There are signs that investors may not know much about the Innovative Finance ISA (IFISA). Crowd Bond platform Downing Crowd explains…
With the birth of the Lifetime ISA (LISA) for 18-39 year olds on 6 April 2017, the Innovative Finance ISA (IFISA) is no longer the baby of the ISA family. But it is perhaps still the least well understood.
With UK interest rates currently at record lows and the continuing uncertain backdrop for investors, we believe the Innovative Finance ISA (IFISA) adds another string to the ISA portfolio bow. The IFISA allows access to alternative finance returns in the form of loans or debt instruments, facilitated directly between investors/lenders and borrowers by regulated platform providers, like Downing Crowd.
Is the typical 0.5% return on savings the best use of your ISA wrapper? Or are you better paying tax on that and protecting a potential 5% or 6% annual return from your lending? As these types of investments involve more risk, they offer the potential for significantly higher returns than currently available through Cash ISAs – typically between 4% to 7% p.a. over short to medium term. If investors and savers are happy to take on the higher risk that comes with investing in Crowd Bonds, this could prove an attractive option. And since they are generally illiquid and held for a fixed term they are not exposed to the short-term volatility that comes with investing through a Stocks and Shares ISA.
Some of the terminology surrounding the IFISA and its associated investments means different things to different people, so the first challenge for anyone looking to research the IFISA is cutting through this jargon to understand what they are looking at, how it works and the risks and potential rewards involved.
Peer to peer (P2P) and crowdfunding are the two most commonly used terms, with some commentators already referring to the IFISA rather loosely and somewhat misleadingly as the ‘P2P ISA’.
The first thing to be clear on is that an IFISA can only hold P2P loans and debt-based investments. This does not include any equity investments but does include Crowd Bonds.
In both cases, the underlying borrowing businesses or individuals should have the means to pay interest to their investors and a clear plan to repay capital. Indeed, the demand for finance from smaller businesses, the potentially attractive returns for investors and the need for more competition and diversity in the SME sector were all considerations in the government’s IFISA launch.
What happens if it goes wrong?
Good providers should take precautions to help manage risk. Both P2P lending and Crowd Bonds may be secured against the assets of the borrower. We believe this is something you should always check to understand, should the worst happen. The terms of any security and the loan-to-value ratio are vital here. At Downing Crowd, we typically only arrange loans to companies where we have first charge over the secured assets and a loan-to-value (LTV) buffer.
When it comes to the FSCS, deposit protection does not apply to either P2P loans or Crowd Bonds. However, the FSCS investment protection scheme may apply to Crowd Bonds. There may be circumstances where Crowd Bond investors can claim of up to £50,000 in compensation if a firm is unlikely or unable to honour legally enforceable obligations against it (e.g. claims for fraud or misrepresentation). It is important to note that investors will not be able to claim under FSCS simply because a Bond fails to repay capital or pay interest, so this is unlikely to significantly affect the risk of investing in Crowd Bonds.
IFISA friendly investments do come with risks but then they also come with the potential for attractive returns. With the annual ISA allowance now £20,000 and transfers now an option, for intermediaries looking to broaden the diversification of client ISA portfolios, the IFISA is surely worth a look if clients understand the risks involved and are happy to take them.
About Downing Crowd
Downing Crowd was launched in March 2016 by Downing LLP, a business with 25 years’ investment management experience. We provide opportunities to lend to established businesses with tangible assets, predominantly those that Downing knows well and has worked with before. We don’t work with early-stage businesses that require equity investment: instead you are providing a loan in the form of a security. Our bonds typically offer a fixed rate of return of between 4% p.a. – 7% p.a. Since we launched our first Bond, we have raised more than £44 million across 21 Bonds to support smaller UK businesses across a variety of sectors. In doing so, we have offered members a 5.7% p.a. weighted average interest rate (as at 4 December 2017).
Downing Crowd was recently awarded Best Investment Platform at the 2017 Growth Investor Awards, November 2017.
If you would like more information on Downing Crowd, our Crowd Bonds or the Downing IFISA, please visit our website www.downingcrowd.co.uk. You can register to become a member to stay up to date with our latest Crowd Bonds.
Disclaimer – Capital is at risk and returns are not guaranteed. Past performance is not an indicator of future performance. Any personal opinions expressed are subject to change and should not be recommended as investment advice or a recommendation.