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This publication is available at https://www.gov.uk/government/consultations/isa-qualifying-investments-consultation-on-including-peer-to-peer-loans/isa-qualifying-investments-consultation-on-including-peer-to-peer-loans
At Budget 2014, the Chancellor announced that the government would make peer-to-peer loans eligible for inclusion within Individual Savings Accounts (ISAs).
This consultation is about implementing that announcement. It sets out proposals to change ISA rules to allow peer-to-peer loans to be held within them; in places it seeks views on the relative merits of different options for changes and on the consequences of such changes.
1.1 About ISAs
An ISA is a tax-advantaged savings account within which any interest, dividends or capital gains that arise are tax-free for the investor. There are 2 types of ISA: a cash ISA and a stocks and shares ISA.
There are limits on how much investors can subscribe to an ISA in each tax year. On 1 July 2014 the 2014-15 limit was increased to £15,000; this can be invested in either a stocks and shares ISA, a cash ISA, or a combination of the two.
Not all types of assets can be held in ISAs. The assets that can be held in them are specified in the Individual Savings Accounts Regulations 19981 (ISA Regulations).
More details on ISA rules are set out in Chapters 2 to 7.
1.2 Policy objectives of the Budget 2014 announcement
The government wants to increase the choice of investments available to ISA investors. Additionally, the government is committed to improving competition in the banking sector, including by diversifying the available sources of finance.
At Budget 2014, the government announced that loans made through peer-to-peer platforms will become ISA qualifying investments. The effect of this change will be that peer-to-peer loans can be made by investors using ISA subscriptions. These loans will count as ISA qualifying investments, and the interest payable to the investor on them will be free of the income tax normally due on loan interest.
Peer-to-peer lending is a small but rapidly growing alternative source of finance for individuals and businesses. This policy will increase choice for investors and encourage the growth of the peer-to-peer sector, thereby meeting both government objectives outlined above.
1.3 Consultation scope
Since the policy announcement at Budget 2014, HM Treasury has consulted informally with stakeholders through a series of meetings. The information and views gathered from these meetings have been used to develop proposals on how best to implement this policy. They have also helped to identify some areas where there are alternative options for implementation, each with differing implications for ISA investors.
Chapters 2 to 7 of this document set out the government’s proposals on how best to accommodate loans made through peer-to-peer platforms within the ISA rules. In some areas alternative options are discussed.
The aim of this consultation is to gather views on the proposals and, where options are presented, on their relative merits. The views expressed will inform the government’s selection of a preferred approach.
This consultation does not ask for views on the principle of whether or not to expand the range of ISA qualifying investments. The government has decided to introduce this policy, in order to extend choice for investors and to support innovative alternative sources of finance.
1.4 Consultation objectives
There are 3 objectives that set the parameters for this consultation:
Bring peer-to-peer loans within the scope of ISA qualifying investments. This is the core objective of the policy.
New ISA qualifying investments must comply with existing ISA rules unless there are compelling arguments to adapt these rules or exempt the newly qualifying investments. The ISA rules underpin ISA’s success as a popular and trusted savings product. The government therefore believes that ISA eligibility should rest on investments complying with existing ISA rules unless there are compelling arguments against requiring them to do so. Such arguments might be: that the application of the existing rules to the investment would or might have consequences that are not in the best interests of the investor; or that the objective of the existing rule is either not relevant to the type of investment being considered or can be equally or better achieved by an alternative means.
Any new criteria for eligibility as ISA qualifying investments must be simple to apply, should provide certainty, and should not impose disproportionate compliance, assessment or monitoring requirements on HMRC. The new qualifying criteria for peer-to-peer loans should be simple and provide clarity about what is included and what is not included under the criteria.
1.5 Responding to the consultation
This consultation asks for views on a number of questions highlighted in boxes throughout the document. Respondents are asked to focus their responses on these questions, although all views are welcomed within the scope of the consultation. Furthermore, once reviewing the consultation, we would be interested in respondent’s views on the overarching question below:
In relation to the proposals generally, what necessary set-up costs (one-off costs) would be necessary for your business to arrange peer-to-peer loans meeting the proposed eligibility requirements for ISAs? What would be the estimated ongoing annual costs of doing so?
We would be particularly interested to hear from:
- peer-to-peer platforms arranging loans that will become eligible for ISA investment under the government’s proposed approach
- any peer-to-peer platforms which consider that the government’s proposed approach – or some of the options set out within this consultation – might exclude loans they arrange from ISA eligibility
- individuals, particularly those who currently invest via peer-to-peer platforms or who might consider doing so once peer-to-peer loans become eligible for ISA inclusion
- ISA managers and others involved in the investment industry who may be considering whether to offer peer-to-peer loans within ISAs once they become eligible for ISA investment, or who have concerns about the interaction of peer-to-peer loans and existing ISA eligible investments
- representative bodies of any of the above groups
Responses to this consultation should be sent to HM Treasury by 12 December 2014.
Please email enquiries and consultation responses to ISAPeertoPeerConsultation@hmtreasury.gsi.gov.uk specifying in the subject line whether your email is an enquiry or a formal consultation response.
Alternatively, address responses to:
ISA peer-to-peer consultation
Pensions and savings team
1 Horse Guards Road
Chapter 8 has further details on responding to this consultation.
