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When it comes to ISAs, choice is the new normal...

Posted on 29/02/2016, by Stuart Sheppard

As the end of the current tax year edges nears, ISA mania is building –as Britain’s savers and investors scour the market for the best rates and plans on offer.

The ISA, or ‘Individual Savings Account’, is a firm favourite with Britain’s savers. Sold in two flavours – cash, and stocks and shares – they allow customers to earn tax-free interest.

Just over £15,000 of new deposits are allowed each tax year but, importantly, customers carry on earning tax interest free on the whole amount. Over the course of the lifetime, that can equate to an impressive savings pot – all beyond the reach of the taxman.

No surprise, then, that 50% of us hold some of our cash savings within one.

The catch? Just like with all savings accounts, you’ll struggle to find a rate to write home about. According to Moneyfacts, the current average easy-access ISA pays a pretty miserable 1.06%.

For those looking for better tax-free returns than on those offered by cash, there’s always a stocks and shares ISA. The benefit remains the same, but instead of saving with the bank, your money’s invested in the stock market – offering higher returns, but also additional risk and unpredictability.

But this year, Britons face another choice when it comes to deciding their ISA portfolio.

Alongside cash and stocks and shares, the Government’s new ‘Innovative Finance ISA’ (IFISA) will make the interest earned through ‘peer-to-peer lending’ (P2P) platforms eligible for tax-free status, too.

Announced by the Government in July 2015, the IFISA represents a huge boon for the growing alternative finance sector; an official vote of confidence that will help introduce some much-needed competition into a financial services sector not much enamoured by everyday consumers.

Peer-to-peer lending refers to the practice of lending money to individuals or businesses in the expectation of being repaid regularly, with interest. It’s been under the watch of the official regulator, the Financial Conduct Authority, since April 2014 – during which time its popularity has surged.

Over the course of 2014, the sector surged an astonishing 160% – and, according to a new report published by Nesta and the University of Cambridge this week, the volume of P2P transactions continued to grow at an impressive 84% in 2015.

According to the report, it’s a trend that the new IFISA will only amplify. P2P lending platforms expect the introduction of the tax wrapper to bring an additional 35% of growth, as more and more investors come to understand the market and research the different products on offer.

But, this week, the IFISA hit a roadblock, as concerns were raised by many existing players that the FCA won’t be ready to provide them with the necessary permissions in time for the new tax year.

According to Andrew Hagger, writing in The Independent, “the P2P sector has flourished in recent years, but the IFISA was seen by many in the industry as a game-changer. It was anticipated that savers would switch in their droves from their poor-paying cash ISAs for something far more rewarding.

“However, even though the Government confirmed in the Budget last July that P2P lending would be eligible for inclusion in tax-free ISAs […] uncertainty remains over whether the Financial Conduct Authority (FCA) will give them the green light come 6 April.”

Under the rules, only those platforms that are regulated under so-called ‘full permissions’ by the FCA will be able to introduce IFISA products. Currently only a few hold such permissions, with the remainder operating under ‘interim’ permissions while the regulator works its way through a lengthy backlog.

Explaining the delay, an FCA spokesperson said: “We have received a very high number of applications from P2P firms, which coupled with recent regulatory changes, has created particular pressures on our authorisation process.”

The response from some commentators has been pessimistic. The Times, for example, responded that “the anticipated rush of investors looking to transfer their ISA savings […] looks as if it might be muted”.

But while it may not be the big bang that some may have been hoping for, the long-term success of the sector won’t be decided in the few weeks or months after 6 April.

As Nesta’s report showed, the sector’s trend of dramatic growth looks set to continue – no matter what delays to the IFISA.

And, more to the point, mass appeal was never going to happen overnight. It was always going to take time for Briton’s savers to familiarise themselves with the ins and outs of what, ultimately, constitutes a new way of thinking about their finances.

That’s as it should be. Customers need to understand how these products work, and the different risks involved.

At Octopus, we’re on a mission to create a new type of product that will allows customers to access far higher returns than cash ISAs, while doing more than any other to minimize the risks.

This product will use the mechanics of peer-to-peer lending but with a real difference: we’ll invest our own money with those of our customers – and would lose our money first, if a borrower failed to repay. As soon as the FCA is ready, we’ll be able to include our product in an IFISA.

Just like the Innovative Finance ISA itself, we think our product will give Britain’s many savers and investors the choice they never had: to make their money work harder, without taking on more risk than they’re comfortable with.

For consumers, choice is the new normal.