Laura Suter looks at the controversial Innovative Finance ISA and asks if the confusing stance taken by government and regulators means the product is not long for this world…
The tide is turning against the Innovative Finance ISA, its days must surely be numbered – although, with the current pace of change in non-Brexit government work, that number of days might be quite high.
The regulator has issued clear warnings about the product.
Charles Randall, chair of the Financial Conduct Authority (FCA), said that he had seen not only “very risky”, but “sometimes fraudulent” investments within the Innovative Finance ISA.
It’s not the first warning from the regulator, which has issued notes on the product previously and seems to be encouraging the government to back away from the product.
His comments come as the Treasury and HM Revenue & Customs are currently assessing whether the rules and regulations around the Innovative Finance ISA are fit for purpose.
“The FCA has already announced plans to try to limit the amount the average Joe on the street can put into an Innovative Finance ISA.”
As part of its review into the collapse of London Capital and Finance, the government departments are looking at the tax treatment of the ISAs and how the market has developed since its launch a mere three years ago. It will look at whether the rules need changing and whether the current permitted investments will remain the same.
Surge of investment
The figures on the Innovative Finance ISA uptake tell a story of their own. The most up-to-date figures only show the first two tax years of the product, but they show a jump in the amount investors put into the products from £36m invested in the first year to £290m in the following year.
While it’s still not a colossal figure, as a result of the massive amount of advertising and marketing thrown at the products in 2019/s “ISA season” I’d expect to see those numbers leap even more when we get the stats for 2018/19.
The FCA has already announced plans to try to limit the amount the average Joe on the street can put into an Innovative Finance ISA.
Newcomers to P2P lending will be limited to having 10% of their assets in peer-to-peer loans unless they received financial advice. The move was branded “patronising” by some in the P2P industry, but is viewed as sensible by many others (the actual detail on how someone’s wealth is calculated and how robust the system for declaring that you’ve not breached the 10% limit is more woolly).
But it’s another example of the disjointed approach to these investments.
One arm of the government is including it in a mainstream tax wrapper that was originally intended to get the masses saving, while the regulator is warning of its risks and attempting to limit its use, and alongside all of this, the industry compensation scheme refuses to cover it.
Surely this is the biggest sign that the Innovative Finance ISA should be scrapped.
Randall says of the controversial product “people are confused when one part of the state encourages an investment, while another public authority says it’s highly risky”. And frankly, I’m pretty confused too.
Laura Suter is personal finance analyst at AJ Bell
This article was originally published on Professional Adviser on the 17th September 2019