This year has seen an explosion of new innovative finance Isas attempting to lure ordinary savers with the promise of bumper returns.However, the h
This year has seen an explosion of new innovative finance Isas attempting to lure ordinary savers with the promise of bumper returns.
However, the higher rewards come with a higher risk – for one, they are not covered by the Financial Services Compensation Scheme.
Capital is also at risk because essentially, the accounts – offered by peer-to-peer lenders which, through their websites, match savers and borrowers – could be hit by loan defaults.
For that reason, experts suggest that if you do get involved, make it a small part of your portfolio and spread around the risk – and treat more like an investment account that a savings one.
It remains to be seen whether startup Orca’s platform allowing investors to put money into multiple P2P lending platforms will make a splash – but it is an interesting product
This is where a new peer-to-peer platform comes into play.
Last week, fintech start-up Orca launched a sort of Russian doll of IFISAs, the first of its kind, which allows investors to spread their money across up to five P2P platforms.
The firm says its aim with the Orca Isa is ‘to open up the P2P market to retail investors and tackle previous barriers to investing across multiple platforms within one tax wrapper.’
It adds that ‘it would have taken an investor five years to achieve the same level of diversification as the Orca Isa can offer in minutes’.
But are they right, and should you consider diving in?
What kind of beast is Orca?
With so many fintech companies swimming around, you could be forgiven for not having heard of Orca.
The Belfast-based start-up was founded in 2015 by cousins Iain Niblock and Jordan Stodart, former Muirfield Investments employees, and began initially offering customers research and analysis of the then-nascent UK P2P market.
It only launched its investment platform last June, and only considered offering an Isa wrapper for it five months ago in October.
At the time, Stodart told Peer2Peer Finance News ‘We are very conscious that the Isa could bring a whole wave of investors who have not had exposure to P2P before, but it has not happened yet.
‘Our ambition is to have multiple platforms in a single portfolio and to wrap that into an Isa, so investors are getting their Isa money spread across different providers.’
It opened a waiting list for its IFISA offering just before Christmas, and the product launched last week.
At the time of a June 2018 crowdfunding round that netted it £575,000, it was valued at just under £1.75million.
It’s also worth noting who Orca’s target market are, if you’re a casual or first-time investor then the product might not be for you.
Stodart said in an interview with Silicon Republic last June that Orca was aiming for retail investors who were older than 45 with investable assets of £150,000, and either professionals or retired.
This is particularly worth noting at a time when there is a growing trend of start-ups who appear to dress up investment products as savings and targeting those after a better rate.
What is an IFISA?
An innovative finance Isa, despite its seemingly complex name, is actually quite a simple product. It is an Isa wrapper for peer-to-peer lending platforms.
Peer-to-peer lending involves using a platform to make loans to consumers or businesses in return for an interest rate return – which is typically two to three times that on cash.
Orca might be the first to offer a wrapper for a platform that allows you to invest in multiple peer-to-peer platforms at once, but the Innovative Finance Isa has become a fairly ubiquitous product with the big three P2P platforms – Funding Circle, RateSetter and Zopa – and plenty of others besides offering them.
Some P2P platforms make unsecured loans to small and medium-sized businesses, others make personal loans to individuals and some give money to developers or buy-to-let landlords that are secured against property.
The Orca Isa
The Orca Isa options, spreads money across five P2P platforms and can be opened with a minimum investment of £100.
Those five are Assetz Capital, Landbay, LendingCrowd, Lending Works and Octopus Choice.
This is Money will break down each of those in turn later, but Landbay and Octopus Choice are property loan platforms, Assetz Capital and LendingCrowd are P2P business lenders, and Lending Works provides personal loans.
The two investment options open to you are Orca Pure and Orca Plus.
Much like with other established peer-to-peer platforms like Zopa and Funding Circle, the plus option comes with greater risk and thus offers a greater return as a result.
In this case, Orca helpfully explains that your Orca Plus portfolio is made up of a greater proportion of unsecured, riskier business loans, while an Orca Pure portfolio is made up of a greater proportion of asset-backed loans made through the property platforms that make up its Isa.
Orca is the first platform to offer a tax wrapper that allows you to invest in multiple P2P platforms at once. It diversifies investments into five platforms across three sectors
The allocation varies depending your investment. Investing up to £2,300 will put your money into three platforms, up to £8,100 will put it into four and above that will split it across all five
Orca Pure offers an average return of 4.3 per cent, while Orca Plus offers 5.3 per cent.
If a single P2P platform like Funding Circle works by diversifying your investment stake across multiple loans, then Orca works first by diversifying your investment across a number of platforms, who then subsequently spread their share over a number of loans.
Risk and reward
Providers often like to market IFISAs as the ‘trick in the middle’ between the stability of a cash Isa and the volatility of a stocks and shares Isa. This isn’t really the case however.
While only FCA-regulated platforms can offer an innovative finance Isa, they come with no protection, covered neither by the £85,000 FSCS savings protection nor by the £50,000 investment protection.
An Isa tag refers only to the fact money in it is tax-free, in the case of an IFISA it does not mean your money is safe.
