The truth about Innovative Finance ISAs

22/03/2018

What exactly IS an Innovative Finance ISA? This ISA season we look at just what's in these so-called cash alternatives. easyMoney claims its Innovative Finance ISA can offer ‘inflation-busting interest rates’ because it has ‘no costly branch networks to maintain’ and doesn’t need to worry about the ‘significant maintenance expenses of out-dated computer systems’.

This is nonsense. In the end, it's debt, it's not protected by the Financial Services Compensation Scheme and you're exposed to more risk than you think.

"For investors frustrated by the poor returns on cash ISAs but also concerned about the current volatility of the stock market, an Innovative Finance ISA could be an ideal solution."

Lending Works

"The easyMoney Innovative Finance ISA is aimed at investors across the UK who have had enough of the poor interest rates offered by cash ISAs and are nervous about the potential volatility of most Stocks & Shares ISAs."

easyMoney

This is how the innovative finance industry sells itself – a gentle middle ground between the volatility of stock markets and the security of cash. Even better, many sell themselves on giving one in the eye to the big guys, to those greedy banks and investment managers.

And it seems that people like what the innovative finance industry is saying. Statistics published in August 2018 by HMRC, show the amount of money invested in Innovative Finance ISAs rose from £36m to £290m in just a year.

Andrew de Candole, CEO of easyMoney said:

Financial services in the UK are in desperate need of a shake-up. Like European air travel 23 years ago, the ISA market is crying out for someone to give everyday investors more for their money.

We wouldn’t necessarily dispute that the financial services industry needs a bit of a shake-up. For some time, providers have acted as if no-one other than my Dad would ever contemplate buying a financial product. However, we are also distinctly wary about overblown claims – and this is why we worry about some of these innovative finance ISAs.

Let’s look in a little more detail.

As we see it, there are a number of important things to note:

They are not cash. They are not even close to cash.

easyMoney claims its ISA can offer these ‘inflation-busting interest rates’ because it has ‘no costly branch networks to maintain’ and doesn’t need to worry about the ‘significant maintenance expenses of out-dated computer systems’.

This is nonsense. It can offer these ‘inflation-busting interest rates’ because the product isn’t invested in cash.

Investors are taking a risk that they can lose capital, which isn’t the case with a cash savings account.

The income comes from loan repayments, not ‘interest’ as such

With an innovative finance ISA, the provider takes your money and lends it to other people. These may be individuals – Zopa, RateSetter – or it may be companies – FundingCircle, ThinCats – or, as in easyMoney’s case, it may be property developers. The income you receive is dependent on those people making those repayments. People tend to be better than companies at repaying loans, but Zopa still estimates a default rate of close to 5% for its 2018 loan book. That means almost 5% of the loans it makes aren’t paid back.

Some providers have measures in place to help if those people don’t make the repayments. EasyMoney has some charge over the property, Lending Works has a slush fund. Either way, the money you receive is not guaranteed.

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Learn the Tribal Way

What are other people doing? Learn from their experiences.

If you know your shares from your SIPPs but could still use a few tips, you might be an Intrepid Investor. Take a look at our specialised Learning Path for an ISA MOT and some fund ideas.

Intrepid Investors

The rates aren’t always very good for the risk you’re taking

In the stock market, the value of the stocks you own can go down, as Carillion shareholders are about to find out. However, if you had your money in a FTSE 100 tracker (which gives you access to a range of the UK’s largest companies), the most your investment has ever dropped is 50%. And that was in an ‘end-of-the-world-as-we-know-it’ scenario - the Global Financial Crisis. Oh, and if you’d stayed invested, you’d have recovered your money and then some by now and been paid dividends while you were waiting.

There’s also quite a big upside - If you’d invested in the average UK All Companies fund over the past five years, you’d have made 43.8%. The best fund would have made you 133%. You may also have received dividends of 3-4%.

With peer to peer you get an interest rate, but that’s it. You can’t get more and you won’t get all your money back if someone defaults on their loan repayments. If I were lending to a property developer, I think I’d like a little more than a 4-5% interest rate to take that risk. N.b. RateSetter pays over 7%, which seems much more realistic compensation for the risks taken.

Some are distinctly better than others

With Lending Works, it is made very clear that capital is at risk. There are credit checks in place for borrowers to ensure creditworthiness and investors will always be diversified across a large number of loans to minimise the impact of any one default. To date, it says, ‘every payment of capital and interest has been paid to lenders on time since we launched in 2014’. For this, investors get 6% p.a. over five years or 4.5% p.a. over three years in the Lending Works ISA.

As of August 2018, the easyMoney ISA 'pays up to 7.28%' interest rate and claims to ‘lend directly to property professionals, secured by UK property’. This could literally be anyone. It could be a half-built scheme on reclaimed land in Greenford. You just have to rely on their property guy. Again I say, I’d like a little more than 4% to take that risk.

