THE TROUBLE WITH IF(FY) ISAs
The City watchdog has published a warning to the public to think twice before putting their cash into an Innovative Finance (IF) ISA. The Financial Conduct Authority (FCA) is worried that these ‘high–risk’ ISAs are being marketed alongside cash ISAs.
The nitty gritty
IF ISAs were introduced in 2016 to allow investors to use some or all of their annual ISA allowance to invest in peer-to-peer (P2P) lending (where you lend your savings to individuals or companies) and mini-bonds (direct loans to companies that pay high-interest rates) and receive tax-free interest and capital gains. To suggest they have the same risk profile as cash is fundamentally wrong, as mini-bonds and P2P loans are a far cry from cash ISAs.
They can be quite quirky investment themes, funding anything from film and entertainment projects to rural-based projects with community interest. Property is also a very popular theme with one IF ISA firm offering bridging loans against UK property and others lending directly to property developers.
There’s a good reason these ISAs have proved popular, however. With investments starting at £500 and annual returns of up to 8% available, IF ISAs will be attractive to some everyday savers who might be left overwhelmed by the investment market and its associated risks – and underwhelmed by cash ISA offerings.
The FCA said ‘Investments held in IF ISAs are high-risk with the money ultimately being invested in products like mini-bonds or peer-to-peer investments. Anyone considering investing in an IF Isa should carefully consider where their money is being invested before purchasing’.
The warning was issued just a day after it was ordered to launch an investigation into the collapse of London Capital & Finance, which left 11,500 ISA investors out of pocket to the tune £237m. The firm claimed to offer savers returns of 8% and said their cash would be invested in start-ups through mini-bonds held in an ISA wrapper. But, in fact, the cash was given to just 12 firms in what its administrators have said was a series of ‘highly suspicious transactions’.
A note from HM Revenue & Customs confirms that the money was not kept in ISAs after all. Investors are now expected to get back just 20% of what they gave to LCF, and the Serious Fraud Office is investigating. Crucially, the Financial Services Compensation Scheme (FSCS) safety net does not apply to this or any other IF ISA holding. Many companies offer a scheme of their own that promises to kick in if the company hits rocks.
IF ISAs are still worth considering as a small proportion of their portfolio for some investors. But they need to make sure they understand exactly where their money is going, the risks and, crucially, be comfortable with them. They should also look very closely at how any so-called safety net being offered actually works.
Most experts agree you should only put 10% of your ISA money in this type of account anyway. Savers who need a risk-free home for their cash should give them a wide berth.
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