1.6 Next steps
Once this consultation has closed on 12 December 2014, the government will consider all responses and publish a ‘summary of responses’ document. This will review the responses received, and set out the government’s decisions in response to these.
Changes to the current position will require amendments to the Regulated Activities Order and the ISA Regulations. This will determine the timetable for implementing the changes. Further details of implementation will be provided in the summary of responses to this consultation.
2. Defining peer-to-peer loans
Peer-to-peer loans are direct transactions between investor(s) willing to lend money and borrower(s) seeking loans. These parties are brought together by an electronic platform which introduces and arranges the loan documentation between the lender and the borrower, and then manages the payment of interest and repayment of the principal according to the terms agreed between the parties.
The funds provided by investors are not deposits: investors are lending money and may suffer loss in the event of default by the borrower(s).
As of 1 April 2014 peer-to-peer platforms arranging loans meeting the definition of ‘relevant agreements’ in article 36H of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (article 36H) (i.e. carrying on the activity of ‘operating an electronic system in relation to lending’) are required to be authorised to do so by the Financial Conduct Authority (FCA).2 The Order refers to loans facilitated by such authorised persons as ‘article 36H agreements’.
The government plans to use this as the basis for specifying the peer-to-peer loans that are eligible for ISA inclusion. This will enable peer-to-peer loans meeting the article 36H definition and arranged by peer-to-peer platforms as authorised to do so by the FCA to be eligible for ISAs, subject to them meeting other eligibility conditions. Equivalent loans arranged by non-UK platforms within the EEA that are subject to appropriate and equivalent regulatory standards to those applied by the FCA, as set out at Chapter 3 below, will also be considered for inclusion within ISAs. In the government’s view, this will provide adequate clarity as to which peer-to-peer loans are eligible for ISA inclusion.
Do respondents agree that the government’s proposed approach provides sufficient clarity as to which peer-to-peer loans will be eligible for ISA inclusion?
3. Regulation of peer-to-peer loans
Firms operating peer-to-peer platforms authorised by the FCA are required to comply with various provisions in the Financial Services and Markets Act 2000. They are also required to comply with FCA rules designed to protect individuals investing and borrowing via peer-to-peer platforms.
Broadly speaking, the FCA’s rules require firms operating peer-to-peer platforms to act fairly, professionally and honestly in the best interests of their customers, and to ensure that the content of their websites are fair, clear and not misleading. The requirements are set out in more detail in Annex A.
Investors in peer-to-peer loans are not currently protected by the Financial Services Compensation Scheme (FSCS). The government and the FCA believe it is important that the regulatory framework for peer-to-peer lending is proportionate, especially while the market is young and growing. Bringing peer-to-peer platforms within the remit of the FSCS would impose additional regulatory costs, which may be quite significant. The FCA considers that this would currently be disproportionate, and that the other protections in place (set out at Annex A) provide adequate protection for the market and the risks it carries at present. The FCA will review the impact of the regulatory framework for peer-to-peer platforms and consider whether the remit of the FSCS should be expanded in 2016.
Under the current regulatory regime, the provision of advice to lenders on entering into a peer-to-peer loan is not a regulated activity. The government considers that making peer-to-peer loans eligible for inclusion in ISAs could significantly increase the provision of advice to investors on peer-to-peer lending as a commercial activity. The provision of advice on all existing qualifying investments for ISAs (other than cash) is a regulated activity. In the case of cash, accepting deposits by way of business is a regulated activity and consumers are protected by the applicable regulatory framework.
The government therefore proposes making the provision of advice to investors on loans made via peer-to-peer platforms a regulated activity. This will require any firm providing advice on peer-to-peer loans to be authorised by the FCA. However, the government does not intend to require firms that currently hold FCA authorisation to advise on investments to have to seek additional authorisation in order to advise on peer-to-peer loans. Instead the government proposes that all firms currently authorised to advise on investments will be eligible to elect to have authorisation to advise on peer-to-peer loans automatically conferred upon them.
The government intends to ensure that its proposal to regulate advice on entering into peer-to-peer loans does not result in any additional regulatory burden in respect of the automated lending (‘auto-lend’) services which some platforms offer. However, platforms which do more than just offer automated lending and offer advice will need to apply to be authorised to do so by the FCA.
The government does not propose to regulate other activities in relation to peer-to-peer lending (for example, dealing in peer-to-peer loans as an agent) at the present time. These activities are regulated when applied to existing qualifying investments for ISAs, which means that firms undertaking them must be authorised by the FCA. However, the government has not been provided with any evidence to suggest that there is a risk of detriment to investors that merits additional regulation of peer-to-peer lending at this time. The government considers it important to keep the regulatory regime for peer-to-peer lending proportionate, to ensure the industry is able to develop and grow. However, if the market evolves such that there is a risk of consumer detriment then the government will review and amend the regulatory framework as necessary.
Whilst the proposed approach to defining ISA eligible peer-to-peer loans (set out at above) is based around UK legislation, the government will consider applications for inclusion within ISAs of equivalent loans arranged by non-UK platforms within the EEA, provided these are subject to appropriate and equivalent regulatory standards to those applied by the FCA. Further details will be provided by HMRC in due course.
Do respondents agree that the proposed regulatory requirements strike the correct balance between investor protection and a proportionate regulatory regime?
4. Peer-to-peer loans and the role of the ISA manager
The ISA rules require that all assets held within ISAs are managed by an ISA manager approved by HMRC.
