RateSetter, a UK P2P lending platform, has raised £13 million in its latest round of fundraising as it prepares to launch its “innovative finance” ISA (IF-ISA). The IF-ISA allows investors, or lenders, to earn interest free of income tax. Before a P2P platform can offer its own ISA, it must be fully authorised by the Financial Conduct Authority (FCA).
This comes at a time of increased regulatory scrutiny of the P2P lending sector. There is growing frustration in the industry at the prolonged regulatory approval process for IF-ISAs. This is a function of high numbers of applications before the FCA and a high level of regulatory scepticism over this type of product.
One FCA concern is whether investors understand the risks of an IF-ISA. The FCA launched a consultation into P2P lending following concerns that investment through an ISA may shift the investor base towards less experienced and knowledgeable retail investors, who trust the ISA “brand” and who may not fully appreciate the risks.
Unlike cash ISAs, money invested in an IF-ISA is not protected by the Financial Services Compensation Scheme (FSCS) and so in theory, is all at risk. Some lending platforms use “provision funds” – pots of cash designed to protect investors from losses if borrowers default (separate from the FSCS). Critics have suggested that P2P lending has grown since the financial crisis in a period of cheap money – its robustness against a rise in interest rates or other economic shocks that would affect a borrower’s ability to repay is yet to be properly tested.
The FCA plans to impose tougher rules on the sector. The first wave of regulatory approvals for IF-ISAs has begun and we are likely to see more – RateSetter has confirmed on its website that is in advanced stages of obtaining full authorisation.