In my first article for Wheelie’s Website last month I wrote about the 'how's and ‘why's' of P2P (Peer to Peer), and if you're unfamiliar with the area it might be worth you reading my first article, paying particular attention to the risks involved:
Remember the bloke that was always talking about “fixing the roof while the sun is shining...?”. Well, in addition to presumably being a very good roofer, he was also responsible for introducing the Innovative Finance ISA (IFISA) to the UK public - a tax free wrapper for your P2P lending investments. He did so in the 2015 Budget to a fairly muted fanfare - after all, few people even knew what it was or would be.
I'm sure the intention was for loads of providers to be offering the new product over the next year or so, but it hasn't work out that way in practice. To be able to offer an IFISA, it requires platforms to obtain full FCA permissions and then HMRC authorisation and this has proven a lengthy and frustrating process (not helped by the Chancellor subsequently losing his job!). With the FCA showing its usual sloth-like pace, only now are we starting to see licences being granted and IFISA's being offered on a regular basis, so the 2016/17 ISA year will come too soon for most providers.
IFISA's are intended to run alongside the other types of regular ISA's already available (Stocks and Shares and Cash ISA's) and you can distribute money in all 3 in any one year, as long as you don't exceed the overall ISA limit (£15,240 this year, ending in April), which is to rise to £20,000 in 2017/18.
In common with the other two ISA types (I'm ignoring getting bogged down in Junior ISA's and Lifetime ISA's), you're only allowed to subscribe fresh money to one of each platform, per year. This restriction is frustrating as far as P2P IFISA's are concerned, because as we discussed in our last article, one of the key's to getting successful returns from P2P lending is to diversify, both by loan type and platform. Only allowing you to invest in 1 IFISA per year means that your risk level to platform failure is significantly increased, not something, I'm sure, the Government or FCA really intended, but it does show their lack of understanding of the industry. There was talk among industry leaders that Philip Hammond was considering addressing this issue in his first budget - but that would have been sensible, so he's left it as it is.
(See later section 'Rules (& How to get Round them!)', for how you can still protect yourself)
So are IFISA's a good thing?
IFISA's: The Double-edged Sword
Whilst it's undoubtedly a good thing from an industry acceptance point of view (FCA/HMRC approval and the potential tax savings will undoubtedly attract a lot of savers to the sector), its probably not a very good thing in terms of making pennies!
With savings rates down at all-time lows and the top cash ISA's providing a measly 1%, we could see a wall of money hit the sector. Indeed, according to Stuart Law of Assetz Capital, IFISAs could make up 30 per cent of peer-to-peer investments this coming tax year and as much as half by 2018.
Whilst on the face of it, that might seem good for the Platforms (and probably is) an ocean of lender cash will be swishing around and be reliant on the platforms attracting a similar increased level of borrowers. As the market had already been struggling to keep pace with lender demand in the latter half of 2016 (after the Brexit-related interest rate cut) this seems unlikely.
Basic supply and demand economics therefore dictates that we'll likely see a drop in lender rates; ironically enough the very thing that will attract the investors in the first place. This issue was ably demonstrated recently, when Lending Works received over £2m in the first 24 hours of launching their IFISA and then had to temporarily close new ISA applications in order to manage rates/queues. They have since returned, but are already offering a lower rate.
This also raises another worrying issue - will we see a reduction in the quality of underwriting, with standards being dropped in an attempt to push more loans through to keep pace with borrower appetite? Platform choice may become even more critical...
Its important to remember, therefore, that P2P is not actually any safer just because its wrapped in a cosy little ISA banner. Ironically, it could be making the whole sector more dangerous. An IFISA should be viewed merely as a tax shelter for your earnings. P2P lenders will therefore have to weigh up if the likely reduced returns still match-up to the risk involved, over and above the comfy refuge of a cash ISA.
For me, the IFISA will probably sit mid-spectrum. With the right platforms, the predictable monthly interest payments are arguably less volatile than a Stocks &Shares ISA (though without the chance of strong capital returns) but if you can achieve anything north of 7-8% (which should still be perfectly possible on secured assets) then that has to be waaay better than the measly offerings of a cash ISA.
Rules (& How to get round them!)
Use Historic ISA's to spread the risk and diversify...
