Which Innovative Finance ISAs have the best track record?
The UK government launched innovative Finance ISAs in April 2016. Now a lot of innovative Finance ISAs providers offer this product. Nonetheless, p2p lending firms have been around for a long time. Since p2p platforms exclusively provide IFISA, researching the performance within peer to peer provides the basis for a valid comparison of track record. The interest rate is just one metric to look at. The main thing is the real returns delivered by the platform in case of defaults.
How risky are IFISAs?
Just like other types of investment, IFISA also has an element of risk. There is always a risk that borrowers may default or that the company could go out of business with unknown consequences for your loans.
Furthermore, the IFISA is not covered by the Financial Services Compensation Scheme in case of default and if the firm goes out of business. But, the peer to peer firms must have a wind-down plan in place. Most platforms have backup provides who manage loans in case the platform goes bankrupt.
Does the FCA regulate innovative ISAs?
Every p2p lending firm needs to have complete authorization from the Financial Conduct Authority (FCA) to provide IFISA. This ensures that the firm has adequate protection set up for the investors/ lenders and borrowers.
The FCA authorization also ensures that platforms comply with the common rules and that all products are provided fairly and clearly to the customers. The FCA has set up additional regulations for handling user funds and complaint procedures.
What is the best way to assess risk among IFISA providers?
There are some key factors that you need to consider when selecting an Innovative Finance ISA provider. We have created a handy checklist of ten questions that you should seek answers to before making a decision:
- How long has the p2p lender been trading?
- What kind of loans they offer?
- Do they diversify investment over different loans?
- What is the loan default rate for the firm?
- Are there any arrears rates?
- Does the firm offer any safeguard against the defaulting borrower?
- Can they offer you a forecast on the default rate?
- Will you be able to transfer or access your Innovative Finance ISAs account whenever you need it?
- What will happen if the platform goes out of business?
- Will the firm compensate you in case the borrower defaults?
Keep in mind that it is important to review the peer-to-peer lending platform’s historical performance. This can allow you to conduct analysis and make the right decision for selecting an Innovative Finance ISA provider. Some providers might also provide statistics of their track record for their users for complete transparency.
Do IFISA providers leverage investments?
Unlike banks, Innovative ISA providers allot funds invested by providers to borrowers on pound to pound basis. Therefore, no funds are leveraged or create, nor is there any type of fractional reserve banking. This simple model means there will be less exposure in case of downturn and, consequently, less risk to customers.
What other risks you should know with regards to IFISA?
You need to take the level of accessibility into account before you invest in an Innovative Finance ISA. If you want to transfer or withdraw your funds, then you must understand the process, fees and timings involved. There is protection from FSCS with peer to peer investment; hence, your money is not quarantined in the event of bankruptcy, though any funds held by the firm should be ring-fenced in client fund account should be held securely.
Is IFISA worth the risk?
Again, remember that Innovative Finance ISA risk profiles differ from firm to firm. However, IFISAs are accepted widely to be a midpoint regarding reward and risk between cash ISA, stocks & shares ISA. In fact, the majority of finance experts agree that some peer to peer lenders offer comparatively low-risk investment. Unlike putting funds into the stock market, so far, lenders have enjoyed steady returns from IFISA.
While the funds are not guaranteed like it is in the bank, almost all the cash ISA returns pay below the inflation rate. This means there will be a low level of risk. This is balanced because funds in the IFISA account will not lose its value like money in Cash ISA. Of course, every lender has their risk preferences, and doing research is very important. However, the combination of inflation-beating, predictable returns and a simple sign-up procedure means the Innovative Finance ISA is building a good track record.