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Neil Liversidge: Isa’s good name will be ruined by P2P

The Government and the regulator have the opportunity to head off a disaster before it happens.

Investment and saving took a great leap forward with the advent of the personal equity plan in 1986 and the tax exempt special savings account in 1990.

Peps and Tessas did what they said on the tin; the words “equity” and “savings” spelling out the difference in risk between the two.

The Isa, which replaced them on 6 April 1999, blurred the line between saving and investing, as an investment in shares or corporate bonds was now theoretically a savings account.

Eighteen years later, we still regularly meet prospective clients who do not know an Isa can hold investments other than cash. Some we meet, who already hold stocks-and-shares Isas but who profess to be ultra-cautious and completely risk averse, respond when challenged over their investments with: “ah, but they’re in an Isa so they are safe”.

We spend a lot of time educating those the Government has confused. When it comes to risk warnings, we paint them with a four-inch brush. That said, Isas have survived the intervening period without any major disasters to give the product a bad name.

Govt: Isas are not a ‘gimmick’ that distracts from pensions

But when it comes to blurring the line between saving and investing, the Innovative Finance Isa offering tax-free interest to tempt savers into peer-to-peer lending is a step too far. Way too far.

Innovative Finance Isas have yet to take off but, when they do, you can bet the advertising for them will lead with the high and juicy interest rates on offer.

Interviewed on the BBC’s Today programme in February 2016, former FSA Chairman Lord Adair Turner predicted big losses on peer-to-peer lending. In fact, he memorably warned that “the losses on peer-to-peer lending, which will emerge within the next five to 10 years, will make the worst bankers look like absolute lending geniuses”.

His worry was that investors would be lending money to borrowers rejected by the banks and that the peer-to-peer industry would fail to properly risk-assess the recipients.

He was right to be worried. That in itself is bad enough but many of those “investors” will, in reality, be risk-averse savers gulled by the “Isa” tag and sucked in by the greed for interest rates way above those on offer from safe cash Isas.

An easy sell

I foresee elderly savers who have never been, and who have never wanted to be, investors automatically associating the advertised interest rates with safe cash accounts. Likewise, the financially unsophisticated of all ages.

I find it extraordinary the consumerists who are normally so vocal on anything involving risk have completely missed this danger.  Equally extraordinary is the near-silence of the adviser community.  Peer-to-peer lending is unregulated but we know we can count on the Financial Services Compensation Scheme to game the rules, deeming peer-to-peer investment advice regulated. Chequebooks at the ready folks.

Too hot to handle: Industry shies away from P2P as capital shortfall exposed

For once, the Government and the regulator have the opportunity to head off a disaster before it happens. Give peer-to-peer Isa-style tax breaks by all means, but do not let it use the Isa tag and ban any reference in promotional literature implying any resemblance to Isas.

To save the Treasury hiring brand consultants to come up with a new name, I have done it for them. Change “Innovative Finance Isa” to “Risk Enterprise Lending Account”. I am sure the product will do exactly what it says on the tin.

Neil Liversidge is managing director of West Riding Personal Financial Solutions

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. Neil I agree. I have had too many clients and prospective clients come to me with pages pulled out of the printed media asking for my comment about the high savings rates on offer from P2P. And asking “why haven’t I recommended them when they’re offering much better rates than their current savings accounts”. After much discussion not one has yet proceeded. Attitude to risk, risk profile, capacity for loss etc.

  2. Very wise comments, Neil. I’m soooo glad I have steered well clear of P2P lending “products” – sub-prime lending in my view. A good “house rule” I have kept to over the last 25 years is “the glossier the brochure, the further I throw it” – no UCIS, no P2P, no iffy SIPP “opportunities”, no Arch Cru, etc., etc.

  3. Neil, very good article. I completely agree and my experiences with some new clients are exactly as those you have described. It beggars belief how P2P lending can advertise these ‘high interest rates’ next to ordinary savings accounts and the risks involved in a P2P lending is arguably greater than a standard Unit Trust or Stocks and Shares ISA. I find it hard to see why any adviser would recommend a P2P ISA when an ordinary mainstream investment would do the same/better job. This needs to be addressed immediately to prevent detriment to the masses.

  4. Really well written piece Neil and bang on the money.

    Mark I love that and may well pinch it.

  5. Bit like double glazing really, so many folk believe the word “Guaranteed” ensures everything will be OK. Few think to ask “who’s giving the guarantee….?”

  6. I’ve been banging this drum (in my small way) for well over a year, since that original Wellesley advert a couple of years ago!

    ‘Interest rates’ should not be allowed to be quoted in adverts, as they are anticipated yields and not really interest rates as the public know them.

    Nothing will happen as our system seems to prefer enhancing its reputation by fighting fires rather than refusing to permit the sale of the matches!

  7. @Darren Cooke

    You are welcome! In all seriousness, it really has been a very decent way of avoiding problems.

  8. Neil Liversidge 16th August 2017 at 6:27 pm

    Name-wise, my esteemed PIMFA-council colleague Tim Harvey has suggested ‘Flexible Finance Savings’. This would, of course, abbreviate to ‘FFS’…

  9. Great article, Neil. The government’s lost the plot to allow this to happen – I’m sure most IFAs would stay well clear of P2P anyway.

    Further, you’re right in highlighting that the FSCS would eventually cover P2P mis-sales… just as they currently cover “unregulated” investments made via SIPPs.

    Absolute bonkers.

  10. Pretty much agree with the article and the comments from everyone.
    I [articulaty like Tim Harvey’s suggested name for them (Hllo Tim).
    That’s not to say I don’t think that a client with a couple of million in investments would feel that £20 or £30k in one would be inappropriate, just more hassle than they are worth.
    It’s almost the reverse of how I see premium bonds and from an advice point of view, P2p, the lottery and Premium Bonds are a “why bother” issue. They are a bit of fun which you should only do if you’re willing to loose something. The first two, you risk loosing EVERY PENNY, hence I don’t do the lottery and whilst I might consider P2P for a couple of grand for me, that would STILL be across a brought portfolio of loans and balanced with equities, bonds, commercial property etc. Premium bonds, you don’t risk your stake, just the reward and hence inflationary devaluation pf the stake. I’ve got PSBs and whilst i mention them to clients, I don’t “advise” them to have them, I explain them as an option.
    I suppose P2P will be the same, an option for HNW clients for a small part of their portfolio we might MENTION, but are unlikely to specifically advise to do.
    I haven’t done any and like most advisers, I have not rejected the variation of permsissions the FCA automatically put on our records for them so as I do with being Independant, with P2P, I have an open mind for the right client, but they will be few and far between and certainly should not be entitled ISAs and nor be allwoed to quote “interest or guarantee” in ANY literature because it is anticipated yield and underwritten by company’s which have littlmore capital adequacy than a small IFA I think and NOT with any meaningful guarantee.

  11. They should be kept away from the public who will understand the rate of interest but not the capital risk. I can imagine the thought process:”After all there’s no risk to capital in any of my other interest bearing accounts. I think its all backed by the Government or Insurance Companies so if it does go wrong I’ll get my money back. Its all guaranteed. Nothing can go wrong.”

  12. Neil – absolutely spot on. I’m very glad that someone with the opportunity to put this to a wider audience has done so.

    P2P is more akin to charity than to investment.

    As Polonius said:

    Neither a borrower nor a lender be,
    For loan oft loses both itself and friend,
    And borrowing dulls the edge of husbandry.

  13. Can politicians really think this is a good idea.

    As already stated most customers will not understand this product.

    It does have a (limited) role, but it is not a true ISA.

    A disaster waiting to happen.

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