The U.K.’s Financial Conduct Authority has issued a warning to consumers regarding certain risks inherent in peer-to-peer loans held in individual savings accounts, according to reports.
The FCA said it saw evidence that Innovative Finance ISAs, which are used to shelter peer-to-peer loans from capital gains and income tax, were marketed along with cash ISAs even though they don’t give the same level of protection to consumers.
“Investments held in IFISAs are generally high-risk with the money ultimately being invested in products like mini-bonds or peer-2-peer investments. These types of investments may not be protected by the Financial Service Compensation Scheme so customers may lose the money invested or find it hard to get back,” the FCA said. “Anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing an IFISA.”
The warning comes in the wake of the highly-visible January collapse of London Capital & Finance, which was selling unregulated mini-bonds.
Peer-to-peer loans and mini-bonds are not protected by the Financial Services Compensation Scheme like cash ISAs are, meaning customers might not recoup their investments if a company goes under.
Customers of London Capital & Finance, numbering in the area of an estimated 11,500, could lose about 236 million pounds. Many of the company’s mini-bonds were incorrectly marketed as IFISAs.
The FCA was ordered to put an independent reviewer in place to look into the regulatory mistakes that the company’s failure exposed. The company is also the focus of a criminal investigation by the Serious Fraud Office, and four people were arrested in March in connection with the issue. They were released pending further investigations.
IFISAs started showing up in April of 2016 and were a popular way for peer-to-peer investors to look for higher returns than those in conventional savings and investment markets, all couched in super-low interest rates.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said rates made ISAs appealing.
“Savers who are disillusioned with the low rates on cash Isas may see the high target interest rates on these Isas and assume they’re a similar safe haven for their life savings,” she said. “However, mini-bonds and peer-to-peer loans are radically different to cash Isas. They haven’t yet been through a really tough time, with large numbers of defaults, so we don’t know how they’ll hold up when these safety nets are deployed.”