Innovative Finance ISAs

What is an Innovative Finance ISA? 

Innovative Finance ISAs (IFISAs, also called alternative investments) are a type of tax-free savings account (like a stocks and shares ISA or a cash ISA). 

An innovative finance ISA contains peer-to-peer loans, like crowdsourcing. This means direct loans to businesses, social enterprises or co-operatives through crowdfunding platforms. With an IFISA, you make loans and get interest payments. You do not invest in companies and get shares or equity. 

They are a great option for ethical investors who are looking for transparent investments. This is because you usually invest directly in a project and can see exactly where your money is going rather than into a mutual fund or a unit trust. 

Alternative investments are also great for ordinary savers because the minimum sums you can ‘invest’ are usually really low. For example, Abundance allows you to invest as little as £5 and Energise Africa’s minimum investment is £50. This makes small direct ethical investments accessible to most people. They tend to offer better returns for those who are willing to take some risk. 

Positive investment and impact

Even though the mainstream ethical investments we cover in our other guides often use the language of positive investing and creating change, the individual companies within the funds rarely make your heart sing. 

But with innovative finance ISAs, there is a whole other world of investing in small projects close to you that you can even get to know and become involved with. 

Recent examples include funding solar panels for school roofs in Oxfordshire, helping insulate social housing in Barnsley, and supporting a community farm in Bristol.

Ethical Consumer has been writing guides to 'alternative investments' since 1992 and there is no doubt that the variety of projects on offer has increased substantially since then. Much of this is down to the new technology and the ability of websites or platforms to guide you through the process.

The downside to this type of investment is that it is high risk and it makes sense to assume that at least a few of the projects you encounter will fail completely. Because of this, and because there are now many more opportunities than there were, there is also more regulation in the UK around selling these types of investment to ordinary people. In many cases you will need to certify yourself either as wealthy or as a “restricted investor” meaning that you promise not to invest more than 10% of your assets into alternative investments like this.

Having said all that, knowing that your choices are having a very real impact can bring you joy in a way which mainstream investing rarely can. It will certainly make sense for any ethical consumers who have an investment pot to consider whether a small part could go into projects of this kind.

What we cover in the guide

In this guide we look first at where Innovative Finance ISAs fit in, then at the four main platforms focusing on offering ethical products to UK consumers. 

We also look at other ways of becoming involved in these types of investment.

IFISAs as a subset of ISAs

Government incentives to encourage people to invest their savings in businesses led to the emergence of Stocks & Shares ISAs. The UK government extended the same tax incentives to some of the alternative investments discussed in this guide. When ISAs consist of these types of alternative investment they are called Innovative Finance ISAs (IFISAs).

Not all IFISAs are ethical

Many of the projects authorised for IFISAs are in areas we would not usually think of as ethical. The website Alternative Credit Investor lists 38 platforms which offer lending to a wide range of projects including buy-to-let mortgages, pawnbrokers, student loans, pubs, and other businesses.

Our four Best Buy ethical investment platforms covered here offer IFISAs which fund sustainable and ethical projects.

Ethical investment platforms and projects

The four main ethical investment platforms included in this guide are all Ethical Consumer Best Buys. 

All of them perform due diligence on the quality of the projects that appear on their platforms which can mitigate the risks to some degree.

Projects fundraising on the platforms tend to change quite often, so it is worth checking regularly (or signing up for emails) to see what new ones there are.

Ethex and Abundance also have areas on their website where people wanting to exit projects early can look to trade their shares with others.

There are other peer-to-peer crowdfunding platforms that are mainly focused on donating money but which also feature some ethical investments. Crowdfunder.co.uk, for example, commonly has one or two community benefit society share issues for smaller ecological projects on its website.

Crowdfunding and the democratisation of capital

Much has been made of the impact of crowdfunding especially in the light of the banking crisis of 2008. According to the European Central Bank, the availability of bank loans to SMEs declined 23% immediately following the crash.

The crowdfunding revolution that sprung up as a result of the rise of the internet may not have completely filled this funding gap, but has led to what some call the democratisation of capital, allowing people to invest with greater ease. It allows organisations to raise finance at reduced interest rates, and also breaks down some of the power once held by larger financial institutions and even governments that had something of a monopoly on finance.

We can see this most clearly in the markets for alternative energy and social housing which have had some success under the crowdfunding model despite a lack of consistent help from governments. 

