Are crowdfunding and P2P ‘a step too far’ for Isas?

ethical; growthAllowing crowdfunding and peer-to-peer loans into Isas would expose investors to excessive levels of risk for a multitude of reasons, experts say.

In the latest Autumn Statement, George Osborne announced that the list of qualifying investments for the new Innovative Finance Isa will be extended next autumn to include debt securities offered via crowdfunding platforms as well as peer-to-peer loans.

But experts have argued such investments are at such an early stage of their development it could make Isas too complicated and raise questions over suitability.

Wealth boutique EQ Investor chief executive John Spiers heeds caution “as more complex and higher risk assets become eligible”.

Spiers says: “I’ve been nervous about this for some time because I don’t feel this is the right time to confer the level of respectability that is associated with Isas to what is still a relatively new type of investment, untested through a full economic cycle.”

Tilney Bestinvest managing director Jason Hollands agrees, saying P2P, being a relatively young market, makes it harder to know how it might react in a recession.

He says: “It is important to remember that peer-to-peer lending is still a very nascent industry, with the first platform Zopa having only launched in 2005, so it is difficult to know where default rates might land in a recession, though I’m told that credit card default rates only ever maxed out at 7 per cent, which is probably the closest comparison.”

Spiers also warns of the pain a collapse of a P2P platform would cause investors.

However, Yorkshire Building Society executive director Andy Caton welcomes the move from the government for introducing greater choice of investment options.

Research from YBS shows roughly 405,000 UK consumers, or 3 per cent of UK Isa savers, expect to invest in this new type of account when it becomes available in April 2016.

It also suggests the new rules will encourage savers to look at putting their money into more traditional types of investment, with 1.1m planning to invest directly into the stock market and 1.5m considering bond investments.

However, Caton says it is vital that investors are fully aware of the risks associated with different types of investment, including P2P.

He says: “Our research has indicated that there is a lack of awareness of the risks of P2P. It is vital that those who opt to invest in the new type of P2P ISA realise how different it is to the existing choices, that it means that they will not receive FSCS protection, and, in extreme cases, that they could lose both interest and capital on their investment.”

Spiers has also expressed concerns over seeking tax benefits on such early stage ventures as equity crowdfunding platforms, with many carrying out only minimal due diligence.

He believes these types of schemes should be only eligible via investment funds for reasons of diversification, which in turn will increase investor protection.

Although there are no plans to include equity crowdfunding in Isas at their next stage, the government says it will work with the industry to further explore the case for this.

Some experts argue equity crowdfunding is even higher risk as the market caters for riskier businesses and is less likely to provide regular returns.

Hollands says: “Contemplating allowing a very high-risk activity such as equity crowdfunding within a retail wrapper such as an Isa, is perhaps a step too far and such accounts should not be allowed to be marketed to retail investors.”