ISA managers’ responsibilities include operating the ISA subscription limit, acquiring, transferring and selling ISA investments, arranging withdrawals from ISAs, making tax claims on behalf of investors and providing statistical and other information returns to HMRC.
Currently, peer-to-peer loans tend to be legally and beneficially owned by the investor, as the investor enters into the loan agreement(s) directly with the borrower(s) to whom they are lending (the firm operating the platform is not a party). Thus they do not satisfy the current ISA requirement that a non-cash investment must be legally owned, or co-owned, by the ISA manager or their nominee.
This legal ownership requirement is designed to facilitate the acquisition and sale of investments held within the ISA by the ISA manager. However, peer-to-peer loans can be easily acquired and, where secondary markets exist (an area covered in more detail in Chapter 5), marketed and sold by investors themselves via peer-to-peer platforms.
The government is aware that some firms operating peer-to-peer platforms would like to become ISA managers in respect of the loans they arrange. Given that investors themselves can buy and (where markets exist) sell the loans, the government does not believe it is necessary to require peer-to-peer platforms that wish to become ISA managers to change their existing practices to satisfy the legal ownership requirement.
To provide flexibility and choice for investors and providers, the government proposes that a firm operating a peer-to-peer platform that has been granted permission under article 36H of the Regulated Activities Order (RAO) by the FCA can be eligible for approval as an ISA manager in relation to the peer-to-peer loans it arranges.
The government further proposes that in such cases, the ISA manager (i.e. the firm operating the platform), or its wholly owned subsidiary,3 will be free to legally own the loan – as per the current ISA model – if it wishes to do so and this is provided for in the terms and conditions. However, the platform will not be required to legally own or co-own the loan. In either case, the ISA manager must be able to report upon loans held in ISAs to HMRC in accordance with the ISA rules, and meet all the other requirements of an ISA manager.
It is not yet clear to what extent existing ISA managers will wish to become involved in offering to acquire peer-to-peer loans on behalf of ISA investors. In instances where they do, if they are not the facilitating peer-to-peer platform, they will be required to legally own or co-own the loan. This is because the ISA manager will need a mechanism by which they are supplied with details relating to the operation of the loan such that they are able to fulfil their obligation to provide reporting information to HMRC.
It is possible for a third party to enter into a peer-to-peer loan on behalf of the investor (unless the loan contract and/or the terms of the agreement with the peer-to-peer platform specifically exclude such an arrangement), such that the investor is the beneficial owner of the loan but the third party is the legal owner. Such arrangements are not thought to be common at present; however an ISA manager who is not the facilitating platform who wishes to hold a loan within an ISA could potentially meet the requirement to be the legal owner of the loan by this means.
The government believes the approach outlined above will allow both existing ISA managers and firms operating peer-to-peer platforms wishing to become ISA managers to manage peer-to-peer loans within ISA accounts should they wish. In all cases, the obligation to provide ISA information to HMRC, and the satisfaction of other ISA requirements, will remain the responsibility of the ISA manager.
The government also proposes to consider applications from non-UK firms operating platforms within the EEA to become ISA managers, provided they are subject to appropriate and equivalent regulatory standards to those applied by the FCA. Further details will be provided by HMRC in due course.
Are existing ISA managers considering offering peer-to-peer loans alongside other ISA eligible investments? What factors may affect this decision?
Are firms operating peer-to-peer platforms considering seeking authorisation to act as ISA managers if the government permits this? What factors may affect this decision?
Do respondents have any concerns regarding FCA-authorised firms operating peer-to-peer platforms being allowed to act as ISA managers? If so, what are they?
Do respondents see any risks arising from firms operating peer-to-peer platforms approved as ISA managers not being required to have legal ownership of peer-to-peer loans held within ISAs?
5. Withdrawals and transfers
Under the ISA rules, within thirty days of receipt of a withdrawal request, an ISA manager must either remove the ISA wrapper and transfer the assets into the sole name of the investor, or liquidate the relevant assets into cash and make a cash payment to the investor.
Peer-to-peer loans are usually designed so that investors can acquire and dispose of their loans themselves. The government therefore believes that where an investor requests the withdrawal of a peer-to-peer loan from their ISA, the ISA manager should remove the ISA wrapper from the loan but should not liquidate it unless that ISA manager is the legal owner of the loan and has been asked to liquidate it by the investor.
Are there any drawbacks to the proposed withdrawal procedure for peer-to-peer loans? If so, what are they?
The ISA rules for non-cash investments require that, where an investor requests the transfer of the whole contents of a single ISA account to another ISA manager, the current manager must comply with the request, and the transfer must be completed within thirty days. Where the receiving ISA manager is unable or unwilling to hold the assets in question, or where the investor has requested that the assets in a stocks and shares ISA be transferred to a cash ISA, the assets may need to be liquidated into cash so that the cash value can be transferred to the new manager.
