P2P lending involves groups of individuals (and sometimes businesses) lending money to other individuals or businesses via a third party platform. The idea behind P2P loans is to remove the banks as intermediaries in the lending process and, with the savings made, offer better interest rates to both lenders/savers and borrowers. P2P lending started in the UK in 2005 and has flourished in the post-crisis world of ultra-low deposit rates and newly cautious banks. The latest data from the Peer-to-Peer Finance Association show its members have now lent £1.89bn, almost double the figure of a year ago. Since 1 April 2014 P2P lending has been regulated by the Financial Conduct Authority.
In the March Budget the Chancellor announced that the Government would examine ways of making P2P lending eligible for investment in ISAs. The Treasury has now published a consultation paper looking at the options. Interestingly the document uses the term ISA throughout, the Budget Day creation of NISAs – New ISAs – seemingly already abandoned.
It turns out to be a more complex exercise than it appeared to be back in March. For example, there is a problem around liquidity and transfers because trading in P2P loans is limited. Integrating P2P loans within cash ISAs would create problems because while cash deposits are covered up to £85,000 under the Financial Services Compensation Scheme, there is no corresponding protection for P2P loans. There are different issues with trying to place P2P loans in stocks and shares ISAs, as the Treasury is unsure how many providers of such ISAs would want to become involved in P2P loans and how many P2P platforms would offer anything beyond P2P loans in their ISAs. It seems probable that P2P loans will become a third category of ISAs so that, for example, you will be able to invest £5,000 in a cash ISA, £3,000 in a P2P loans ISA and £7,000 in a stocks and shares ISA, all within your £15,000 annual limit.
The consultation runs until 12 December, so it is unlikely P2P ISAs will appear before the 2015/16 tax year. If you have not made your 2014/15 ISA investments yet, your choice therefore remains between cash and stocks and shares. If you need advice on what to select, do talk to us.