The move to include peer-to-peer lending and crowdfunding in Isas was heralded by the industry, but a new report has questioned the impact it is likely to have, particularly on the adviser-led market.
In the Autumn Statement, Chancellor George Osborne announced the list of qualifying investments for the new Innovative Finance Isa will be extended to include debt securities offered via crowdfunding platforms as well as P2P loans.
Research from Yorkshire Building Society shows roughly 405,000 UK consumers, or 3 per cent of UK Isa savers, expect to invest in this new type of account when it becomes available in April.
Intelligent Partnership research director Daniel Kiernan says: “It’s estimated that there is £500bn in Isas, split 50:50 between cash and stocks and shares. If peer-to-peer lenders can capture just a small percentage of this market, it would provide a huge boost to their volumes, and signal mainstream acceptance for this new industry.”
However, a new paper has poured cold water on hopes for a booming adviser market in the sector. The Alternative Finance report, produced by Intelligent Partnership, suggests advisers lack knowledge on the crowdfunding and peer-to-peer industry, and are unlikely to recommend the products to clients.
It also raises questions about whether the crowdfunding and P2P industry has its technology and systems ready for the Isa inclusion.
The research found advisers are aware of the crowdfunding and P2P space, with two-thirds having heard of P2P lending and 60 per cent having heard about equity crowdfunding.
Despite that, the research of 130 advisers showed just 9 per cent expect the P2P sector will form part of their advice process in the next 12 months.
Advisers lack knowledge of the P2P space, the report suggests, with only 7 per cent of those questioned aware alternative finance platforms are now regulated by the FCA.
Hargreaves Lansdown chartered financial planner Danny Cox says: “P2P loans and crowdfunding debt securities becoming qualifying for Isa from April adds credibility to the industry and you would expect to see their popularity increase.
“The question is how will financial advisers be able to judge which platform to recommend to their clients. There is reputational risk for the adviser in an unfamiliar area,” he says. “It is difficult to see how advisers would want to recommend this form of investment to their clients.”
Crowdfunding and P2P platforms say the vast majority of their existing business comes from the self-directed market, rather than through advisers.
However, RateSetter, one of the largest P2P firms in the UK, says it is actively engaging with the adviser market in an attempt to boost education and flows from the sector.
Ceri Williams, from the investor operations team at RateSetter, says: “The adviser market is really important to us. We are the only platform that has a dedicated portal that allows the adviser to manage their client’s investment into peer-to-peer lending and are in the middle of developing our product so it will become available via certain investment platforms next year.”
The adviser market represents “a huge opportunity” for the P2P industry, he adds, and will drive a large amount of inflows in the coming years.
Williams says: “We have made every effort to ensure that both the client and adviser experience are as efficient as possible, and although it is in its infancy there is a huge appetite and potential for these products, whether that be through a tax efficient vehicle such as a Sipp/SSAS or Isa, for example, or to earn interest on deposits that languish in bank accounts earning scant returns.”
Zopa, another of the large P2P platforms, is less enthusiastic about the adviser-led market, believing the bulk of investment will still come from DIY customers.
Zopa head of PR Mat Gazeley says: “It is something we are looking at in the asset class, wanting IFAs to recommend clients to us. We don’t have a portal where IFAs can set up accounts on behalf of their clients.”
Instead, Zopa is “cutting out the middle man” and targeting end investors directly.
Gazeley says: “Advisers maybe don’t necessarily understand each platform’s level of risk and return, and that is something we are looking to engage with on that side.”
Rather than focusing on boosting engagement with advisers, the P2P and crowdfunding market is instead concentrating on preparing its systems to allow investors to allocate money within an Isa wrapper.
Gazeley says Zopa is aiming to become an Isa manager, so investors don’t have to go through another investment house or adviser.
But with the Government yet to release the final technical standards on certain aspects of the Innovative Finance Isa, the industry is struggling to prepare.
The Intelligent Partnership report says: “We know from some on and off-the-record conversations with providers and consultants that are working with them, that the alternative finance platforms are not up to speed with the administration issues that come with Isa acceptance.
“These centre around liquidity (retail investors should be able to get their hands on their money swiftly, should their circumstance change), reporting and disclosure to HMR Revenue & Customs.
“The technical consultation ends on 1 February, so there is still a lot of time from now until then until we know what they want to do. It leaves a month and bit to finalise it and get it set up.
“We are still in a waiting process.”