Platform Lending In Review Ahead Of IFISA Season Race To Invest
Ahead of the “ISA season” – aka the frenzy to invest before the end of the tax year on 5th April, we offer the final instalment of our review of platform lending. Below we look at the major similarities and differences between Innovative Finance Individual Savings Accounts and (IFISAs), which allow investors to hold platform loans, and “mainstream” Individual Savings Accounts (ISAs).
IFISA – Similarities With Other ISAs
The IFISA is an ISA like any other. The £20,000 annual allowance applies to all types of ISA: IFISAs, cash ISAs, lifetime ISAs, and stocks and shares ISAs. It’s possible to have capital committed to any of these categories
Transfers work in the same way. Transfers into and out of IFISAs work in just the same way as transfers from, say, a Cash ISA to a stocks and shares ISA. An individual can transfer cash from a Cash ISA, for example, into as many IFISAs as desired. But to open a new IFISA, the rules require just the individual to use just one in a given tax year. After that, flexible transfers are possible.
The annual ISA allowance is precious. To keep the annual £20,000 allowance in tact, it’s imperative to use the transfer mechanism. If an individual sells up a Cash or stocks and shares ISA to buy an IFISA, the allowance will be lost. Most lending platforms have readily available transfer facilities (typically downloadable forms for those who prefer paper transactions).
IFISA – Key Differences
The big difference between Cash ISAs (especially) and IFISAs is that IFISAs are not cash instruments. The loans carry risk – which all reputable lending platforms will highlight, and any adviser should understand an communicate fully to a client. IFISAs are not to be confused with cash accounts. The Financial Conduct Authority has issued a guidance note to the industry expressly disapproving of the promotion of IFISAs alongside Cash ISAs.
IFISAs are investments with an attractive yield ad a downside risk – just as stocks and shares ISAs carry the possibility of growth and income with a commensurate downside risk.
Liquidity is another important issue to address. Cash ISAs are redeemable according to the terms of notice (a few months is usual). Loans in an IFISA cannot be instantly turned into cash. They will typically be for a fixed term of one, two three or as much as five years. Lenders who want to get their capital out shouldn’t expect the borrower to remit capital early. The exit route for early capital withdrawal is to sell the loan to other registered lenders on the platform. A key sign of a healthy platform is a vigorous secondary market where lenders can sell on their loans with little difficulty.
Security is another issue. Most Cash ISAs are issued by regulated banks and building societies. As such, the first £70,000 or so on deposit is protected by the Financial Services Compensation Scheme (FSCS). Most lending platforms are not covered by the FSCS. Some, such as Money&Co., which has asset management functions in its group of companies, is. However, that does not mean that if a loan goes bad, the money is safe. The FSCS protection only relates to monies held by the institution. So if a platform were to get into difficulty, the FSCS would protect any uninvested monies held by that platform before lenders invested. The loan itself would not be protected.
To check levels of security, the lender should see what the lending platform’s risk analysis is, what charges it takes on the assets of the bower (so that they can be seized and sold if the borrower defaults) and look at the platform’s track record – how have the loans performed?
The key factors are security, access and yield. See the foot of this page.