Can IFISAs reverse negative pandemic trend?

Analysis by peer to peer real estate investment platform, easyMoney, has shown that the number of ISA subscriptions has dipped by -6.1% year on year, having previously grown at a steady rate in the run up to the pandemic.

Since their introduction at the end of the 20th Century, Individual Savings Accounts, better known as ISAs, have become one of the UK’s most popular money saving methods. In fact, the figures show that between 2017/18 and 2019/20, the number of overall ISA subscriptions increased by 29%.

However, the latest figures shows that the total level of ISA subscriptions fell by -6.1% as the pandemic struck, falling to a total of 12.2m.

This decline is being driven by Innovative Finance ISAs (IFISAs) which have fallen by -52.9% and cash ISAs which are down -16.9%. Only stocks and shares ISAs and lifetime ISAs have avoided the drop, increasing by 31.6% and 1.5% respectively.

The downward trend in overall subscriptions has also impacted the total level of investment into ISAs, with the latest figures showing a -3.2% year on year drop, although some £72.2bn was still invested.

Again, IFISAs alone are down by -79% and cash ISAs are down by -24.5%. Meanwhile, the total invested in stocks and shares ISAs has grown by 39.9% and lifetime ISAs are up 18.1%.

What is an IFISA?
Launched in 2016, Innovative Finance ISAs are a relatively new offering, hence their relatively low figures for both current subscriptions (16,000) and amount subscribed (£92m).

An IFISA is an ISA that operates on peer-to-peer loans instead of the more established cash or stocks and shares ISAs.

Peer-to-peer lending matches people who are willing to lend money with individuals, businesses, or property developers who are looking to borrow. Borrowers then repay the loan with a pre-agreed amount of interest, thus adding to the investor’s wealth.

For borrowers, this means that banks and other major lending institutions can be entirely bypassed. For investors, often called subscribers, it means they can invest some or all of their annual ISA allowance and receive tax-free interest at a higher rate than more traditional ISAs can offer.

IFISA Pros
– IFISAs are easy to open and access via online platforms.
– IFISAs provide returns ranging from 3% – 12%, far greater than traditional cash or stocks and shares ISAs which deliver between 2% – 4.5%.
– IFISAs enable investment in a much wider range of assets which allows for diversification of investment portfolios.

IFISA Cons
Regulated Peer-to-peer platforms which offer IFISA’s are not protected by the Financial Services Compensation Scheme (FSCS) in the event of a collapse.
There is potential for poor investment options due to the low barriers to entry, but reputable providers are easy to recognise.
IFISAs are considered a high-risk investment.

Jason Ferrando, CEO of easyMoney says

“While in its relevant infancy, the IFISA sector has had to contend with a number of factors that have ultimately caused a decline in overall appetites, some of which were expected within an emerging sector and others we simply couldn’t have planned for.

In any new sector, there’s always an initial influx of businesses entering the market, many of whom will inevitably fall by the wayside. With this happening to a number of big names within the IFISA space during the early days, it’s understandable that consumer confidence in the IFISA product offering will have taken a knock.

At the same time, the pandemic almost certainly played a part in declining consumer activity, creating a far more nervous market than previously seen. The fact that IFISAs are not protected by the FSCS will have deterred many from investing, as in times of economic uncertainty, consumers value security and protection ahead of larger returns.

Regaining this consumer trust takes time but the silver lining is that those who continue to pioneer the IFISA product offering have weathered the storm and built a very attractive proposition in the process. Peer to peer companies offering IFISAs are regulated. So putting all IFISAs under one unregulated umbrella is throwing the baby out with the bath water.

We’re confident that once we are able to demonstrate the strength of the IFISA, investors will become more comfortable and we should see the negative trends of previous years start to reverse.”