Once you put money into an IFISA, you might not get it back.
Therefore, it’s important to note that none of the products or platforms mentioned in this article can guarantee you will receive a return on your investment if borrowers default on their loans, while if Orca itself went bust you would not necessarily get that money back either.
However, in order to take advantage of all five platforms you need to invest £8,100 or more.
Investing up to £2,300 will put your money into Assetz Capital, Landbay and Lending Works, with roughly a third each being spread into the three sectors; business, property and consumer loans.
Investing up to £8,100 will put the cash into four of the five platforms; Assetz Capital, Landbay, Lending Works and Octopus Choice, putting 48 per cent into the two property platforms, and 26 per cent in the other two sectors.
Finally, investing above £8,100 will split your investment across all five platforms, putting 47 per cent in property, 27 per cent in the two business lending platforms and giving 26 per cent to Lending Works.
Orca say there will be no costs or fees involved until April 2020.
Orca does make a point of providing lending profiles on its website for three of the five P2P platforms included in its Isa, although Assetz Capital and Landbay do not feature.
These include details of the specific portfolios and products your money is invested in through the Isa, as well as outlining the risks involved, the recovery process and the process of withdrawing funds.
However, you should make sure you go through the platforms’ own websites as well.
Another firm based around an animal that lives in the sea, Octopus was founded in 2014 and is the P2P arm of Octopus Investments and provides loans to property developers.
The ‘Octopus Portfolio’ offered through Orca’s Isa splits investor’s capital across multiple property loans, typically between 10 and 60, that usually have two-year terms, and advertises a 4 per cent rate of return.
It adds that it invests five per cent of each loan itself, claiming to be ‘so confident’ in its underwriting process.
Octopus Choice says the loans never exceed a loan-to-value rate of 76 per cent, and average 61 per cent, and that borrowers ‘tend to be experienced property professionals who need a level of speed, flexibility and certainty that more traditional lenders can’t generally provide’.
These typically include ‘professionals looking to buy a property in cash at auction before selling it on’, ‘creditworthy expats after buy-to-let’, and ‘those looking to borrow against slightly less typical properties’.
The loans it offers include short-term, high-risk bridging loans, buy-to-let, bridge-to-let and commercial loans.
It says it has funded 564 loans since its inception as of February 19 this year. But bear in mind that four per cent could be viewed as a relatively low return given the high risk of bridging loans.
Orca offers two portfolios. Its Plus option puts a greater proportion of money into riskier loans that are not asset-backed
While Orca only offers one product with Octopus Choice as part of its Isa, it gives you a choice of three in the case of LendingCrowd, a P2P platform investing in business lending founded in 2014.
The three products offered through Orca’s Isa are the growth account, the income account and the self-select account.
The growth account offers an estimated return of six per cent, and spreads your capital across 20 different loans ‘through LendingCrowd’s loan market.’
It adds that no more than five per cent of your funds will be invested in any one loan, and will automatically reinvest your repayments.
The income account spreads your capital across ‘all the loans available’ on its loan market, giving you an estimated return of 5.6 per cent.
Interest payments on the loans you have invested in are withdrawn to a separate account to provide you with a source of income, while capital repayments of the loan itself are automatically reinvested.
Finally, its self-select account allows investors to manually choose the loans they want to invest in, which can give you an advertised rate of anything from 5.95 per cent all the way up to 14.25 per cent.
Bear in mind that a higher rate of return often means a higher risk of the loan defaulting.
LendingCrowd doesn’t specifically list the kind of businesses it offers loans to, nor does it provide a clear explanation of how it makes its loan decisions.
It says it takes a ‘case-by-case’ ‘flexible’ approach, and simply says that when applying for a loan it is good for a business to have ‘cashflow indicating ability to repay’, ‘proven management ability’, ‘a strong and considered business plan’ and ‘positive business and industry indicators’.
Founded in 2014, Lending Works is the sole personal loan providing platform offered in the Orca Isa.
It claims to offer personal loans to ‘creditworthy’ borrowers, with three and five-year term loans available through Orca’s platform.
Your capital is split across multiple consumer loans, with your maximum exposure to a single borrower five per cent.
The three-year option offers an advertised return of 4.5 per cent, and the five-year six per cent.
It will charge you either 0.6 per cent or £20, whichever is greater, to sell any loans on before the end of that term.
Lending Works’ representative APR on the personal loans it provides, that you’re investing in, is 12.9 per cent, which is comparable to bank loans from Santander and Nationwide if you were borrowing £2,000 over a three-year period.
While there is no FSCS protection, Lending Works claims to come with a three-part ‘shield’ to help protect against you losing your capital if there are defaults on its loans.
One of these is diversification, by spreading your investment across multiple borrowers it hopes to reduce your exposure if individual borrowers default.
It also comes with insurance covering the loans in instances of a loss of employment, accidents and sickness, or death.
It says it is backed ‘three of the largest UK insurers’, who are all A and B-rated, but does not say who they are.
Finally, it holds a reserve fund in cash in a segregated bank account with high street bank NatWest, which it tops up using a portion of the fees and interest payable by borrowers. It says it is maintained at ‘a level sufficient to cover our expected rate of arrears and defaults.’