Abundance, one of the companies in this guide and a well-known innovator in this space, was instrumental in the creation of the idea of Innovative Finance ISAs, which were launched in 2016. Why, they reasoned, should the tax advantages of a stocks and shares ISA not also be available to people wanting to invest ethically into smaller community-oriented projects?

Other alternative investment options

There are some other options for ethical alternative investments. 

We list a selection of other websites where people seek investor capital for smaller projects: renewable energy and overseas development/microfinance.

Renewable energy

Energy4All is a not-for-profit social enterprise dedicated to expanding the number of renewable energy cooperatives within the UK. It is different from the other schemes in that it is owned by the co-operatives it assists and is a vehicle for them to offer mutual support to each other. It lists current share offers on its website for ethical investors.
Call 01229 821 028 or visit energy4all.co.uk

Repowering London helps develop community (solar) energy projects in London, periodically listing on its website those that are seeking funding from ethical investors.
Call 07960 829 826 or visit www.repowering.org.uk

Overseas development

Shared Interest is a community benefit society which acts co-operatively and specialises in supporting Fairtrade organisations within the developing world. You can open a Share Account by going to Shared Interest’s website. 
Minimum investment £100.
Call 0191 233 9100 or visit www.shared-interest.com

Microfinance

Microfinance involves individuals making small loans to small businesses or low-income individuals or those who don’t have access to typical banking services in low-income countries.

Lend With Care (LWC) is an initiative from CARE International UK in cooperation with The Co-operative Group. Entrepreneurs in low-income countries approach local microfinance institutions with business proposals. If approved, business proposals and the entrepreneur’s portfolio are uploaded to the LWC website where you can select businesses to loan to. 
Minimum investment £15.
Call 020 7091 6000 or visit www.lendwithcare.org

Kiva is a US-based non-profit organisation aiming to connect lenders with borrowers in low-income countries to alleviate poverty. Small loans, as little as £25, are sent directly to microfinance institutions within countries (called Field Partners), who administer the loan.
Minimum investment £15.
Visit www.kiva.org

How much can I put into an alternative / innovative ISA?

UK investors currently have an annual tax-free savings allowance of £20,000. They can split this however they like between the three current types of ISA: a cash ISA, a stocks and shares ISA, and the new IF ISA.

For example you could save: 

• £10,000 in a cash ISA,
• £5000 in a stocks and shares ISA and
• £5000 in an IFISA. 

You can only open one new Innovative Finance ISA each tax year. However you can open a new one every year and there is no limit to the number that you can have. You can also transfer money that’s in an existing ISA to an IFISA.

Note that there is some discussion that the UK government will lower the cash ISA threshold to £4000.

What are the financial risks and returns?

IFISAs have a generally higher risk profile than cash ISAs or stocks and shares ISAs. But, they may offer a higher rate of interest than many traditional bank or building society cash ISA accounts are currently able to offer.

However some commentators have described IFISAs as the ‘wild west’ of ISA investing, and you should be aware that the rate quoted is an expected rate and is not necessarily the rate you receive. In addition, you could receive no interest at all or lose all your money depending on how the individual projects in your portfolio perform. 

Whilst only Financial Conduct Authority (FCA)-regulated platforms can offer an Innovative Finance ISA, they come with no other protection. IFISAs don’t qualify for the savings element of the Financial Services Compensation Scheme (FSCS) that protects up to £85,000 should a firm go bust. Neither do they get the FSCS investing element that covers up to £50,000 in case your investing platform goes bust and hasn’t done what it is meant to with your money.

Some platforms have “reserve funds” that they claim can cover you in the event of defaults with loans or businesses failing. However they are under no obligation to use these funds and it is at the discretion of the platform.

It is also more difficult to access your money with an IFISA. Most of the assets (or loans) will be fixed term, making instant access impossible. You should, therefore, take into account the length of time the asset is held for when making a decision about what projects to invest in. Some of the platforms offer secondary markets to sell on your bonds but you are not guaranteed to get a buyer for anything you are trying to sell.

All the platforms we cover here do their own due diligence work on each project seeking funding both in terms of ethics and financial risks. After all it is in the platform’s interest to have projects that perform well – poor performers could damage the platform’s reputation.

For more information on how to limit risks see The Innovative Finance ISA page.