Scrap ‘risky Isa’ to protect savers, say stockbrokers

Some of Britain’s biggest financial companies have called for the newest type of Isa to be withdrawn from sale.

The “innovative finance” Isa, introduced in April 2016, allows “peer-topeer” and other alternative investments to be held in a tax-free wrapper.

In the 2017-18 tax year £290m was invested in these Isas by 31,000 people, data from HM Revenue & Customs shows. This number is likely to have increased sharply since.

However, critics have said the Isa status can legitimise high-risk schemes, which can offer returns of up to 15pc per year but are not protected by the compensation scheme for savers.

Three of the country’s biggest fund shops, AJ Bell, Interactive Investor and The Share Centre, have now called for the new Isa to be scrapped altogether.

The firms argued that, unlike stocks and shares Isas, whose risks were more broadly understood, innovative finance Isas had encouraged people to put their savings into risky deals that were unsuitable for ordinary investors.

Andy Bell, the founder of AJ Bell, said: “The Isa brand is being used to legitimise investments that are inappropriate for most people and we think innovative finance Isas should be abolished.”

Investors who have stocks and shares Isas receive protection from the Financial Services Compensation Scheme (FSCS), the lifeboat fund, should their stockbroker go bust. However, peer-to-peer investors have no such cover if their platform collapses. In both instances, the FSCS does not pay out in the event of poor investment performance.

Moira O’Neill of Interactive Investor said: “It has added more complexity to the Isa family and I would not be sorry to see it go.” Alternative investments such as peer-to-peer and “mini-bonds” have come under the spotlight following the highprofile collapse of London Capital & Finance, which had sold them to investors inside Isas. Mr Bell added: “This has shown that this Isa can be used by poorly run companies to entice ordinary savers into schemes that are higher risk than they are marketed as.”

Bruce Davis of the UK Crowdfunding Association, a trade body, rejected the idea that such investments should not be given tax-free status. He said the industry was subject to strict rules from the Financial Conduct Authority.

“We’ve had a review of the sector and the FCA is comfortable with the level of regulation,” he said. “Customers understand the risks. We should not reduce diversity or choice for investors.” The number of innovative finance Isas opened by investors in the 2017-18 tax year