On that subject, Lending Works shares fairly comprehensive data on its actual and expected default and bad debt rates.
It says it has made 25,000 loans up to the end of January 2019 at an average of £6,158 a loan, with an estimated bad debt rate – that is the percentage of defaulted loans that can’t be recovered – of four per cent.
It forecasts 4.6 per cent of the loans originated in 2018 to go bad.
Landbay is an established peer-to-peer property lender that was founded in 2013, and focuses on providing buy-to-let mortgages to landlords, with an average loan-to-value of 72 per cent.
Unlike its fellow property P2P platform that features in Orca, it doesn’t touch short-term bridging loans, or mortgages for property development or commercial real estate purposes.
That’s reflected in the rates of return on offer; its fixed-rate – which can be fixed for up to five years – pays 3.54 per cent assuming your interest is reinvested, while its automatic tracker rate pays 3.2 per cent.
Landbay says the average duration of its buy-to-let mortgages are four years, but some last for 25 years.
However, you can access your investment early as you can sell your investment on Landbay’s secondary market provided someone else is there to pick it up.
It adds there may be a small fee if you have invested in a fixed-rate.
Some Innovative Finance Isas allow you to make loans to property developers or buy-to-let landlords, but they shouldn’t form the building blocks of your investing or saving portfolios
We looked at Landbay last year and wrote: ‘Investments are diversified across multiple mortgages and are always to prime, creditworthy borrowers – generally professional landlords.
‘Landbay matches an investor’s funds to multiple loans that align with their term and rate preferences, so that no investor is ever fully exposed to a single borrower, region or property type.’
What’s more, Landbay has a discretionary fund derived ‘solely from our borrower platform and product fees’. This is designed to provide some layer of protection in the event of late or missed payments.
It says: ‘If a borrower defaults and there is a shortfall which means that, after selling the property, its value falls below that of the total value of any remaining capital and interest owed to you as an investor, then a claim will be made to cover the additional amount on the Reserve Fund.’
However, it does not guarantee that there will be sufficient funds in its reserve fund to cover a claim. It claims it has expected just 0.1 per cent of loans issued in each year since 2014 to default.
Finally, Assetz Capital is the second peer-to-peer platform in Orca’s Isa providing loans to businesses.
Because Orca does not provide a profile of it on its website, it is not known which of the six different accounts, all of which are Isa eligible, it offers are available through Orca.
It offers a quick access account paying 4.1 per cent, which it says invests your money into ‘secured business loans’ and allows you access to your cash in normal market conditions, and 30 and 90-day access accounts which it also claims are secured business loans. The 30-day pays 5.1 per cent and the 90-day 5.75 per cent.
As well as these, it offers a Great British business account, paying 6.25 per cent, which it says ‘automatically invests money in business loans with asset security.’
You can withdraw your money at any time, subject to demand from other investors.
You will receive your capital when the loans mature, which Assetz Capital says is typically between six months and five years.
While principally a business lender, Assetz Capital also offers one product which allows you to make loans to property developers.
It pays 5.5 per cent and says that your money is automatically invested in business loans ‘with property security’ that ‘substantially exceeds the loan value’.
Under the borrower section of its website, it says it provides bridging finance, commercial mortgages, buy-to-let for landlords, development finance and loans for residential refurbishment.
The rules on capital access and on receiving your capital are the same as with its Great British business account.
Assetz Capital says it originated £300.5million of loans last year at a rate of 7.6 per cent.
It is relatively transparent on its default and bad debt rates, expecting 4.6 per cent of its 2018 loans to default.
However, it does not specify its lending criteria, nor does it provide details on a ‘provision fund’ that supposedly helps protect some of its accounts, like the quick access account.
Innovative finance isas are becoming increasingly commonplace with new providers launching all the time, but it remains the investing Wild West and you should be cautious
Should you dive in?
Iain Niblock, Orca’s chief executive, says that this product ‘can be the gateway to the P2P market for everyday investors’.
However, while the product certainly offers a level and speed of diversification it could otherwise take you five years to achieve, it’d still take you a decent amount of time to understand the ins and outs of all five products to the extent that you’d have a good understanding of what exactly you were putting your money in.
After all, having five platforms in one gives you five times as much work to do.
What’s more, it’s not strictly true that just because a loan is asset-backed or property-backed it is necessarily more secure – as Orca suggests for its Orca Pure product.
All the different platforms have their own individual rates of return and particular risks, which are then rolled into Orca’s final average rate of return.
This means you’d probably need to judge all the component parts of the Isa that you were investing in in order to work out whether or not 4.3, or 5.3, was a good rate of return.
For example, if your portfolio contains a larger percentage of Octopus Choice, which offers higher-risk bridging finance and commercial loans, then is a return rate of 4.3 per cent worth that risk – even if there is an element of diversification.
It’s an interesting product and it’s certainly worth keeping an eye on to see if it catches on with other providers, but if this is your first rodeo in the IFISA Wild West it might not be for you – and with no protection, the Orca Isa could end up being a killer for your cash.