The Innovative Finance ISA

From 6th April 2016 the FCA rulebook will be changing to pave the way for the new Innovative Finance ISA (“IFISA”) which is part of the Government plan to allow loan-based crowd funding, often called peer-to-peer (“P2P”), to be included in ISAs.

CP16/5 sets out details of the likely changes which are designed to give some better protections as advising on P2P agreements will become a regulated activity.

Rules currently exist to protect customers investing in regulated loan based schemes. These focus on the provision of information, allowing customers to better assess the risks and therefore make informed decisions. Firms will be subject to the FCA Principles and have to have plans in place to cope with a platform collapse.

The objective is to beef up protections. Changes proposed include:

  • Adding guidance to existing disclosure rules
  • Applying “suitability” rules to P2P arrangements
  • Banning commission on P2P personal recommendations
  • Provision for the supervision and assessment of competence for advisers (including qualifications)
  • The provision of access to both FOS and the FSCS.

There will be a new permission of advising on P2P agreements. However, firms already carrying out the activity of “advising on investments” will be treated as if the permission automatically applied. Other firms will need to apply.

Firms that hold themselves out as “independent” will not have to consider P2P arrangements as part of the service.

This will come as a relief to many. The risks to consumers in this marketplace are clear. It is not simply the underestimation of credit risk by consumers (and their inability to measure it) but the potential for the collapse of platforms and, without an active secondary market, the illiquidity of the investments.