Launch of new ISA product will be ‘game-changer’ for industry

According to research for RateSetter, two thirds (66 per cent) of cash ISA holders in Yorkshire and the Humber are unhappy with current interest rate – substantially more than the figure for the UK in general (60 per cent).

Moreover, more than a fifth (22 per cent) of cash ISA holders in the region are interested in moving to the new Innovative Finance ISA (IFISA) – potentially unlocking £24m in extra interest for Yorkshire’s ISA holders in 2016.

The poll was conducted ahead of the IFISA launch in April 2016. IFISAs will be able to hold peer-to-peer loans, which typically pay significantly higher returns than cash savings accounts. For example, in 2015, RateSetter’s one-year product returned an average interest rate of 3.54 per cent. By contrast, the average annual return on one-year cash ISAs in 2014-15 was just 1.47 per cent.

The potential downside is that investors’ capital is exposed to more risk as it is not protected by the Financial Services Compensation Scheme. Even so, RateSetter says that while it is no guarantee for the future, its Provision Fund has ensured that no individual lender has lost a penny to date.

Rhydian Lewis, CEO of RateSetter, said: “Savers in Yorkshire and the Humber have been offered terrible rates for years, and this survey shows they are now reaching breaking point.

“The launch of new IFISAs in April 2016 will put a welcome new option on the table. With the majority of cash ISA holders identifying interest rates as a priority, this will give them the opportunity to increase their returns.

“We urge savers to think ‘What IF’ when it comes to taking out an ISA next year. We will be releasing more details about what the new ISA will look like and how people can increase their returns in the new year.”

RateSetter is not alone in thinking the new IFISAs will be a game-changer. Bruce Davis, who co-founded another of the market’s big names, Zopa, and is managing director of ethical peer-to-peer company Abundance, agrees that the new savings vehicles are a positive development.

“The introduction of IFISAs is great. It should shake up the investment environment for the better,” he said.

“Basically, you’re putting your money to work in the real economy, and they offer substantially better rates than cash ISAs. I can see a lot of people moving in on that.”

According to RateSetter, investors who take advantage of the maximum tax-free ISA allowance of £15,240 could see an increase in the annual return from £224 to £540 by switching from a cash ISA to a new IFISA.

The annual return on the average ISA investment of £5,924 could be boosted from £87 to £210.

Yet despite the potentially lucrative returns, RateSetter’s research found that half of cash ISA holders had never even heard of the IFISA, so the company has pledged to increase awareness and understanding of the new products.

Mr Davis said: “Zopa, RateSetter and Funding Circle have all been building up significant warchests to market their products in 2016. Zopa are rumoured to be raising £70m through JP Morgan to grow their business.

“We’ll probably see some consolidation as a result. The big players will move ahead, and the question is who will be among them.

“On the other hand, the banks will probably be worried about the effects of IFISAs, because they’ve had it relatively easy until now. Suddenly, there’ll be products that are easily understood, where the risk involved is easily understood, and which offer a tax-efficient return.

“The banks will either have to launch their own peer-to-peer products or they’ll have to buy the existing providers.”

The Innovative Finance Individual Savings Account, or IFISA, will offer the tax advantages of an ISA combined with the investment possibilities of peer-to-peer (P2P) lending – the internet-enabled financial market that has developed between individuals, bypassing the banks.

IFISAs are due to be introduced in two phases. Those allowing for investment in P2P loans will be available from April 2016, and those investing in debentures or bonds will come in in the autumn.

According to Abundance’s Bruce Davis, they could provide a shot in the arm for the economy.

He said: “I think it should boost GDP because more businesses will have the confidence to invest.”