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How risky is innovative finance?

Innovative finance Isas offer particularly attractive rates of interest, but investors need to be aware of the risks to their money, says Zayani Bhatt
How risky is innovative finance?

Today, innovative finance individual savings accounts (IF Isas) offer anything from 4 to 12 per cent interest. That’s a very good incentive to buy one, particularly in this low interest rate environment. But are they too good to be true? And what exactly are the risks of investing through an IF Isa?

To understand this, we first have to look at how an IF Isa works. IF Isas were introduced in April 2016 as a tax-efficient way to engage in peer-to-peer (P2P) lending. Through IF Isas, investors can channel their money into personal loans, small business loans, property loans and other debt-based securities, provided they fulfil the eligibility criteria of an IF Isa. Many P2P platforms that are regulated and approved by the UK regulatory body, the Financial Conduct Authority (FCA), offer the IF Isa wrapper themselves to investors, as a way to lend through them. 

You can invest some or all of your annual Isa allowance of £20,000 in an IF Isa and receive tax-free interest (and capital gains should there be any). The annual Isa allowance can be spread across different types of Isa, including a cash or stocks-and-shares Isa, and it does not have to be invested in a single lump. As with these older types of Isa, investors can only have one IF Isa each tax year, but can open a new IF Isa with a different provider each tax year. You will need to consider if an IF Isa is the best way to use your annual allowance.

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