The service terms to which both lenders and borrowers agree when they register with a peer-to-peer platform (‘platform service terms’) and the peer-to-peer loan contracts that govern each loan typically include a provision that payments of interest and principal between the borrower and the lender will continue to be transferred via the platform that introduced them, throughout the term of the loan. The loans are therefore non-transferable to the degree that all parties commit to the involvement of the introducing platform throughout the life of the loan. Lenders can sometimes seek to sell their interest in the loan to a third party if they wish, but the platform service terms generally include a restriction such that any sale must be to another registered lender and arranged via a secondary market process provided by the peer-to-peer platform. Where such a secondary market exists and a loan is sold, the role of the firm operating the platform in administering the loan continues but the rights of the original lender pass to the purchasing lender. There is typically no market-maker in these secondary markets and so there is no guarantee that a willing purchaser will be found – although in practice secondary markets operated by the firms running major UK peer-to-peer platforms appear to operate effectively and secure purchasers quickly where required. However, not all platforms provide a secondary market and so it is possible that there may be no market and no means of selling.
The government proposes that if the transfer requirement is applied to peer-to-peer loans, which is discussed further below, it will be adjusted so that the ISA manager will only be obliged to effect a transfer after the investor (or their representative) has found a buyer for the loan (see below as to how this might work in practice) and the ISA manager is holding the cash proceeds of the sale. As such, it will be the cash realised on sale of the loan that is transferred within the ISA wrapper, not the loan itself. The ISA manager will be obliged to ensure the transfer process is completed within a specified time period. In such cases, ISA managers (whether firms operating peer-to-peer platforms or third parties) must ensure that the sale proceeds remain in the ISA account and are not returned to the investor (thereby not leaving the ISA wrapper).
If the transfer requirement is applied to peer-to-peer loans – do respondents foresee any risks or detriment for consumers resulting from the proposed modification of the current ISA requirements? If so, what are these?
Following the sale of the peer-to-peer loan and transfer instructions from the investor, what would be the most appropriate time period within which the cash realised should be transferred?
Is the proposed modification to transfer requirements likely to present any difficulties or administrative obstacles for ISA managers (including those receiving transfers)? If so, what are these?
Overall, the government considers that transferability of ISA investments contributes to the development of effective competition within the ISA market. However, the non-transferability of peer-to-peer loans between platforms means that investors would have to be able to sell loans they hold in an ISA, in order to transfer the cash value to another ISA manager. Thus the lack of a secondary market, or the absence of a willing purchaser where such a market exists, could prevent or delay transfers.
The government is considering possible measures to address this potential difficulty. The measures under consideration and further challenges that they may present are explored below. The government is interested in respondents’ views on these measures, and on the degree to which the balance of resulting reassurances and risks is sufficiently compelling to waive or further modify the ISA transfer requirements for peer-to-peer loans.
5.3 Secondary markets
The government could require that for a peer-to-peer loan to be ISA-qualifying, it must be facilitated by a firm operating a platform that provides a facility for the investor to seek a third party purchaser for the loan, throughout the term of the loan. In other words, it must provide access to a secondary market at all times. This would exclude from ISA eligibility those peer-to-peer loans that are wholly non-transferable other than to the firm operating the platform arranging and managing them, and ensure investors could access an openly competitive market if they wished to sell their loan and transfer the cash realised to another ISA manager.
The most likely way firms could fulfil this requirement would seem to be a contractual commitment in their platform service terms to those lending via their platforms. However, the need to ensure the existence of a secondary market in order to establish ISA eligibility might compromise achievement of the third objective in that it would introduce complexity for ISA managers; and potential new entrants to the peer-to-peer lending industry might consider that requiring a secondary market as a condition of ISA eligibility disadvantages them. The government would also need to clearly define what constitutes an eligible secondary market for this purpose.
What are respondents’ views on requiring the existence of a secondary market in order for a peer-to-peer loan to qualify for ISA eligibility? Would such a requirement provide a useful degree of reassurance to investors?
Would a requirement to offer a secondary market pose any problems or difficulties for peer-to-peer platforms and if so, what are these? Could secondary market arrangements of this type be easily defined?
5.4 Ensuring a sale at market value within a given period
Even where a secondary market exists, the lack of a market maker means there is no guarantee that loans held within ISAs can be sold for cash at their market value within a given period. Whilst currently secondary markets for peer-to-peer loans appear to operate effectively, there is nonetheless a risk that investors might experience a delay in finding a purchaser, with the result that any transfer they wished to make could not take place within a reasonable period of time.
The government could address this by insisting that, for a peer-to-peer loan to be ISA eligible, there must be arrangements in place under which the loan could be sold at market value within a specified period (say, twenty days) at the investor’s request. This would allow investors certainty that within a specified number of days, they would be able to sell their loan at market value, and transfer the cash realised to another ISA manager.
One way firms operating platforms could achieve this would be for them to put in place a contractual commitment that either the firm itself or a third party would offer to purchase loans from investors at their market value if they remain unsold after a specified period. This would ensure that loans could be sold (and therefore transfers of the cash realised could take place) within a reasonable time period, even where either no secondary market existed, or where no willing buyer had been found via such a market. Firms would need to ensure that any such arrangement was structured in such a manner as to avoid any conflict of interest on their part.
The market value of an asset in an ‘arm’s length’ transaction is generally determined by reference to the availability of willing buyers and the prices they are prepared to offer. Therefore, given the absence of another willing buyer – or where no secondary market exists, the inability of the investor to sell the loan – the market value of the loan could be very low. In these circumstances, the market value, and thus the value transferred to the new ISA manager, could be considerably less than the sum of the outstanding capital plus interest due.
