Angus Dent, CEO, ArchOver
UK savers are under a lot of pressure. Consumer interest rates remain low following the Bank of England’s recent decision to leave the base at 0.5%. The pound keeps finding new cliffs off which to fall as we navigate the never-ending unknowns of Brexit. In that kind of environment, it’s difficult to make your cash work hard enough to give you returns above the rate of inflation, let alone provide any meaningful yield. Returns on cash ISA investments have been abysmal.
In that context, the government’s introduction of the Innovative Finance ISA (IFISA) in 2016 was a good move. Essentially, it allows UK taxpayers to use their tax-free finance allowance to cover investments over peer-to-peer platforms. Returns earned through direct lending are ring-fenced from HMRC, increasing the potential pay-off. The new(ish) model can be a useful tool to help turn the tide, but it must be treated with respect and know-how.
Like all things, it comes with its downsides – there’s no such thing as a free lunch, and just like any other investment, cash in an IFISA is at risk. If savers jump into an IFISA without fully understanding the potential for loss, and more to the point, without picking a secure provider, they could create a serious problem for themselves.
With that in mind, do UK savers really understand the IFISA?
What do savers think of the IFISA?
We recently conducted some in-depth research, which analysed the way that people in this country invest and save their hard-earned cash. One of the questions we asked was about the key drivers that would encourage people to open an IFISA. Higher returns came out as the clear winner, with nearly two-thirds (62%) of savers saying they would invest in an IFISA for this reason if they had the cash. People understand that ‘ISA’ means higher returns, which is prompting them to look closer. They understand the benefits well enough.
On the other hand, they don’t seem to understand the risks. For many, the ‘ISA’ tag simply means ‘savings account with a higher interest rate’ – but the IFISA is an entirely different kettle of fish. The majority of savers (57%) told us that they still don’t fully understand the IFISA. Somewhere along the line there’s been a communication breakdown. ‘ISA’ does stand for ‘individual savings account’, so in all fairness, that’s not surprising. Maybe it’s a problem with the initial branding. But one way or another, savers need to be given the right information if they’re to avoid a financial snafu.
How to use the IFISA properly
The burden of educating savers should fall in part on the P2P sector. P2P platforms that provide the service should make sure they’re clearly laying out the risks at the point of first contact. Transparency and control are supposed to be the foundational principles of the P2P market. At its heart it’s about offering an alternative to traditional banking, shaking up the way that finance is done, and putting the individual first.
The IFISA is an opportunity to extend that remit and help people boost their savings, but only if companies are upfront about the risks, however negligible they might be. If P2P is going to be a long-term concern, it can’t afford any major breaches of trust. If savers and investors ever start associating P2P with hidden costs and untrustworthiness, the proverbial goose will be cooked.
But the onus doesn’t have to sit solely with the provider. Above and beyond that, savers have to take responsibility for choosing a platform that comes with a decent level of security. Credit analysis, controlled accounts, dispute resolution, credit insurance – there are plenty of ways to keep cash as safe as possible in an IFISA arrangement. Don’t sleepwalk into a mistake – check your provider. Are they doing their due diligence? Is security integral to their model?
P2P is about transparency and control. Make sure you have proper insight into the companies you’re investing in. Not just their current situation, but their future prospects, the contracts they have lined up, their recurring revenues and accounts receivable. Or if that’s not available, make sure that you pick a provider with a reputation for reliable credit analysis that reviews all these indicators of future success.
Last of all, there’s a plethora of self-service tools ot there to help you pick the right investments. Automated investment advice is pretty commonplace nowadays – make the most of it. While you should take it with a pinch of salt, the key benefit is that you don’t need to pay someone thousands of pounds to read the landscape for you any more – with a bit of patience you can do it yourself online. It’s the same principle for the IFISA. Consult online resources to see where your best bet might be.
The bottom line is that the IFISA could be a boost for savers and borrowers alike, but a bit of nous is required. It’s up to both the P2P sector and to individual savers to make the most of the options on the table – and not let this opportunity pass them by.