Friday HighlightMar 15 2019

Three reasons the Innovative Finance Isa might be suitable for clients

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Three reasons the Innovative Finance Isa might be suitable for clients

I can already sense the scepticism some of you will be feeling as you scan this article.  

And given past problems with new kids on the investment block, no one would blame advisers if they approach this product with a fair degree of caution: the Ifisa wrapper is only three years old, even if the loans and bonds you can hold in it have been around much longer.

But the latest figures from the CCAF 5th UK Alternative Finance Industry report show that people are ploughing around £5bn a year into peer-to-peer (P2P) and crowd lending platforms.

In the post-financial crisis era, many clients are increasingly concerned – and want a say – in where and how their money is being invested.

This growing popularity could well mean that clients start asking their advisers about this area of the market. And, with the spotlight on client suitability making it more important than ever to assess a wide variety of investment options for clients, Ifisa-eligible loans and bonds should at least be on the table.  

It is not always straightforward for advisers to know if and where these newer types of investment fit into the picture with their clients.

To help, here are three situations where the Ifisa may be relevant for a client.

Pension savers restricted by annual and/or lifetime limits

Cuts to pension allowances have left many of the mass affluent population looking for alternative, tax-efficient, wealth accumulation routes.

With the potential to earn returns of 4 per cent to 8 per cent per annum tax-free, according to 'An adviser's guide to the Innovative Finance Isa' by Intelligent Partnership, the Ifisa definitely warrants some attention here. 

Any client investing through an Ifisa must be able to commit to tying up money for the term of the loan or bond, although this is likely to be less of a concern for pension savers who are not in the later stages of accumulation.

Discerning investors

In the post-financial crisis era, many clients are increasingly concerned – and want a say – in where and how their money is being invested.

Transparency, choice and engagement are key when it comes to selecting investments for this type of client.

Alternative finance can provide the opportunity to invest in projects or companies they believe can make a positive impact in the world.  

Diversifying away from volatile markets 

Amid the current stormy markets, chances are you may be planning to create some important diversification for clients who have a significant portfolio of stocks and shares held in an Isa wrapper and/or a self-invested personal pension.

Selling some shares in order to transfer cash into an Ifisa wrapper would avoid capital gains tax (CGT) and allow lending to companies and projects that are not directly correlated to the volatility of stock markets. 

Assessing risk on an individual P2P loan can be nigh on impossible for an investor and not much easier for a professional adviser, so many P2P platforms are making life easier by using their own rules and algorithms to select the loans on behalf of lenders.

Some 97 per cent of lending, according to the CCAF 4th UK Alternative Finance Industry report, is ‘auto select’ which eliminates the need for advisers to pick loans, but leaves them with the challenge of assessing platform risk.

Just how are those loans selected and priced? P2P platforms that operate in this way have no Financial Services Compensation Scheme cover of any kind (although some will have provision funds).

But there is another way. Similar to P2P loans, Ifisa-eligible unlisted corporate bonds do not have FSCS deposit cover, but do have FSCS investment cover.

This means that regulated platforms offering these bonds are responsible for producing an official offer document, signed off under section 21 of FSMA, which presents full and correct facts to the investor.

Concerns in our industry about the number of Isas on offer and the potential confusion this could create among savers and investors alike are legitimate.

If it does not and a bond defaults, putting the platform out of business, then investors could potentially claim up to £50,000 in compensation, though capital is still at risk, these are not savings accounts.

The offer document shines a closer light on the investment and requires a high standard of due diligence from the Ifisa provider.

And with the last reported average bond sizes of £1.4m versus £95,000, for P2P business loans, you should expect the levels of diligence pre-investment, and monitoring post-investment, to be higher. 

Typically, the adviser would have to select individual bonds on behalf of clients. But some platforms have a discretionary bond service for advisers only, which will support them in assessing risk and selecting bonds that are in line with their clients’ needs.

Some Ifisa providers organise impartial third-party analysis of risk and reward, including credit and Companies House checks. It will soon become easier for advisers and investors to assess providers side-by-side, as more comparison sites covering the industry begin to emerge online.

Other helpful ways to assess risk include comparing the borrower’s rate with the interest being offered to lenders; checking whether the platform’s fees are more aligned with investors or the borrower; and looking out for a healthy loan-to-value ratio on the loan or bond.  

A final thought on the Isa market

Concerns in our industry about the number of Isas on offer and the potential confusion this could create among savers and investors alike are legitimate.

But the Ifisa surely deserves a seat at the table, as a potentially attractive alternative to cash and stocks and shares Isas that has the potential to add valuable portfolio diversification for a range of clients.

Julia Groves is head of Downing Crowd