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.
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.
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