Here’s a warning. Not from me but from the Financial Conduct Authority. Beware Innovative Finance ISAs.
They are, it says, generally high-risk, with the money ultimately invested in mini-bonds or peer-to-peer lending. That means they are not covered by the Financial Services Compensation Scheme (FSCS), which protects up to £85,000 of cash or an investment if the bank or the investment firm goes bust. But these “IFISA” investments are outside its protection.
The regulator also warns that Innovative Finance ISAs are being promoted alongside cash ISAs. That was done by several websites, which turned up at the top of online searches for top cash ISAs.
- £20 billion-worth of National Savings Certificates are losing value
- Reader questions: Where is the safest place for large sums of money?
- Maximum worry from mini-bonds
They listed IFISAs and cash ISAs by the return they offered. IFISAs were always top of those lists because they promised five per cent or more while cash offered two per cent or less. By comparing high-risk IFISAs with low-risk cash deposits, the websites created a false sense of equality between them.
In fact they could not be more different. Readers will recall that London Capital & Finance (LCF) went into administration in January 2019. The administrators have warned they are unlikely to recover more than a fifth of the £236 million that 11,605 people had invested.
LCF was heavily promoted on websites that compared its promised eight per cent returns with cash offering two per cent or less. LCF topped those lists and attracted thousands of investors. As things stand, they will not get a penny from the FSCS.
Many of these websites have disappeared. But the regulator warns: “Anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing an IFISA.”
Remember, too, that even if an investment is said to be in an ISA, that does not give it any protection. LCF offered its mini-bonds in ISAs. Only much later did HMRC decide they didn’t qualify to be put inside the magic ISA bag.
Some people who’ve lost most of their capital may now find the taxman trying to recover the tax they should have paid on the quarterly dividends they received before LCF went out of business.
Lose-lose has no better definition.