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P2P lenders finally launch ISAs after 10-month hold-up

Why have peer-to-peer lenders struggled to receive regulatory approval for their new Innovative Finance ISAs?

P2P lenders finally launch ISAs after 10-month hold-up

A raft of peer-to-peer lenders have finally been able to launch Innovative Finance ISAs, following a 10-month regulatory hold-up.

This new type of ISA allows savers to lend money directly to individuals and businesses in return for an attractive yield, provided the borrower does not default. These loans, known as peer-to-peer, can be held tax-free within an Innovative Finance ISA, forming part of this tax year’s £15,240 ISA allowance. Crowdfunding investments, where private investors take equity stakes in companies or projects, are excluded from Innovative Finance ISAs.

The City watchdog, the Financial Conduct Authority (FCA), approved this new type of ISA in April last year. However, savers have been left waiting for the market to open up. This is because the peer-to-peer platforms require full regulatory approval from the FCA and authorisation from HM Revenue & Customs become ISA managers. This sparked a surge of applications to the regulator, resulting in delays.

Prior to this, the platforms operated with interim permissions from the FCA, with a view to getting fully authorised later down the line.

Even today, the UK’s top three peer-to-peer lenders – Zopa, Funding Circle and Ratesetter – are still awaiting full regulatory authorisation, and have therefore not been able to launch Innovative Finance ISAs. And they are not alone.

So, what is behind the hold-up?

Neil Faulkner, founder of 4th Way, a provider of peer-to-peer lending ratings and research, suggests that the delay has been caused by both the regulator and the platforms. Firstly, turnover in staff and a lack of knowledge within the FCA about this new and growing sector partly explains why it has been a slower process than firms anticipated.

However, it isn’t necessarily a bad thing that the regulator has taken its time to make sure it understands the range of business models that operate in the space.

A spokesperson for Zopa, the UK’s largest peer-to-peer lender, commented: ‘Although the approval process is taking longer than expected, we welcome the regulator’s attention to detail in reviewing the various peer-to-peer business models.’

It is understood that a number of platforms have made changes to their business models on the back of FCA recommendations. A pre-requisite for receiving full authorisation is that underlying lenders must have specified contracts with the borrowers on platforms. However, this isn’t the case for all platforms, as some allow institutions to pre-fund loans. The platform then sells the loan on to private investors.

Landbay which provides loans that are secured against buy-to-let mortgages previously allowed institutions to pre-fund its loans, but took the decision to stop last year. Since then, the FCA has awarded it full authorisation. A spokesperson said the firm has just received approval to become an ISA manager from HMRC and plans to launch an Innovative Finance ISA soon.

The regulator also takes issue with platforms that lend money to businesses, which then in turn lend the money to individuals or other businesses. This is known as ‘wholesale lending’ and Faulkner says that some platforms have since stopped this type of lending on the advice of the FCA.

The regulator is also understood to have  asked peer-to-peer lenders to use a specified client money management system, rather than an in-house proprietary system. This makes it easier for the watchdog to monitor their systems and processes.

A spokesperson for the FCA said the watchdog had undertaken a 'robust assessment' to ensure that each firm met certain conditions.

'Some of the loan-based crowdfunding firms applying for authorisation have not yet demonstrated they meet the minimum standards set by the threshold conditions. Whilst we are actively working with firms to support them during the application process, and will continue to do so, it is ultimately the responsibility of firms to ensure they meet the threshold conditions and are ready, willing and organised to commence regulated business. We will refuse authorisation to firms where they are not able to demonstrate they meet the required regulatory standards,' he added.

The FCA said that 22 peer-to-peer lending platforms have so far received full authorisation. There are currently 65 applications in progress, although this also includes new businesses seeking authorisation alongside existing lenders.

Who is to blame for the long delay between the FCA approving the new ISA structure and firms actually being able to launch these products? Some take the view that the Treasury and FCA put the horse before the cart by approving the structure before the industry was ready.

Alternatively, maybe the industry was ill-prepared when it came to meeting the FCA’s requirements.

‘Clearly it is an industry issue,’ said Faulkner. ‘Although, maybe these companies did not want to make a load of changes in advance of their application in case they were wrong, so they decided to wait and see.’


As the top three platforms continue to wait for regulatory approval, they may be encouraged to see that Lending Works, the fourth largest peer-to-peer lender, has received FCA authorisation. Last week, it launched an Innovative Finance ISA, offering investors 4% interest for three-year loans and 4.7% for five-year loans. These are personal, unsecured loans between £1,000 and £25,000 over terms of up to 60 months, typically to finance home improvements or to purchase a new car.

LendingCrowd has also launched an Innovative Finance ISA targeting a 6% annual return across a portfolio of emerging small and medium-sized enterprises (SMEs) across the UK. Meanwhile, Downing launched an ISA targeting 'crowd bonds', typically offering interest rates of 4% to 7% per annum. 

Abundance, Crowdstacker and Crowd2Fund also offer Innovative Finance ISAs.

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