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Are Innovative Finance ISAs as bad as they are painted?

When George Osborn, then Chancellor of the Exchequer, announced the launch of Innovative Finance ISAs (IFISAs) back in 2016 there was much hype about how they would be an exciting new way to invest, bringing investments previously only open to the ultra high net-worth investor to the ordinary investor. 

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Taxing Times on Inheritance

HM Revenue & Customs (HMRC) has reported a new record high for Inheritance tax (IHT) receipts in 2017/18 with around £5.2 billion being received, a £400 million year on year increase in the amount received in 2016/17 last tax year, around an 8% increase.  And this despite the introduction

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Cyber Insecurity

A recent report by the UK’s National Cyber Security Centre (NSCS) shows that millions of us are using passwords, on sensitive accounts, that are almost laughably easy to crack.  The NSCS conducted an analysis of passwords found in public databases of previously breached accounts to see what the most

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Enterprise Investment Schemes (EIS)

An alternative investment to VCTs, or one that could run alongside them, are Enterprise Investment Schemes (EIS). Launched in 1994 (a year before VCTs) EISs offer the opportunity to invest directly into small and developing companies in a tax-efficient manner. The companies must be unquoted, have less than £15

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The market for Venture Capital Trusts

Venture Capital Trusts (VCTs) appear to be becoming a more commonly exercised investment choice for an increasing number of high earners. VCTs are tax-efficient, closed-end UK collective investment schemes that are listed on the London Stock Exchange. They invest in private and up-and-coming companies which are not themselves listed.

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Revisiting Interest-Only Mortgages

Interest-only mortgages have been used for some time to give clients a way of affording properties that are more appropriate for the requirements of themselves and their families. However, as has always been the case, due consideration should be given to the intended method of mortgage repayment. The consideration

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ISAs

Even though they do not of course attract tax relief on contributions, ISAs are still popular. The maximum ISA contribution remains unchanged at £20,000. This could be directed solely into a cash, investment or innovative finance ISA, or split across them. The last of these has been available since

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Personal Allowances and Savings

The increase in the personal allowance to £12,500, as well as the widening of the income band charged at basic rate tax by £3,000, means that higher rate tax is now not charged until taxable income reaches £50,000 (note that rates for Scotland differ slightly). Whilst the basic rate

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Preparing for a New Tax Year

The end of the 2018/19 tax year is now less than one month away. While there may still be time to act on certain measures to optimise the use of HMRC-approved tax breaks and reduce personal tax liabilities for 2018/19, this article looks ahead to the position for the

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Probate Fees to Increase

The government did not proceed last year with plans to increase probate fees to a maximum of £20,000. However, following consultation, they are to go ahead with replacing the flat fee of £155 with a sliding scale of fees ranging from £250 up to a maximum of £6,000. At

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Are Innovative Finance ISAs as bad as they are painted?

When George Osborn, then Chancellor of the Exchequer, announced the launch of Innovative Finance ISAs (IFISAs) back in 2016 there was much hype about how they would be an exciting new way to invest, bringing investments previously only open to the ultra high net-worth investor to the ordinary investor.  Invested money is used by the fund managers to invest in highly fashionable areas such as mini-bonds (loans to companies that pay high interest rates as they can’t easily access the funding required through more mainstream suppliers) or peer-to-peer investments.

However, the recent collapse of London Capital& Finance has resulted in the financial watchdog – The Financial Conduct Authority (FCA) – issuing a warning about these products.  In fact, the warning is more around taking careful note over how the IFISA is marketed rather than the IFISA itself, which is no more (or less) risky than it was when it was first launched.

Key points from the FCA’s warning include:

  • Although IFISAs are generally high-risk, some firms are marketing them alongside cash ISAs.
  • The investments may not be protected by the Financial Service Compensation Scheme (FSCS) so customers may lose the money invested if their provider fails

This is not the first time that the FCA has shown its concerns in this area, back In December 2018 the FCA instructed one provider to withdraw all of its marketing literature because it appeared to suggest that IFISAs were somehow similar to cash ISAs.  The FCA’s concerns then centred on the marketing material (‘promotions’) used by the provider and included:

  • Warnings within the promotions that the underlying investments were not covered by the FSCS and were not themselves regulated by the FCA were given much less prominence than the statement about the firm being authorised and regulated by the FCA
  • The statement within the promotion  “LOOKING FOR HIGHER RETURNS THAN THE HIGH STREET” was given higher prominence than the balancing statement, which was “Investing in bonds means your capital is at risk and payments are not guaranteed if borrowers default”

While the firm itself was authorised by the FCA, the specific activity of issuing mini-bonds is not a regulated activity.  Mini-bonds, at first glance, may seem to be the same as corporate bonds which have a long track record within unit trusts and OEICs as lower risk investments.  But unlike corporate bonds, mini-bonds are not traded on any exchange and must be held until maturity.

These types of investment cannot be considered to be risk free, or even low risk as the loans are typically unsecured and the FCA is concerned that consumers are not fully aware of the underlying investment risks due to the way some IFISAs are being marketed.

In a note on its website, the regulator states that it has ‘seen evidence that IFISAs are being promoted alongside cash ISAs’ which could be seen as implying that they share the risk profile of cash.

The note goes on to say ‘Investments held in IFISAs are high-risk with the money ultimately being invested in products like mini bonds or peer to peer investments,’

‘These types of investments may not be protected by the Financial Services Compensation Scheme so customers may lose the money invested or find it hard to get back.’

In a time of low returns from more conventional investments, it is natural for investors to be attracted by investments offering potentially higher returns but it is essential that they recognise that higher potential returns invariably come at the cost of higher risks and that they are comfortable with this.  In the case of IFISAs, this higher risk comes from the facts that:

  • There is generally no FSCS protection and,
  • There is no guarantee the individual and business borrowers will be able to service the interest or, ultimately, repay the capital

The FCA’s warning about IFISAs followed closely upon the heels of its announcement that it intends to  conduct an independent investigation into the collapse of London Capital & Finance.

High return investments are available even in the current market but investors should recognise that they expose them to more risk and that they should seek to mitigate those risks by careful consideration of the underlying investments themselves.