There is big news out of the UK today. In his annual budget, Chancellor of the Exchequer (the equivalent of the US Treasury Secretary), George Osborne, made an announcement that will have a lasting impact on the P2P lending industry there.
Until now investors in the UK have not been able to be invest in P2P lending through the tax-advantaged ISAs (Individual Savings Accounts). And as we have discussed many times on Lend Academy taxable accounts make this investment less lucrative. While we have enjoyed investing through IRAs in this country for many years this has not been the case in the UK.
Here is the all important excerpt from the 2015 UK Budget:
Extending ISA eligibility – The government will introduce the Innovative Finance ISA, for loans arranged via a P2P platform, from 6 April 2016 and has today published a public consultation on whether to extend the list of ISA eligible investments to include debt securities and equity offered via a crowd funding platform.
This is a big moment for the industry in the UK so I reached out to the major platforms to get their reaction. They were all obviously very pleased with this development. This is what they had to say.
From Giles Andrews, CEO and Co-Founder of Zopa:
“Today’s announcement confirming a third ISA category, the Innovative Finance ISA dedicated to peer-to-peer lending, is a game changer for the industry and millions of Brits who have suffered from poor returns since the financial crash. It signals that P2P lending has become a mainstream way for people to invest for their future.
We are pleased to see that the Chancellor is open to services like Zopa, allowing consumers to side-step the banks for higher returns.
With cash ISA rates from banks at rock bottom, this new IFISA will, I believe, provide reliable, predictable and low risk tax free returns that will beat most other asset classes. We expect huge demand for this new type of ISA and see P2P lending through Zopa becoming one of UK’s most popular ways to grow your money.”
From Rhydian Lewis CEO and Co-Founder of Ratesetter:
“The Chancellor seems determined to unblock finance, allow innovation to flourish and crucially give savers and investors more control over their money. I see the Innovation Finance ISA as part of that new spirit. It will be an immediate boost for hundreds of thousands of everyday investors and has the potential to move the dial on the availability of small business and personal finance in this country.
The new ISA will offer investors a much needed middle ground between low yield cash and high risk investments – by including their RateSetter investment in an ISA, a higher-rate taxpayer could save around £350 in tax and a basic rate taxpayer around £175.
Today’s announcement provides a welcome boost for investor choice and will help reinvigorate the ISA market.”
From James Meekings, Chief Commercial Officer and Co-Founder of Funding Circle:
“The inclusion of peer-to-peer lending within ISAs is a pivotal moment for our industry. Not only will it give investors a better deal, but it will help even more small businesses access the finance they need to grow, which in turn helps the economy. Everyone wins.
According to our data, 41% of investors said they would invest more in marketplaces like Funding Circle if it was included within ISAs. One in ten people said they would transfer their existing stocks and shares into a Lending ISA. Additionally, TISA (Tax Incentivised Savings Association) estimates that more than £50 billion is invested in ISAs every year. If just 3% of this money was channelled through marketplaces such as Funding Circle it would create more than £1.5 billion of new lending to businesses annually, leading to approximately 75,000 new jobs.*”
*Previous independent research by government think tank Nesta revealed businesses that receive a loan through Funding Circle employ on average 11 people, and see an average increase in employment of 27% after receiving finance.
From Christian Faes, CEO and Co-Founder of LendInvest:
“George Osborne’s budget delivered in a big way for the UK P2P industry. The formalisation of a new ISA category – the Innovative Finance ISA – is a great step forward for the industry, and takes us closer to the mainstream of financial services. In a perfect world it would have been confined to simply a Lending ISA (LISA), but in any event this is a great move by the government, and LendInvest will be working hard now to get IFISA-ready for 6 April next year.”
The biggest challenge will likely be handling the huge infusion of new ISA money into the sector. This is a good problem to have, but a problem, nonetheless. While many of the platforms are at a scale where they can deal with a big influx of new cash and will likely be at an even larger scale by next April, it will still be a significant challenge I expect.