The UK’s money watchdog the Financial Conduct Authority (FCA) has warned that investing in an Innovative Finance ISA (IFISA) is risky, claiming it has seen evidence that IFISAs are being advertised alongside cash ISAs.
In a statement on its website the FCA said that the types of investments held inside IFISAs are “high risk,” with “the the money ultimately being invested in products like mini-bonds or peer-2-peer investments.”
It went on to warn that IFISA type investments may not be protected by the Financial Service Compensation Scheme (FSCS), adding that “customers may lose the money invested or find it hard to get back.”
Like all investments, IFISA investments are not protected by the £85,000 FSCS cover afforded to cash balances, meaning cash savers will be refunded up to this amount if their bank or building society goes bust.
Some IFISA providers are covered by the FSCS scheme if the investment manager goes bust, however this is up to a limit of £50,000. Any investment amounts over this amount can potentially be lost if the provider goes into administration.
The FCA concluded its statement stating: “Anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing an IFISA.”
London Capital & Finance collapse
The statement follows the collapse of London Capital & Finance (LC&F), a mini-bond provider that was an IFISA eligible lender that recently fell into administration with £236 million of investors money on its books.
LC&F advertised mini-bonds paying between 6 per cent and 8.5 per cent backed by property investments. A recent report from administrators has revealed this largely consisted of speculative offshore property developments in the Dominican Republic and Faroe islands, while £58 million was paid to the Brighton-based marketing agency advertising the bonds.
Both the FCA and HMRC have responded to calls from government to investigate for their oversight of LC&F, including the FCA granting the firm regulated status and the Treasury allowing the firm to become an ISA provider in 2016.
Commenting on the FCA’s statement, Bruce Davis, founder of IFISA eligible renewable energy investor and Good Egg company Abundance Investment, says: “For some time now The UK Crowd Funding Association has been asking the FCA to enforce existing rules on financial promotions more swiftly.
“LC&F is a good example of a company that allegedly appeared to be operating outside of the rules and despite several whistleblowers it took several months for tangible action.
“The problem is not the need to ‘rein in’ the IFISA but rather to make sure that rules are enforced in a timely and more public way to dissuade those who seek to avoid the controls the majority of platforms across P2P and crowdfunding comply with. You only have to look at the low levels of complaints to see that the regulations are working well.”
IFISA industry best practice
The regulator’s observation that IFISAs are high risk should come as no surprise to investors in the sector, where responsible providers are at pains to warn that IFISA eligible bonds – like any other form of investment – are at risk of capital loss, with returns not guaranteed.
Lisa Ashford, chief executive of leading impact investment platform and regulated IFISA provider Ethex says: “”It is important that responsible platforms are clearly communicating the risks associated with IFISAs or investment products i.e. capital at risk, returns not guaranteed and whether or not investments are covered by the Financial Services Compensation Scheme.”
“In addition, investors in this area should make sure that not more than 10 per cent of their savings are in unlisted products including IFISAs. Before making any investments people should also find out more about the provider and where the money is going.
“There are often independent personal finance publications like Good with Money and Ethical Consumer that have compiled industry research which it would also be good for investors to familiarise themselves with.”
However, Ashford also points out the many benefits of IFISAs, which often give investors the ability to invest in small, grassroots projects making a real and measurable positive impact to society and the environment.
She says: “IFISA products themselves are particularly innovative and give investors looking for an ethical option more flexibility to do good with their money such as supporting solar energy installations in schools, electric charging infrastructure or solar home systems in Africa, whilst also getting the benefit of potential tax free returns.”
If you want to find out more about the IFISA, check out Good With Money’s comprehensive guide here
IFISAs are not cash
Picking up on the FCA’s observation that IFISA’s are being marketed alongside cash accounts, Sarah Coles, personal finance expert at online investment platform Hargreaves Lansdown said savers should be clear that IFISAs are not the same as cash.
Coles continues: “Savers who are disillusioned with the low rates on cash ISAs may see the high target interest rates on these ISAs and assume they’re a similar safe haven for their life savings. However, mini-bonds and peer-2-peer loans are radically different to cash ISAs. They lend money direct to businesses, so there’s no guarantee they’ll be able to pay interest or repay the loans.
“IFISAs are still a sensible option as a small part of a wider portfolio for some investors – as long as they understand the risks and are comfortable with them. However, savers who need a risk-free home for their cash should steer clear.”