Insisting upon a guarantee of a sale at market value within a specified period would enable the provision of liquidity and thus enable transfers. However given the restricted nature of the markets available for peer-to-peer loans, their values are likely to be more volatile – and thus the market value on a specified day possibly much lower – than is generally the case where assets are traded on recognised exchanges with market-makers and quoted prices. There is a risk that investors may wrongly infer that ISA transferability implies that their loans will achieve equivalent valuations to those typically achieved when selling existing ISA-qualifying investments on recognised exchanges.
5.5 Is transferability either necessary or beneficial for peer-to-peer investors?
Besides the options and possible consequences set out above, there is a more general risk that investors may wrongly infer that ISA transferability implies that their loans can be transferred between peer-to-peer platforms without the need for them to be sold. As per 5.4 above, this is not the case: peer-to-peer loan contracts generally provide for the involvement of the introducing platform throughout the term of the loan.
If the government is to ensure that any investor with peer-to-peer loans within an ISA can transfer their investment to another ISA manager, then it will need to implement additional measures beyond that proposed above. The government has identified a range of options available to modify the ISA transfer rules for peer-to-peer loans:
It could insist on the existence of a secondary market as set out above: this would ensure that all peer-to-peer investors within ISAs had access to a market to re-sell their loans in order to facilitate a transfer of the cash proceeds, but there would be no guarantee as to how long this might take. There might also be adverse implications for some firms running peer-to-peer platforms.
It could instead insist on the availability of a mechanism to effect a sale at market value within a given period as set out above: this would ensure that whether or not investors had access to a secondary market, they could be assured of a willing purchaser within a given period in order to facilitate a transfer of the cash proceeds of a sale. However, the market value of their investment might prove to be quite low and not in line with their expectations based on their experience with other ISA eligible investments. Additionally, there might be adverse implications for some firms running peer-to-peer platforms.
It could combine both of the above measures, such that all ISA eligible peer-to-peer loans could be exposed to a secondary market and be guaranteed a sale at market value within a given time if the investor wished to take advantage of this – albeit with the possible risks and adverse implications already outlined.
Alternatively – the government could conclude that the possible complexity, adverse consequences and risks of seeking to apply ISA transfer requirements (even in a modified form) together present a sufficiently compelling reason not to apply any form of transfer requirement to peer-to-peer loans held within ISAs.
Do respondents think that a guarantee of a sale at market value within a given period would be desirable in addition to the proposed requirement of a secondary market?
Is there merit for investors in requiring that there must be a mechanism by which loans can be sold at market value within a given period? What period should this be, taking account of the times taken at present to achieve sales on existing secondary markets?
Are there other ways in which to facilitate transferability, besides those described above? If so, how might these work?
Overall, do respondents feel that the benefits to investors from applying transfer requirements to peer-to-peer loans held in ISAs outweigh the possible risks of doing so?
5.6 Failure or collapse of an ISA manager
If an ISA manager ceases to trade as a result of a financial failure or similar then investors can transfer their ISA investments to any other willing ISA manager, within 30 days, without loss of the ISA wrapper and its tax advantages. Additionally, the ISA rules provide for a managed bulk transfer of accounts from a failing ISA provider to another ISA manager willing to take on their management.
These arrangements assume the ready availability of another ISA manager willing and able to take on the ISA investments. Were a failing firm operating a peer-to-peer platform to be an ISA manager, then given the non-transferable nature of peer-to-peer loans and the FCA requirement for a resolution plan (see Annex A), an ISA manager willing to take on the ISA investments might nevertheless be unable to do so unless they were liquidated into cash first. Responsibility for operating the platform, including receiving loan repayments from the borrower and passing these to the investor, might pass to an administrator as part of the resolution plan (as required by the FCA’s regulatory regime). This could result in a situation where the administrator may not be able to fulfil the requirements of an ISA manager.
In these circumstances, even where a secondary market existed and continued to operate, the market value available to investors might be quite low. The investor might find their only options were either accepting this low market value in order to transfer to a new manager, or the loan(s) remaining with the peer-to-peer platform’s successor administrator under its resolution plan, which would result in the loss of the ISA tax wrapper were that administrator not an ISA manager.
A similar situation could arise if firms with interim permission to operate peer-to-peer platforms are approved by HMRC to act as ISA managers but are subsequently not granted full authorisation by the FCA. Once they cease to have the necessary FCA approval for their activities they will no longer meet the requirements to act as ISA managers; this would also result in the loss of the ISA tax wrapper.
One way that it might be possible to avoid ISA investors losing the ISA wrapper in event of firm failure or loss of FCA authorisation would be for the investor to transfer legal ownership of their loans to a new ISA manager at the time of the platform’s failure. This could enable the new ISA manager to fulfil the proposed requirements of the ISA rules and enable the investor to retain their ISA tax advantages.
Do respondents have suggestions as to how loans held within ISAs could continue to be managed by an ISA manager in cases where either a firm operating a peer-to-peer platform collapses and they were acting as ISA manager, or where such a firm becomes ineligible to act as an ISA manager following removal of its FCA permissions?
6. Mixing peer-to-peer loans with other qualifying investments within a single ISA account
The ISA rules allow an individual to subscribe to one cash ISA and one stocks and shares ISA in each tax year. As ISAs have to be managed by an ISA manager, individuals can only invest in their stocks and shares ISA from within the range of qualifying assets available via a single ISA manager each year.
