Innovative Finance ISA Compensation

Innovative Finance ISA Compensation.

With the launch of the new Innovative Finance ISA (IFISA), we thought it was time to explain the mechanics behind both peer-to-peer lending and crowdfunding and what protection you have as an investor.

Peer to peer (P2P) lending is where people wish to borrow money using some form of trading platform and you, as the investor, lent money on agreed terms, usually at a slightly higher interest rate than you would receive from a bank and likewise the borrower is able to borrow money without the need to go to a bank. Peer to peer lending can now be included in an ISA.

Crowdfunding is broadly a very similar position where people with ideas that they need to raise capital for all business ideas or indeed business expansion either borrow money or offer an equity stake in the new venture. It may be that you only invest £100 in a business idea for a very small share. The idea being that if the business proposer attracts enough investors then it will give them enough capital to get their particular idea or expansion of the ground. Again, these can now be included in an ISA.

What if it all goes wrong? Compensation ..

Whilst the Innovative Finance ISA is a regulated investment product, the equity shares all alone notes inside this type of ISA have little or no protection. In short, you cannot seek compensation for losing money for a poor investment. There is no Financial Services Compensation Scheme protection.

This is exactly the same if you own direct shares or equities in an ISA. If the limited company that you own shares in goes into liquidation your shares are potentially worthless. This is the same for the Innovative Finance ISA.

If you have been mis-sold the ISA i.e. the risks of financial loss were not explained to you then of course, you may have recourse for poor financial advice (limited to £50,000 compensation).

Warning: many people are attracted by peer to peer lending and crowdfunding due to potentially higher returns. If you are tempted by such an offer be aware that many of these ISAs may be sold to you without advice i.e. it was your decision to buy. Does go wrong you then have no protection. We have a saying at this firm: "you can only con a greedy person".

That said, you may uncover the next "Facebook" or "Apple" and become wealthy off the back of a shrewd investment (that's just us being greedy!).