By bringing peer-to-peer (P2P) lending into the ISA stable, the government and the regulator have kicked off the sector’s journey to the mainstream. Now they need to finish the job.
Approach with caution
Some commentators estimated nearly half a million new investors would try their hand at P2P lending when the Innovative Finance ISA brought eligible platforms into the ISA fold.
This is unsurprising given that, according to government statistics, British consumers have around £500 billion either saved or invested in ISAs.
Not only can the tax wrapper give investors’ returns a welcome boost, it can also give their investments a stamp of mainstream credibility.
However, the stampede has not arrived yet. Though the market continues to grow at a rapid pace, many investors, and many more financial advisers, have remained cautious of the opportunity.
Some of that is to do with another of our favourite Kitemarks – or rather, its absence – the Financial Services Compensation Scheme (FSCS).
The FSCS was set up in 2000 as the ‘compensation fund of last resort’. When they hear ‘FSCS’, most people think of the deposit protection service, which guarantees the first £85,000 (2017/18 tax year) of an individual’s savings if a bank goes bust. But the scheme also protects certain investments, yet many investors do not really understand how.
Plenty of people think the FSCS offers an insurance policy against poor investment performance. It does not. If a share portfolio tanks, for example, the scheme will not be there to save you. That is the risk you run by choosing to invest in the equity markets.
The FSCS is, however, on hand to compensate investors if a provider has been shown to mismanage its product, and has subsequently gone bust. Only then does it offer up to £50,000 (2017/18 tax year), not the larger amount doled out to savers.
Exemptions need lifting
P2P lending products are not savings accounts: they are…