(From the FT, 6 June 2014)
The Treasury is poised to launch a consultation next month on how investors might gain access to the peer-to-peer lending market through individual savings accounts – and whether a new type of Isa should be created for the purpose.
The move follows an announcement in the Budget that peer-to-peer investing can be included within the Isa tax-free wrapper for the first time next April.
Wrapping p2p lending in an Isa will boost returns by making them exempt from income tax – saving 40 per cent for higher-rate taxpayers. But the practicalities of wrapping p2p within an Isa are proving complex, and the Treasury plans to launch a consultation in July. One option mooted by an industry working group in discussion with the Treasury is that platforms could offer stocks and shares Isas that invest solely in p2p lending. However, this option would limit investors’ choices since they can only invest in one cash Isa and one stocks and shares Isa every year. Putting money into a “p2p Isa” would mean they would be unable to buy any shares or funds in an Isa elsewhere. An alternative suggestion is that platforms should provide full stocks and shares Isas, offering not just their p2p investment but also shares and funds, so investors are able to buy diversified Isas. Rhydian Lewis, founder and chief executive of Ratesetter, said this would entail “another level of administration” but believes p2p platforms are nimble and technologically advanced enough to be able to do it. A third possibility is that a new type of Isa could be created specifically for p2p platforms, allowing investors to continue going elsewhere for a broader stocks and shares or cash Isas. Platforms are in discussion with execution-only brokers that already provide Isa wrappers.However, Danny Cox of execution-only broker Hargreaves Lansdown said: “In the short term, we almost certainly won’t offer it [p2p]. In the long term, provided the products are robust and there aren’t issues on liquidity and scalability, then I think it’s viable. But it’s a long time away.”
Jason Hollands, managing director at Bestinvest, said the group will “watch and see how the market develops”. Although peer-to-peer lending can offer attractive levels of income, there are risks. Mr Lewis points out that it falls within the stocks and shares Isa category, rather than cash, because it is not technically a savings account and does not qualify for the Financial Services Compensation Scheme. Lenders also face the risk that the borrower defaults on interest payments. Some platforms have put protections in place, such as a provision fund to compensate lenders if a borrower defaults. Ratesetter, for example, requires all borrowers to pay into a provision fund, depending on their risk profile and the size of the loan. Many platforms have arrangements in place to ensure the trustee takes over the administration of the loans if the platform itself becomes insolvent.The Financial Conduct Authority, the City watchdog, began regulating peer-to-peer firms in April. It requires that lenders are given a detailed explanation of how the loans work and the risks involved.
Platforms will have to hold separately any client money that has not yet been lent out and must have arrangements for loan agreements to continue if the platform should fail. HM Treasury said: “The government is helping savers by increasing the simplicity, flexibility and generosity of Isas. We also want to encourage growth in the peer-to-peer sector as part of our plan to increase competition in the banking sector and diversify available sources of finance for businesses. “The government will consult informally on allowing peer-to-peer loans within Isas before launching a public consultation later this year.”