The Nanny State Postpones the Secret Investor's Christmas

Like a child desperate for Santa Claus to arrive, the wait for the Innovative Finance ISA (IFISA) seems to have been never ending. The countdown to 6th April is over at last but… it's not Christmas for me yet because none of the platforms I am active on have received the go ahead from the Funding Conduct Authority (FCA) to act as ISA Managers.

So the Secret Investor will have to wait a little longer until the income from his P2P deposits is tax-free and existing Cash ISAs can earn a decent return.

The reason for the delay is due to the intervention of the Nanny State. Although I have been investing in P2P loans for almost 3 years, the powers that be have decided I cannot do so without paying tax on the income until the FCA grants full authorisation to the platforms in question.

Although P2P sites were able to seek the required approval from last October the FCA were unable to process the number of requests in time for this week's deadline. In fact, they were unable to handle the applications they received by some margin.

Of the 86 companies who wanted to offer IFISAs, as of 30th March, only 8 had received the required approval. A further 44 are operating under interim authorisation because they had previously been assessed by the Office of Fair Trading to enable them to offer consumer credit however the procedures undertaken to achieve this accreditation were not deemed sufficient to permit them to offer IFISAs.

Although it is 6 months since the FCA opened up the application process, further delays arose when new legislation was introduced during January and March to clarify how operating a P2P platform fits with other regulated activities.

Many industry watchers were surprised that the lucky few platforms that are able to offer IFISAs from 6th April did not include the biggest hitters – Zopa, Ratesetter and FundingCircle. Instead they are some of the lesser knowns sites such as Crowd2Fund, Funding Tree and Crowdstacker.

While the safest P2P investment strategy is to diversify capital across as large a number of loans as possible, those platforms that I am aware of which have received full authorisation offer some of the smallest number of investments opportunities – although a full list of the platforms currently with IFISA clearance is not available.

Like many of those who don't understand how P2P works it appears as though the body that is attempting to regulate the industry envisage investors placing large chunks of their capital in the hands of a small number of borrowers otherwise full authorisation would have only been given to those sites that support many borrowers. This may also explain why 1 year's IFISA allocation can only be invested in a single platform (or maybe multi-platform IFISAs are too complicated to implement!).

Although their offerings are at the low risk/return end of the scale, so far none of the IFISA approved providers I am aware of provide the levels of diversification I deem essential. The FCA have 12 months to process the applications for full authorisation therefore it could be October before my favourite sites able to offer an IFISA. This means, for the time being, my P2P investments will continue to be liable to tax although – thanks to new rules this April – the first £1,000 of income will be tax free.

Even with having to pay tax on the capital I invest over the next few months, I would still be better off investing in P2P than keeping it in a cash account that pays next to zero interest and so I shall continue to lend as normal for the next few months. It's a shame – and actually quite ridiculous – that FCA rules mean I will be unable to move the loan parts I will be purchasing into the IFISAs I am waiting for.

The fact that full authorisation is being handed out in a staggered fashion is something of a headache for the platforms themselves and will put those who are last to be granted permission at a distinct disadvantage when it comes to attracting the capital needed to meet the requirements of their borrowers.

FundingCircle are combatting this by offering iPads and Kindles to those investing 5 figure sums between now and mid-May while bridging loan-platform, Saving Stream, wrote to the FCA requesting that they abandon the 6th April start date and grant full approval to all sites at the same time after every application has been considered.

The latter was unlikely to happen due to the risk of negative press arising from the missed deadline. A better solution would have been to allow those sites with interim authorisation to offer IFISAs giving those willing to accept the risk – and anyone investing in P2P loans has to understand that there are risks – a broader range of products to choose from.

Due to the amount of control the FCA has decided to impose, it is difficult to imagine a worse scenario for the introduction of the long awaited IFISAs.