What is the Innovative Finance ISA (IFISA)?
The Innovative Finance ISA allows you to invest your ISA allowance across peer-to-peer platforms such as the ArchOver platform. This type of ISA generally gives you a higher rate of return at the cost of reduced security.
What are your views on the IFISA as a form of investment?
There is a lot of money in the UK in cash ISAs, which are not performing very well in terms of ROI. So the idea of getting a decent performance for those savers has to be welcomed. As such I think it’s a credit to the government that they have broadened the scope of the ISA to allow savers to access higher-yield options with their tax-free allowance. .
On the other hand, there is a danger that people might not quite understand what they are buying into because the security offered by a cash ISA is very different to the security you get with an IFISA from peer-to-peer lenders. There is a good rate of return, but people shouldn’t think that they can increase their return without the loss of some security. So, I welcome the IFISA, but it needs to be properly sold to potential investors.
Peer-to-peer is still a young industry. How is it an attractive choice of investment in the UK?
Peer-to-peer is a technology-enabled, young sector that helps businesses secure the funding they need to grow by sourcing money from private investors—the ‘crowd.’ We are becoming an increasingly relevant sector in the UK: In 2017 a significant proportion of business lending was provided by peer-to-peer lenders.
We believe that we offer a decent rate of return coupled with a decent amount of security and increasingly, lenders and investors are picking up on that.
Peer-to-peer platforms provide IFISAs as part of their financial offering. How has the response been so far?
I think the impact so far has been positive. Investors and savers seem to like it. They are putting their money into it. From the conversations I’ve had with CEOs from other peer-to-peer lending platforms that have already got the IFISA in place, they are seeing significant amounts of money flowing through. So it clearly has a strong future as a service for the P2P sector to offer.
How is the IFISA attracting new peer-to-peer investors?
The IFISA is attracting some new peer-to-peer investors. But I think the first flood of money is coming from people who were already investing across peer-to-peer platforms. It’s likely that the cautious ISA saver will wait a little while and see what happens before they switch their money from a cash ISA to an IFISA.
This is a long game. At ArchOver, we generally find that investors who are cautious to begin with and start off slowly are the people that are still with you two, three and five years down the line. Those are the people we particularly want to reach, because they help us provide a steady stream of money to borrowers.
Can the IFISA add definite value to one’s future investment plan?
The probability is that it will, but there is always risk involved when you are investing cash. There is no such thing as a definite rate of return.
What is the key benefit when the IFISA is incorporated into a pension plan?
The main benefit is that the return should be higher than it is now. For example, if you’ve got savings that supplementing your income, putting some of that money into an IFISA could help you improve your return on that cash. If you invest carefully, that could allow you to keep your capital intact and live off the return rather than having to keep dipping into the capital.
If you have to dip into the capital each year then your return the next year is going to go down and it’s a downward spiral. This is an opportunity to break out of that downward spiral.
How is the interest rate decided?
The interest rate is decided based on a combination of the time value of money and a rate that our lenders have indicated to us is fair by putting their money in. It is always the case that investors would like to receive more interest while borrowers would like to pay less interest. So we have to balance out.
You mentioned investors can choose IFISA with peer-to-peer platforms. Does this mean they can hold other financial services in the same account?
It wouldn’t be in the same account, but investors can have different investments over the same platform. We already have that to an extent where people will invest in their own name across the platform; people will invest through their company across the platform; and conceptually the same person can invest through the IFISA as well. They can have three different accounts and there’ll be no mixing between the accounts.
Does ArchOver offer an IFISA?
Not yet. However, we will be launching one soon with a small group of existing investors and we will then roll it out more gradually.
What opportunities does ArchOver provide for investors and borrowers?
In terms of borrowers, we are looking for businesses that have a debtor book contracted recurring revenues such as a software rental stream, and we will advance money against that. The opportunity for investors is to invest project by project, company by company through the services we offer.