The 2016/17 tax year end is just around the corner, crowdfunding platform Downing Crowd is reminding the many last minute ISA savers and investors to consider diversifying their portfolio and get the most out of their annual allowance by investing in an Innovative Finance ISA (IFISA).
What is the Innovative Finance ISA?
This is a new kind of ISA, launched in April 2016, specifically for peer to peer lending (P2P) and Crowd Bonds. Investors can spread their annual allowance across Stocks and Shares, Cash and Innovative Finance ISAs depending on their risk appetite and investment goals.
It’s the potential returns that can really set the IFISA apart. Downing Crowd has now launched its own IFISA this month allowing investment into future Crowd Bonds which, to date, have achieved an average weighted interest rate of 5.79%. Provided that investors and savers are happy to take on the higher risk that comes with investing in Crowd Bonds, this could prove an attractive option compared to the current low interest rates offered by many cash ISAs.
Why a third ISA?
Neither loans or Crowd Bonds are covered by FSCS deposit protection, because these are not savings, so they cannot go in a cash ISA. Equally they’re not listed so can’t be held in a Stocks and Shares ISA. So, the new Innovative Finance ISA was created in April 2016.
Similar to P2P, Crowd Bonds can allow investors to lend directly to businesses and secure this against a firm’s operational assets. But the crucial difference between the two is that P2P lenders only receive a loan contract whereas Crowd Bonds receive an individual debenture or security. The Downing IFISA offers access to a range of asset-backed Downing Crowd Bonds, all of which are secured against a firm’s operational assets.
Julia Groves, Partner and Head of Crowdfunding at Downing LLP said: “Despite any good intentions to invest early, the end of every tax year inevitably sees investors flock to ISAs at the last minute – it’s simply human nature. But investors should still take time amidst the rush to shop around, particularly in today’s low interest rate world.”
“Different types of crowdfunding often get lumped together as being too risky but Crowd Bonds are actually a very simple form of lending that can, in many ways, be less complex and risky than traditional equity investing.”
Downing Crowd is part of Downing LLP, an FCA authorised and regulated investment manager with over 20 years of investment management experience, 35,000 investors and in excess of £800 million of funds under management.
The first Bond offer to be included in the Downing IFISA features £1.39m funding for Alternate Energies Limited, which owns an established portfolio of over 300 PV systems – a type of solar power – on residential buildings owned by Colchester Borough Council. A third of Downing LLP’s funds under management are invested in renewable energy including solar power, onshore wind and biomass.
The ISA allowance can also be split across all three types of ISAs (or four once the Lifetime ISA is introduced for those aged under 40 from this April), which can help ISA savers and investors diversify their portfolios. This opportunity for diversification will increase further with the introduction of the increased £20K annual allowance from this April. It’s also worth remembering that IFISA investors only have to make a deposit by the end of the current tax year, allowing the flexibility to spread their money across different Crowd Bond offers over the course of the year. There are no charges for opening an IFISA with Downing, however no interest is paid on cash on deposit, so investors should not leave their cash uninvested any longer than necessary.
Julia continues: “The watchword for anyone interested in the IFISA has to be transparency. A Crowd Bond platform offers a small number of larger scale investments, allowing us to carry out higher levels of due diligence, and provide a higher level of disclosure, which helps the end investor know where their money is going. The smaller size of P2P loans means this level of due diligence is usually not possible, so investors are not fully aware of how risk has been assessed. Nor will they always be able to choose where their money ultimately ends up as most P2P platforms select loans for their lenders, often spreading money across multiple borrowers through ‘auto-lend’ tools.”
Capital is at risk. Bonds are investments, not deposits, and your capital is at risk. Downing will seek to minimise risks but investors should be aware that the returns are not guaranteed and you may not get back the full amount invested.
Bonds are not covered by the Financial Services Compensation Scheme (FSCS) on deposits. This means that if the terms of the Bond are not fulfilled, investors have no right to receive compensation from the FSCS.
Single investment. You are recommended to spread your funds across a number of investments to diversify risk and not to put too much of your capital in one Bond.
Non Readily Realisable. While the Bonds are transferable to other members of the Downing Crowd, there is no formal secondary market in place and you should assume you will need to hold it for the full term.
 In order to manage risk, Downing Crowd Bonds will be secured by a debenture over all the assets of the investee company. This means that if the borrower defaults on the bond, Downing, as security trustee, has the right to take control of the asset. The proceeds (net of any costs associated with enforcing the security) would then be used to repay some or all of investors’ capital and interest. Bondholders rank ahead of any other existing (or indeed future) loans into the business.
 As at 31 December 2016