ISAs could be set for Peer-Peer re-vamp as government deliberation on Tax-free Savings Accounts commences

Government is deliberating over how to include peer-peer lending websites, such as the hugely successful Funding Circle, into the ISA system, with the prevalent proposal being the implementation of a tax free ISA for peer-peer investors.

Peer-peer lenders have revolutionised the role of middleman in investor-business transactions, through their tendering of far more affordable rates to both investor and borrower than those offered by traditional banks.

Investors can expect returns of in between 7-10% if they choose to lend peer-peer if they are willing to lock their money away for a fixed amount of time, compared with the meagre rates on offer from banks. However, no small amount of risk is attached as peer-peer sites arenít covered by the Financial Services Compensation Scheme (FSCS) and as such investors cannot be sure their money is safeguarded in the event of a companyís failure.

This is a risk that investors seem all too willing to take, with over 100,000 savers now investing via peer-peer, in no small part due to the eye-wateringly low interest rates on savings accounts. Over £1.6bn in loans have been doled out by peer-peer investors ñ evidence that the sector is thriving and showing no signs of slowing down. Moreover, the sector begun being regulated by the Financial Conduct Authority (FCA) last April, further enhancing its credibility.

In his budget earlier this year, the Chancellor announced his intentions to harness the popularity of peer-peer loans and incorporate them into the Coalitionís flagship ëNew ISAsí (NISAs) which thus far have proved a comprehensive failure. It is hoped that as a result of this, savers will have greater choice of how they invest whilst also boosting the profile of NISAs.

At present, the government are discussing how best to apply these changes: whether a new type of ISA ought to be initiated or whether peer-peer loans can be entailed within stocks & shares ISAs, as part of its £15,000 max allowance.

Samir Desai, chief executive of Funding Circle, which uses P2P investorsí cash to loan to small and medium-sized enterprises, said: ìInclusion of peer-peer lending within Isas will be another stamp of credibility on our sector. Not only will it give investors a better deal, but it will help even more small businesses access the finance they need to grow, which in turn helps the economy. It’s a win, win, win.î

Investment aficionado Danny Cox, head of financial planning at Hargreaves Lansdown, appeared reflective on the matter, paying heed to its inherent risks, stating: ìP2P is an interesting market and one where lenders can substantially improve their headline rates of return compared to cash accounts. But investors are heavily reliant on the credit checks and risk assessments performed by P2P firms and must understand the risks that borrowers may not pay back all of the interest or the capital.

However, Mr. Cox concurred with Mr. Desaiís viewpoint that the government move will lend authority to the peer-peer industry and substantially increase public confidence in it as a viable mode of lending.

ìItís still a relatively immature market and, unlike a savings account, investors have no FSCS protection. However regulation of the industry from last April and the potential for Isa next year increases the marketís credibility.î

Government are expected to reach their final decision by the 12 December, and disillusioned savers across the country await the news eagerly.

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