You aren’t covered by the Financial Services Compensation Scheme

The FSCS covers you for up to £85,000 if your financial services provider goes bust. It was introduced when people were all nervous about the banks to make sure they didn’t withdraw their money. This is important protection, particularly when you’re investing with smaller businesses and companies. https://www.fscs.org.uk/.

Peer to peer lending is now regulated, but it still doesn’t have FSCS protection.

The verdict? treat with caution.

You can ask us any questions about Innovative Finance ISAs (or anything else) this ISA season here.

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My question was about a man offering a 22.2% average return on his stock picking ability. I've tried to find reviews of his services but cannot find them anywhere except on a really old forum of his older product 'Spreedbet Beginner' where people have said they are blocked pretty swiftly on Twitter etc if they raise an issue. What is even more odd is that he cannot be found on Companies House. I would like your opinion on this matter as I have no idea what I should do.

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Phoebe Smith's Response
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Precious | Surrey | 03/01/2019 | 0
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Phoebe Smith's Response
From my retirement I received a lump sum of money and a monthly pension. I have £100,000 that I do not need for the foreseeable future... One of my main concerns with Financial Advisers are their costs... All I want is simply to see this money grow to its potential, sensibly and above inflation... Therefore my next thoughts are Stocks and Shares ISAs... My only concerns here are the current Brexit problems - I saw the FTSE drop this past week. I cannot find any information out there to assist with my decision making if this is certainly a good time to invest... I am aware that I can place £20,000 for this year. Come April 2019 I place another £20,000 and so on until the £100,000 has been utilised. Do I have to place it into the same fund or can I choose another different fund with a different company?... Please can you help to ease some of this burden, which has proved an awful part of my retirement and made me frightened to spend any money.

Katherine | Derbyshire | 02/01/2019 | 0
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- Workplace Pension
Helena Wardle's Response
I often find that my monthly salary is spent on things I don't need or just saved up; without accumulating much. So what can I do with my money to make money? I am not expecting you to tell me where and when to invest but simply what to read, and I guess I really would like to know how you became an expert, where did you start? I feel like investment is something so big I can barely even touch it, and I would greatly appreciate any words of advice you could share with me.

Beth | London | 07/12/2018 | 4
- Stocks and Shares ISA
Holly Mackay's Response
I'm the sole carer for my chronically ill and elderly mum, as well as a full-time police officer. I have no other family apart from her. Due to mum's condition, and the fact that I'm exhausted performing both roles, the only option is to go part-time, as mum won't accept help from anyone else. To allow me to go part-time, I will need about £25,000 until March 2020 when I will be retiring. I’m confident of getting another job shortly thereafter. In January 2021, I will receive a commutation lump sum of about £50,000. I have a sizeable fund portfolio under an ISA wrapper with Hargreaves Lansdown. That is doing very well, so I don't really want to sell any of these funds and 'lend myself money' from that. My ideal funding solution would be a bond-type IOU agreement, where 'someone' lends me the money. Are you aware of a peer-to-peer site that could assist? Thanks

Dave | Hertfordshire | 27/11/2018 | 1
- Stocks and Shares ISA
- Online Investment Platforms
- Other
Holly Mackay's Response
I am 35 and working part time on a reasonable salary. I've recently taken out a Stocks & Shares ISA with Wealthify (from reading the recommendations on Boring Money) where I pay in £40 per month. However, I'm wondering if I should be doing more? Should I be diversifying and using more than just Wealthify? Or is it better to increase the amount into Wealthify?

Holly | Sussex | 17/10/2018 | 1
- Stocks and Shares ISA
- Online Investment Platforms
Lesley James's Response
I am 25 and starting to seriously financially plan out my future. I would really welcome a 'sense check' on my thinking as well as some help on which investment choices to make. My goals are: To invest for 15 years - my risk appetite is very high (i.e. I could afford to lose all my money). Goal 1 - More Important: To have an investment pot of £1,500,000. Goal 2 - Less Important: To be mortgage free. My plan is: 1) Open an annual Stocks and Shares ISA each of the next 15 years. 2) Open Share trading/dealing account. 3) Reduce my mortgage term to 6 years by 2025. I appreciate the above is a lot to go though, but I'd welcome any help and guidance.

Mo | London | 15/10/2018 | 5
- Stocks and Shares ISA
- Shares
- Online Investment Platforms
- Funds
- Other
Holly Mackay's Response
The recent Metro article which Holly participated in has really inspired me and made me think that investing in shares is something which I would like to do. Unfortunately I am completely thrown about where to start. I would be grateful for any advice you could pass my way. Realistically, I would only have about 2k to invest, so any tips would be gratefully received.