The government has decided it would be inappropriate for peer-to-peer loans to be eligible for inclusion within a cash ISA. Peer-to-peer loans involve a higher degree of risk than other forms of savings and investments eligible for cash ISAs; and unlike these other eligible savings and investments they are not covered by the deposit class of the FSCS, which guarantees up to £85,000 compensation per licensed institution.
One approach would be to make peer-to-peer loans eligible for stocks and shares ISAs. As set out in Chapter 4, it is not yet clear whether and to what extent existing ISA managers will want to acquire and hold peer-to-peer loans within the ISA accounts they manage. It may be that they will choose not to do so, initially at least, and that most ISA managers offering peer-to-peer loans within ISAs will be firms operating peer-to-peer platforms.
Were this to be the case, ISA investors would likely find themselves having to choose between either investing in peer-to-peer loans or investing in other eligible non-cash investments (e.g. shares) in each single tax year. It would be open to firms operating peer-to-peer platforms to seek and obtain relevant authorisations from the FCA such that they could manage a wider range of ISA eligible investments – but there is no guarantee that they would choose to do so, or that the FCA would grant them authorisation.
How important is it that investors should be able to mix peer-to-peer loans with other eligible investments within their ISA in a single tax year? Do respondents believe most investors wishing to place peer-to-peer loans into an ISA account will additionally want to invest in other types of non-cash ISA investments within the same tax year?
Alternatively, as the peer-to-peer lending market differs from the existing investment industry, the government could create a third category of ISA. The ISA rules could provide for investors to subscribe to one each of a cash ISA, a stocks and shares ISA, and a third type of ISA where peer to peer loans could be held. This would allow an ISA investor to invest in assets that are currently eligible for cash and stocks and shares ISAs, but also to then invest in peer-to-peer lending via a different ISA manager if they wished - subject to the overall ISA subscription limit. They would be free to hold the three available ISA types with different ISA managers, provided their total annual subscription across the three ISA types did not exceed the annual ISA allowance. For example, an investor might choose to invest £10,000 in shares in a stocks and shares ISA with one ISA manager, £2,000 cash in a cash ISA with a second ISA manager, and £3,000 in peer-to-peer loans through a third ISA manager. Of course, if an ISA manager were to become suitably authorised to offer investments eligible for all three ISA types, then it would be possible for an investor to hold all three ISA types with the same ISA manager if they wished.
Previous chapters have set out several areas where the government proposes that it could adjust or waive existing ISA rules to accommodate peer-to-peer loans in a manner that provides both clarity and flexibility for investors. Given this, restricting application of any amended ISA rules to a third specific ISA type might assist both investors and ISA managers in clearly understanding the different provisions that apply to peer-to-peer loans held within ISAs.
However, ISAs are very popular and trusted and the current ISA regime is well understood by savers, investors and ISA managers. The government is interested in respondents’ views on whether a third ISA type would confuse investors and make understanding the ISA regime more difficult.
The government believes that both approaches – i.e. making peer-to-peer loans eligible for inclusion within stocks and shares ISAs, and creating a third ISA type for which peer-to-peer loans would be eligible – would:
- meet the consultation’s main objective of allowing peer-to-peer loans within the scope of ISA qualifying investments
- meet the consultation’s third objective in that it would be clear what peer-to-peer loans are included and are not included under the criteria
However, with regard to the consultation’s second objective, the government must judge whether the ability to combine peer-to-peer loans with other ISA eligible investments within a single tax year, together with increased ease of understanding of the rules applicable to peer-to-peer loans within ISAs, would provide a sufficiently compelling reason to significantly depart from or adapt the existing ISA rules. The government is interested in respondents’ views on the implications of the two options available, to inform this judgement.
Would a third ISA type be helpful in alerting investors to the different rules which will apply to peer-to-peer loans within ISAs? Overall, would a third ISA type aimed specifically at alternative finance products such as peer-to-peer loans be a good thing – and if so, why?
What potential difficulties or challenges might the creation of a third ISA type present for savers, investors, ISA managers or others?
If the government decides not to introduce a third ISA type, how can we best ensure that customers are clear about the special characteristics associated with peer-to-peer loans, for example that they are not covered by the FSCS, and that they may be difficult to liquidate?
7. Child Trust Funds and Junior ISAs
The investments that can be held in Child Trust Funds (CTFs) and Junior ISAs are broadly aligned with those that qualify to be held in ‘adult’ ISAs; therefore the general approach when expanding the range of ISA eligible investments is to similarly expand the range for CTFs and Junior ISAs unless there are particular reasons why the investments in question are unsuitable for children.
Investors in peer-to-peer loans can lend to both private individuals and to businesses. Most individual firms operating platforms allow lending to either individual consumers (and perhaps to sole traders) or to business entities. In some cases – usually where the borrower is a business – the investor is provided with details of the specific lending opportunity, including the nature of the business to which they are lending. In other cases, the investor simply sets criteria they require to be met for their loan (e.g. a minimum interest rate, a maximum term, or a risk category) and the firm operating the peer-to-peer platform then matches the investor to a suitable borrower (or borrowers – as some firms operating platforms spread risk by creating a portfolio of small loans which when combined meet the investor’s criteria) in accordance with pre-set rules which are specified in advance to the investor.