You'll recall earlier I mentioned the HMRC rule of just one IFISA per year (which notably increases the risk in investing in P2P, as it prevents diversification across platforms), well, you can sidestep this daft rule quite nicely if you've got any cash ISA's floating around (or indeed spare cash in a Stocks & Shares ISA).
I have a cash ISA due to come to the end of its term shortly and my plan is to split the proceeds across two different IFISA's, that way providing some diversification across platforms and spreading my risk.
Furthermore, if you haven't yet taken up your ISA allowance for the current year (of £15,240) and have some spare cash floating around earning peanuts in a bank or building society, you could open a cash ISA now, prior to the financial Year End. Whilst you can't transfer cash ISA's from a current financial year, as soon as we're past 5th April, it becomes 'historic' and so can be transferred into the IFISA of your choice and NOT affect your right to open an additional IFISA in the same year.
Again, this is something I've put a few £k aside for in a Virgin cash ISA, and I'll just let it sit there earning its 1% until the right IFISA to come along for me to switch into (for ideas on this, see below).
Potential IFISA choices
Thanks to the FCA dragging their feet, at the moment the choice is still fairly limited (hence the reason I'm using cash ISA's as a temporary stop-gap), but there are some platforms now offering IFISA's:
One of the first to get IFISA status, I transferred a cash ISA here last year. Set up by Bruce Davies, the co-founder of the first P2P company, Zopa, it offers a unique and Long Term proposition; Green investments, so I feel like I'm doing my tree-hugging bit for the environment too! Typically the investments are in renewable projects such as local council solar schemes, wind turbines, biomass plants, etc. and are set up as debentures that pay semi-annual or annual dividends. It’s worth noting too, that most debentures on Abundance are amortising, i.e. each payment you receive consists of an interest dividend, and a capital repayment. In this way the dividend yield % increases exponentially as the investment matures, leaving you with more money to re-invest (and be earning again) elsewhere, without affecting the future payout of the investment! Double bubble indeed!!
They have a useful Secondary Market (strangely called a Bulletin Board) and interestingly I've never seen anything sell for under par, so it’s possible to make a nice turn by buying more than you want of a new project and then trimming your holding down to your required size say 6 months or so later, pocketing a nice typical gain of between 5-10%, during a period when the projects are usually being constructed and so not yet paying a dividend.
As discussed earlier, one of the bigger players in the P2P market, they primarily focus on personal consumer loans. It’s important to recognise these loans are unsecured, though they do have the Lending Works 'Shield' that aims to protect investors from losses due to missed payments or defaults, via a combination of a Reserve Fund and a unique Insurance Policy.
After being snowed under with applications within 24 hours of launch, they've since closed and re-launched their IFISA, now offering a reduced 3 year rate to 3.8%.
If you wish to invest with them, please feel free to use the link below and you will also receive a £50 welcome bonus for any investment of £1000 or above:
Octopus Choice: https://octopuschoice.com/
If you fancy spreading your tentacles (pardon the pun!) into property and more specifically mortgages, look no further than Octopus Choice. They've recently obtained FCA & HMRC approval, but have yet to launch their IFISA (due imminently, I understand). Supported by the Investment Bank, Octopus, they invest 5% in every mortgage they offer, and will take first loss in the event of any default, so do have some skin in the game. Their USP was they were originally set up for IFA's to recommend to clients who might be interested in P2P, so safety of loans is paramount. Their website claims they have Lent over £2 billion and lost less than 0.1% ! Average LTV is 59%, Interest is paid monthly and the current rate is approximately 4.3%.
Zopa and Ratesetter
The majority of people wanting to take out an IFISA will probably be waiting to take out one with one of the 'big-hitter' platforms such as Zopa or Ratesetter. If you wish to invest with them, there are cash incentives to be had for new customers, by following the links below:
- £100 welcome bonus for £1k investment with Ratesetter:
- £50 cashback for £2K invested with Zopa:
While there's no denying these companies have financial clout, they are passive investments, where you give them your money and they invest on your behalf, you need to be aware that the loans are unsecured, consumer. Though they both have provision funds to protect against defaults, you need to bear in mind how you think these may cope if the number of defaults rises dramatically due to a downturn in the economy should, for example, Brexit prove a little more difficult than some envisage. Also their rates are likely to reduce further, due to the large inflows of lender money I'd expect them to receive, as such, they're not the type of IFISA's I'm looking out for, but I perfectly understand those who would prefer to stick with the established brands.
