In this week's blog, we are talking about IFISAs; with the product's merits recently being loudly discussed in the press, we attempt to debunk a few myths and talk a little about the importance of competition in fair and free consumer markets.
Firstly, a quick history lesson, The Innovative Finance ISA (IFISA) was first introduced in the UK in April 2016 as a new tax-efficient savings account that allows investors to invest in peer-to-peer (P2P) lending and other alternative finance platforms. This new type of ISA was created in response to the growing demand from investors for alternative investment options that offered better returns than traditional savings accounts but with similar tax benefits. Since its introduction, the popularity of the IFISA has grown steadily, with more and more investors looking to diversify their portfolios and seek higher returns from alternative finance options. This steady growth is evidenced by the 781Mil invested in the product market wide across the 2020-2021 tax year.
Before the IFISA, P2P lending platforms were not included in the list of ISA-eligible investments. This meant that investors could not enjoy the tax-free returns offered by ISAs when investing in P2P loans. However, the introduction of the IFISA changed this, allowing investors to hold P2P loans within an ISA wrapper and receive tax-free interest. These products are designed to give people already interested in P2P investing a chance to enjoy tax-free returns by using some of their ISA allowances as part of a balanced portfolio of different investments, ergo running in conjunction with the Financial Conduct Authority's aim to encourage more consumers to start investing - it's a straightforward product that gives investors a better tax deal with something that they are already interested in.
For us - this is the crux of the argument; according to published data, the growth rate of the Peer-to-Peer Lending Platforms industry in the UK is expected to increase by 8.7% in 2023, with the market size of the Peer-to-Peer Lending Platforms industry in the UK growing 11.9% per year on average between 2018 and 2023. As a popular and in-demand asset class, it makes no sense to consider removing the investor's tax-free benefits when the regulators and government mandate is to encourage more responsible retail investment.
Investors should have balanced portfolios, which means taking risks suitable for their appetites. It also means making investment decisions over different time horizons depending on the returns they seek. An example from capital markets; there is something to be said for slowly investing in an index-tracking product over a long time horizon; you take both the bull and bear years in your stride and compound your gains; however, if your goal is steady returns over a smaller time window, it's important to remember that P2P outperformed the FTSE 100 from 2018 - 2022 even with the volatility ironed out over a five-year horizon. Looking further across the market, there were huge gains to be made in tech stocks and cryptocurrencies between 2018 - 2022, but investors saw a 33% retracement in the NASDAQ in 2022 and an 81% retracement in Bitcoin in 2022 on a timeframe comparable to the term of a P2P loan, yet in that same period, a P2P loan was perceived by some to be much higher risk than say a Stocks and Shares ISA, filled with underperforming equities.
Competition in capital markets is critical for efficient capital allocation and promoting economic growth. This is because a competitive capital market allows investors to make informed investment decisions, lowers the cost of capital for companies, and facilitates the flow of funds between investors and borrowers. The same economic theory applies here; investors must make their own choices, and the more options on offer, the more capital will be invested. This is also in line with the regulator's goals; the Financial Conduct Authority (FCA) is committed to promoting fair market competition in the financial services industry, recognising that healthy competition is essential for delivering better outcomes for consumers, driving innovation, and improving the quality of financial services.
The popularity of the IFISA is only getting started; it's a fantastic product that gives P2P investors a better tax deal, and the more we hear those conflicted voices suggesting otherwise, the more confident we are that we are correct in our assessment.
Invest & Fund has returned over £144 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.
To take maximum advantage of this robust and exciting asset class, please visit www.investandfund.com or contact Shaheel at shaheel@investandfund.com.
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