In some instances, therefore, investors in peer-to-peer loans do not know the identity of the borrower to whom they are lending4 and can be investing in a business without knowing its nature. The government considers it appropriate that adult investors should be free to decide whether they are happy to invest in this manner and should not be denied the tax advantages of the ISA wrapper should they choose to do so. It is interested in whether respondents have any concerns about the government offering a tax advantage where an adult investing on a child’s behalf (see below), or an older child (a child aged 16 years or over may assume responsibility for their own CTF or Junior ISA and make investment decisions), may be lending to a business without knowledge of its activities, or lending to an individual (or several) without knowing the intended use of the loan. The government will need to consider whether any concerns or potential risks are sufficient to justify differentiating between children’s savings products and ISAs with regard to the eligibility of peer-to-peer loans.
Do respondents have any concerns about offering a tax advantage where loans made by or on behalf of children might be made without knowledge of the intended recipient(s) or usage of the loaned funds? If so, what are they?
To ensure that the terms of peer-to-peer loans are enforceable, it is not generally possible for children to be party to them as either lender or borrower. A child cannot therefore be the legal owner of the loan: another party has to lend on the child’s behalf. In order for a peer-to-peer loan to be held within a CTF or Junior ISA, the government proposes to require that the CTF or ISA manager must be party to any peer-to-peer loan held within it on behalf of the child for whom the account was opened. The alternative option proposed for ISAs in Chapter 4 will not be available for peer-to-peer loans held within CTFs or Junior ISAs. This will mean that where a firm operating a peer-to-peer platform obtains approved CTF or ISA manager status but is unable or unwilling to be the legal owner of any loans it arranges, it will be unable to hold peer-to-peer loans within a CTF or Junior ISA.
The government has considered the option of allowing the responsible adult who opened the CTF or Junior ISA account to be the legal owner of the loan. However as the person(s) qualifying as the responsible adult can change during the lifetime of the account (e.g. when the child reaches the age of 16, or as a result of changes in parental responsibility) the government has decided this would not be appropriate.
Do respondents agree that if peer-to-peer loans are made eligible for CTFs and Junior ISAs, these loans should be in the legal ownership of the ISA manager? If not - what alternative approach might be considered?
8. How to respond
The government welcomes views on the following questions, although all views are welcomed within the scope of the consultation.
|Question 1||In relation to the proposals generally, what necessary set-up costs (one-off costs) would be necessary for your business to arrange peer-to-peer loans meeting the proposed eligibility requirements for ISAs? What would be the estimated ongoing annual costs of doing so?|
|Question 2||Do respondents agree that the government’s proposed approach provides sufficient clarity as to which peer-to-peer loans will be eligible for ISA inclusion?|
|Question 3||Do respondents agree that the proposed regulatory requirements strike the correct balance between investor protection and a proportionate regulatory regime?|
|Question 4||Are existing ISA managers considering offering peer-to-peer loans alongside other ISA eligible investments? What factors may affect this decision?|
|Question 5||Are firms operating peer-to-peer platforms considering seeking authorisation to act as ISA managers if the government permits this? What factors may affect this decision?|
|Question 6||Do respondents have any concerns regarding FCA-authorised firms operating peer-to-peer platforms being allowed to act as ISA managers? If so, what are they?|
|Question 7||Do respondents see any risks arising from firms operating peer-to-peer platforms approved as ISA managers not being required to have legal ownership of peer-to-peer loans held within ISAs?|
|Question 8||Are there any drawbacks to the proposed withdrawal procedure for peer-to-peer loans? If so, what are they?|
|Question 9||If the transfer requirement is applied to peer-to-peer loans – do respondents foresee any risks or detriment for consumers resulting from the proposed modification of the current ISA requirements? If so, what are these?|
|Question 10||Following the sale of the peer-to-peer loan and transfer instructions from the investor, what would be the most appropriate time period within which the cash realised should be transferred?|
|Question 11||Is the proposed modification to transfer requirements t likely to present any difficulties or administrative obstacles for ISA managers (including those receiving transfers)? If so, what are these?|
|Question 12||What are respondents’ views on requiring the existence of a secondary market in order for a peer-to-peer loan to qualify for ISA eligibility? Would such a requirement provide a useful degree of reassurance to investors?|
|Question 13||Would a requirement to offer a secondary market pose any problems or difficulties for peer-to-peer platforms and if so, what are these? Could secondary market arrangements of this type be easily defined?|
|Question 14||Do respondents think that a guarantee of a sale at market value within a given period would be desirable in addition to the proposed requirement of a secondary market?|
|Question 15||Is there merit for investors in requiring that there must be a mechanism by which loans can be sold at market value within a given period? What period should this be, taking account of the times taken at present to achieve sales on existing secondary markets?|
|Question 16||Are there other ways in which to facilitate transferability, besides those described above? If so, how might these work?|
|Question 17||Overall, do respondents feel that the benefits to investors from applying transfer requirements to peer-to-peer loans held in ISAs outweigh the possible risks of doing so?|
|Question 18||Do respondents have suggestions as to how loans held within ISAs could continue to be managed by an ISA manager in cases where either a firm operating a peer-to-peer platform collapses and they were acting as ISA manager, or where such a firm becomes ineligible to act as an ISA manager following removal of its FCA permissions?|
|Question 19||How important is it that investors should be able to mix peer-to-peer loans with other eligible investments within their ISA in a single tax year? Do respondents believe most investors wishing to place peer-to-peer loans into an ISA account will additionally want to invest in other types of non-cash ISA investments within the same tax year?|
|Question 20||Would a third ISA type be helpful in alerting investors to the different rules which will apply to peer-to-peer loans within ISAs? Overall, would a third ISA type aimed specifically at alternative finance products such as peer-to-peer loans be a good thing – and if so, why?|
|Question 21||What potential difficulties or challenges might the creation of a third ISA type present for savers, investors, ISA managers or others?|
|Question 22||If the government decides not to introduce a third ISA type, how can we best ensure that customers are clear about the special characteristics associated with peer-to-peer loans, for example that they are not covered by the FSCS, and that they may be difficult to liquidate?|
|Question 23||Do respondents have any concerns about offering a tax advantage where loans made by or on behalf of children might be made without knowledge of the intended recipient(s) or usage of the loaned funds? If so, what are they?|
|Question 24||Do respondents agree that if peer-to-peer loans are made eligible for CTFs and Junior ISAs, these loans should be in the legal ownership of the ISA manager? If not – what alternative approach might be considered?|
8.1 Submitting responses
Responses to this consultation should be sent to HM Treasury by 12 December 2014.
