Savers told to steer clear of high-risk Isas

THE City watchdog has issued an unprecedented warning over the highrisk isas introduced by George Osborne.

Regulators urged the public to think twice before putting their cash into an innovative Finance (iF) isa, a product launched by the then Chancellor in 2015.

it came after savings firm London Capital & Finance collapsed, owing £237m to 11,500 investors.

iF isas allow savers to put their nest eggs into speculative investments such as mini-bonds.

The money is lent directly to companies with the promise of higher returns than regular savings accounts offer.

Gains are tax-free but investors’ cash is not legally protected by the Financial Services Compensation Scheme, meaning if the company the money is lent to goes bust they stand to lose everything.

The Financial Conduct Authority said it has seen evidence that iF isas are being marketed alongside safe-ashouses cash isas.

The FCA also reported widespread confusion over how iF isas work.

‘investments held in iF isas are high-risk with the money ultimately being invested in products like mini-bonds or peer-to-peer investments,’ the watchdog said. ‘Anyone considering investing in an iF isa should carefully consider where their money is being invested before purchasing.’

Trading firm London Capital & Finance went bust earlier this year, owing £237m.

it claimed to offer savers returns of 8pc and said their cash would be invested in start-ups through mini-bonds held in an isa.

But, in fact, the cash was given to just 12 firms in what its administrators have said was a series of ‘highly suspicious transactions’.

And it appears that the money was not kept in isas after all. investors are now expected to get back just 20pc of what they gave to LCF, and the Serious Fraud Office is investigating.

There will also be an independent inquiry into whether the FCA failed in its duty as a regulator.

iF isas were announced by Osborne in 2015 to support the growth of so- called peer-topeer lenders.

Traditionally, a saver would deposit their money in an account at a bank, which would then lend the cash out.

The bank would pay the saver a small amount of interest and lend at much higher rates, pocketing the difference as profit.

Peer-to-peer firms cut out the middleman and mean almost all the interest goes straight to the saver, giving much higher returns.

However, up to £85,000 of savings are protected by law if a bank goes bust.

There is no protection at all for money that is invested with peer-to-peer firms.