Sarah-Jane | London | 12/09/2018 | 3
- Stocks and Shares ISA
- Cash
- Online Investment Platforms
Holly Mackay's Response
Any advice for two young people trying to get themselves a home? My girlfriend and I are saving for a house together. Currently house prices in our area are a ridiculous £300k. The max we can get from banks is about £220k, meaning somehow saving up a whopping £80k deposit. This would take us about 8 years (and house prices are increasing faster than we're saving!) That's not to mention solicitors fees, stamp duty, the cost of moving, furnishing the house, white goods, and any repairs or renovations. It all just seems impossible!!

Joe | Buckinghamshire | 23/08/2018 | 0
- Stocks and Shares ISA
- Lifetime ISA
- Cash
- Mortgage
Kate Fitzpatrick's Response
I have cash saved in ISAs and savings accounts - probably a 30% deposit on a property - first time buyer. I am at least 12 months away from getting a permanent job, so at least 12 months away from buying a property. What can I do with the cash in the meantime? Best just to leave it in cash for now, or invest a portion in stocks and shares ISAs?

Malti | London | 25/07/2018 | 2
- Stocks and Shares ISA
- Lifetime ISA
- Cash
- Mortgage
Holly Mackay's Response
I'm nearly 30 and looking to open a private ready made pension, and also an investment ISA for retirement funds or towards a property, but very unsure what risk level to choose (low to medium, or medium to high)? Any comments or advice welcome.

Susan | West Midlands | 24/07/2018 | 1
- Private Pension
- Stocks and Shares ISA
Cherry Reynard's Response
Hello Are there any specific pensions you would recommend, with low charges, which I can set up for my 11 yr old son? I am already paying the maximum into a Junior ISA. Anita

Anita | West Sussex | 18/06/2018 | 3
- Private Pension
- Junior ISA
Richard Allum's Response
Can I move an old Child Trust Fund?

Suzanne | Greater London | 08/05/2018 | 0
- Junior ISA
Holly Mackay's Response
I would like to open a Junior shares ISA for my Grandson for about £50/month. How do I go about it and can you recommend some reliable companies?

Roger | Surrey | 26/04/2018 | 2
- Junior ISA
- Shares
Holly Mackay's Response
I am very lucky to have just received a gift which I want to invest for our retirement. My husband and I aim to retire in around five years. We have 11 more years of school fees to fund, then hopefully university fees for two after that. I've put together a plan for us - can you have a look and see if it makes sense?

Fiona | UK | 18/01/2018 | 6
- Private Pension
- Stocks and Shares ISA
- Junior ISA
- Shares
- Cash
- Online Investment Platforms
Holly Mackay's Response
We have four grandchildren (2 English living in UK, and 2 Irish living in Eire). We have decided to start savings plans for their futures. Their ages are 18yrs, 11yrs, 8yrs and 4yrs respectively. My age is 75yrs, and my wife is a little older. What should we do, please?

John | Buckinghamshire | 01/01/2018 | 1
- Junior ISA
- Lifetime ISA
- Shares
- Funds
- Inheritance
Martin's Response
Have you a review on Halifax Stocks and Shares ISA?

Moira | London | 21/10/2017 | 8
- Stocks and Shares ISA
Dr Richard Bradley's Response
My mother is 84 and has around £35,000 in cash, realised when she moved to a smaller house. She would like to invest it and draw income that would be slightly higher than the natural yield - say around £2,000. What is the best vehicle for that please?

Ed | Sussex | 18/09/2017 | 4
- Stocks and Shares ISA
- Cash
Boring Money's Response
I have a delightful 12 year old daughter and she has just opened her first bank account. I am dreadful with money but I would like to know what I should teach her so that she does not pick up my bad financial habits. Do you have some top tips of things to teach our children so they are wise and responsible with money please?

Louise | Greater London | 11/09/2017 | 1
- Junior ISA
- Shares
- Cash
Lesley James's Response
I've got £20,000 from an endowment policy (astonishing, I know), and I'm looking into how best to invest to get a reasonable return without excessive risk. Any thoughts much appreciated!!

Penny | Peterborough | 09/08/2018 | 1
- Stocks and Shares ISA
- Cash
- Online Investment Platforms
- Life Insurance
Boring Money's Response
How risky is a Stocks and Shares ISA?

Alexandra | Greater London | 06/09/2017 | 3
- Stocks and Shares ISA
Holly Mackay's Response
Should I be even thinking about the stock market?

Lysa | Greater London | 06/09/2017 | 0
- Stocks and Shares ISA
- Shares
Holly Mackay's Response
Pensions vs ISA - which one is best?

Roderick | Greater London | 06/09/2017 | 0
- Stocks and Shares ISA
- Junior ISA
- Lifetime ISA
- Pension
Holly Mackay's Response
Hi, I am 67 years old and I want to know the best way to invest £10,000 for growth rather than income. I would like to do this online and to be able to save money on fees.

Rohan | Greater London | 06/09/2017 | 0
- Stocks and Shares ISA
Holly Mackay's Response

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