authority says it’s highly risky". 

Mr Randell said any reviews in this area must take a broad view to prevent the "skimmers and scammers" from resurfacing in some other part of the financial services landscape. 

Ricky Chan, director at IFS Wealth & Pensions, said he agreed with Mr Richards and warned many retail clients unknowingly believed Innovative Finance Isas were similar to deposit based savings.

Mr Chan said he has seen advertisements comparing deposit savings with Innovative Finance Isa interest rates offered.

He added: "I feel that many do not understand the inherent risks involved, namely that their capital is at risk as the individuals or companies could default on their loans, liquidity risks as capital cannot be accessed easily and is usually tied into the duration of the loan and there they lack the FSCS protection offered on deposit based savings or investments and pensions.

"P2P lending is also relatively new and has had a relatively smooth ride through the benign economic landscape – when the next economic downturn hits many Innovative Finance Isa and P2P investors will be surprised and disappointed.

"Certainly signposting investors for advice would help. But I’d go further and say that I don’t think Innovative Finance Isas should be advertised to retail clients or those not classed as sophisticated investors."