Peer-to-peer (P2P) lending is set to become part of tax-free New Individual Savings Accounts (NISAs) from April 2015, following a Treasury consultation. The discussions between government and industry experts beginning this month will look at ways in which investors could use ISAs to access the P2P market, and whether a new ISA category should be created to enable this.
Potential For High Returns
Peer-to-Peer lending platforms are becoming increasingly popular with investors due to the level of interest they offer – around 6-7% – compared to the low rates of 1-1.5% interest being offered by banks. match creditworthy borrowers looking to borrow funds with investors willing to lend – have strict vetting procedures to minimise risk for investors and the industry is now regulated by the Financial Conduct Authority. Under the FCA’s watch, P2P lenders must publish full details of how their loans work as well as the risks involved. In addition, platforms must ensure that all client money that is held is segregated, and procedures are in place for the run-off of loans in the event of operator insolvency.
Lending platforms are becoming increasingly popular with investors due to the level of interest they offer – around 6-7% – compared to the low rates of 1-1.5% interest being offered by banks. Leading P2P platforms match creditworthy borrowers looking to borrow funds with investors willing to lend – have strict vetting procedures to minimise risk for investors and the industry is now regulated by the Financial Conduct Authority. Under the FCA’s watch, Peer-to-Peer lenders must publish full details of how their loans work as well as the risks involved. In addition, platforms must ensure that all client money that is held is segregated, and procedures are in place for the run-off of loans in the event of operator insolvency.
The ‘Feel Good’ Factor
As well as offering a better rate of return, some choose to invest their savings in P2P lending platforms as a way of supporting the UK’s small businesses. This creates a ‘feel good’ factor for investors keen to encourage economic growth in the UK’s SME sector. With banks still reluctant to lend to SMEs, Chancellor George Osborne is also keen for Britain’s small businesses to gain access to more readily available sources of funding. As a result, the suitability of using tax-free ISAs as a vehicle for more widespread investment in Peer-to-Peer lending platforms is being examined.
Adding lending to available ISA options would make them a far more attractive proposition for savers as interest earned would be exempt from income tax – boosting returns by 20% for basic rate taxpayers and 40% for those on a higher rate. However, working out the best way to include P2P platforms within ISAs may prove complicated, which is why the Treasury has called for the consultation.
How P2P ISAs Might Work
One idea is for P2P platforms to offer stocks and shares ISAs that invest exclusively in lending. However, this would restrict choice for investors – who can only put money into one cash ISA and one stocks and shares ISA per year under current regulations – as investing in a Peer-to-Peer ISA would stop them from buying any other kind of stocks and shares. To broaden the options available to savers, some are suggesting that P2P lenders offer diversified ISAs including not only P2P but other kinds of stocks and shares. However, offering such products would certainly involve a lot more administrative work on the part of P2P platforms.
Another alternative is to create a brand new type of ISA for lending platforms which would allow savers to additionally invest in a cash ISA and a stocks and shares ISA simultaneously. This idea would seem to offer savers the best of both worlds by enabling them to invest in P2P but not forcing them to do it to the exclusion of other investment instruments. Although the biggest P2P lenders have measures in place to limit investor losses – such as a provision fund to compensate lenders if a borrower defaults – Peer-to-Peer is not without risk and savings are not guaranteed under the Financial Services Compensation Fund. As such, offering a dedicated P2P ISA would give investors the maximum opportunity to spread risk and would likely boost the rate of adoption among more cautious savers.
If Peer-to-Peer lending is included in future NISA options as a result of the Treasury consultation, it could lead to billions of pounds in additional investment for Britain’s small businesses. With an estimated 24 million current ISA holders in the UK, the growth potential for UK SMEs as well as P2P providers is huge.