Ones to Watch
The 3 platforms I'd most like to open IFISA's with all favour secured assets, which in my opinion, give greater security, and, pleasingly, greater returns. On the downside, they are all smaller platforms than the likes of Zopa & Ratesetter, so platform risk may be greater.
A black box / passive type platform, but unlike some of the big hitters, primarily invests in secured loans across a range of loan types and platforms. Basically, provides you with instant diversification, if you can only open one IFISA. They currently target an annual return of 7%, after 1% fees. Will pay monthly interest soon - great if you need a regular income, and superb communication from Steve Findlay (former of Fidelity) on the P2P BB's.
Cream of the crop for me in terms of P2P platforms. Excellent secured deals, primarily property, and offering rates of between 10-12%. Communication again is first class on the P2P indie forum from the boss, Ed, and the rest of the 'Things'.
Pawn specialists - jewellery, coins, watches and also cars. Though branching out into property now too. All secured with first charge at decent LTVs (Loan to values) and often with a trade partner prepared to purchase at loan value in the event of a default.
Don't fancy DIY P2P ? How about an Investment Trust?
If you like the idea of P2P Lending, but don't fancy doing the donkey work yourself, you can always use the Investment Trust route, as there are several options available, all of which can go straight into the tax-free wrapper of a Stocks & Shares ISA. Here's some options:
Ranger Direct Lending (LSE:RDL)
Very good management team, that set the bar high with a target of an 8-10% yield on IPO, but so far are delivering exactly that. They trade at a sizeable discount to NAV of c.15%, having had a recent scare with one of the lending platforms that they use, Argon Credit, going under Chapter 11 Bankruptcy Protection in the US. However, they have apparently seized control of the collateral and expect to recover the majority of their funds.
A word of caution if investing in RDL - some brokers may incorrectly deduct tax from these dividends (or 'interest distributions' as they are referred to by some IT's) even if held within a Stocks & Shares ISA. idealing.com did this to me, purely down to their failure to complete a 'Declaration of Eligibility' form on behalf of their nominees. I advised them that this was the case, but they simply would not listen. The solution for me was to transfer it and my entire account to AJBell /YouInvest ( who had filled out the form!) and I now receive the payments in full. So whoever your broker is, might be worth checking with them beforehand if they've completed the necessary documentation so you can avoid being wrongly deducted 20%.
P2P Global (LSE:P2P)
The first and biggest P2P IT, trading at a big discount and probably justly so! Managers have made a right balls-up by hedging their $ earnings against the £, and consequently are having to use cash that should be used for investing in loans to facilitate the forex charges! Quarterly returns are down as a result and they are failing to meet the divvy target. Best thing they could probably do is make an offer to buy out the trust, and if they did this you would make a decent return based on current discount to NAV of over 20%. Every dog has its day, maybe this trust will be no exception...VCP is another similar basket-case, and this one was infamously backed by a certain Mr Woodford...
Honeycomb Investment Trust (LSE: HONY)
Similar to RDL, HONY is another well run IT, offering an excellent, covered divvy, the only problem being it’s shot to a premium over the last month. One to keep an eye on maybe, if it falls back closer to NAV.
I appreciate that ISA's and tax are subjects that can be as dull as ditch water, so for those who would prefer a quick summary:
- IFISA's are a new tax shelter for your P2P Lending.
- Your overall investment must not exceed £15,240 this financial year (16/17) and £20,000 from April 2017.
- Can have any combination of Stocks & Shares ISA, cash ISA, &/or an IFISA as long as don't exceed the above limits.
- Limited providers at the moment - Abundance are probably the best option so far, but look out for Moneything, BondMason or Collateral in future months, as well as Zopa & Ratesetter.
- Under present HMRC rules, you can only take out one IFISA in any tax year, which heightens your exposure to platform failure. To circumnavigate this, you could use your historic cash ISA's to transfer across several different platforms.
- If don't want the hassle of ‘hands-on’ P2P lending, you can always invest in a P2P Investment Trust via your stocks and shares ISA such as RDL.
Thanks for reading! Please note, all the above is my opinion only, it does not constitute advice in any way, please DYOR as ever. If you've any questions, please feel free to ask below, or contact me on:
Twitter: https://twitter.com/sloan_phil or @sloan_phil