Please email enquiries and consultation responses to ISAPeertoPeerConsultation@hmtreasury.gsi.gov.uk specifying in the subject line whether your email is an enquiry or a formal consultation response.
Alternatively, address responses to:
ISA peer-to-peer consultation
Pensions and savings team
1 Horse Guards Road
The government has held informal meetings with industry representatives prior to publishing this consultation. It will continue to meet with industry and other stakeholders during the consultation period to discuss their views on the questions set out in this document.
When responding please say if you are a business, private individual or representative body. In the case of representative bodies please provide information on the number and nature of people or businesses you represent.
Please be aware that all responses may be shared with HMRC and the FCA.
Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the Environmental Information Regulations 2004.
If you want the information that you provide to be treated as confidential, please be aware that, under FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Treasury.
HM Treasury will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.
8.3 Consultation Principles
This consultation is being run in accordance with the government’s Consultation Principles. The Consultation Principles are available on the Cabinet Office website.
The government’s Consultation Principles state that “timeframes for consultation should be proportionate and realistic”. This consultation will run for eight weeks, which should be sufficient time for stakeholders to consider and respond. A longer consultation is considered unnecessary because this document consults on implementation rather than principle, and the policy will involve a secondary, rather than primary, legislation change.
If you have any comments or complaints about the consultation process please contact:
HM Revenue & Customs
100 Parliament Street
Please do not send responses to the consultation to this address.
9. Annex A: Regulatory rules with which peer-to-peer platforms must comply
The FCA consulted on and has implemented rules which apply to all authorised firms operating platforms.5 These are summarised below.
9.1 Investor-specific rules
- a minimum capital requirement on the firms operating platforms of either a percentage of loaned funds or a fixed minimum of £50,000 – whichever is higher. The fixed minimum will be lower (£20,000) until April 2017, to allow firms to transition to the new regime. Firms with an interim permission will not be subject to the FCA’s prudential standards until they become fully FCA-authorised
- firms operating platforms are subject to the FCA’s client money rules. These rules require the firms to ensure adequate protection of client money when the firm is responsible for it
- firms operating platforms must have resolution plans in place such that in the event of the platform collapsing, repayments on existing loans will continue to be collected so that investors do not lose out
- where firms do not run a secondary market, investors can cancel without penalty and without reason within 14 calendar days of entering into any loan agreement
9.2 Borrower specific rules
- firms operating platforms must provide adequate explanations of the key features of the credit available to prospective borrowers before any agreement is made
- firms operating platforms must assess the creditworthiness of borrowers before any credit agreement is made
- firms operating platforms must provide notice to borrowers in arrears and provide information sheets to such borrowers directing them to sources of free and impartial debt advice
- firms operating platforms must comply with FCA rules relating to ‘financial promotions and communications’, ‘refinancing’, and ‘debt recovery and credit information services’
- firms must provide borrowers with the right to withdraw from any agreement into which they have entered, without giving any reason, within 14 days of the agreement being made
9.3 Additional requirements
In addition to the investor- and borrower-specific rules, the firms running the platforms are subject to additional over-arching requirements that, among other matters, require the following:
- firms must have appropriate systems and controls to address the risks of the business
- firms must employ staff competent for their roles
- communications must be fair, clear and not misleading
- firms must have processes in place to deal with complaints. If a complainant is unhappy with the firm’s response, they should be able to take the complaint to the Financial Ombudsman Service
10. Annex B: Summary of impacts
10.1 Exchequer impact
|N/A||Neg||£-10 million||£-15 million||£-35 million|
These figures were set out in Table 2.1 of Budget 2014 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside the Budget.
This annex provides a summary of the expected impacts of this policy. A full Tax Impact and Information Note (TIIN) will be published alongside draft regulations following the completion of this consultation.
10.2 Economic impact
This may increase funding to businesses that struggle to get funding from banks. This will benefit businesses that will be able to secure funding to sustain and or create output and jobs. Including peer-to-peer investments in ISAs may increase funding through this channel.
Lending may also increase to consumers, who will in turn be able to use the funds to buy goods and services in the economy.
The measure will also provide another source of saving and potentially higher returns for those holding ISAs. Those who already invest in peer-to-peer lending are likely to benefit as the returns would be in a tax free wrapper. The higher returns could either be reinvested into peer-to-peer lending and therefore further boost direct lending, saved in conventional institutions, or consumed. All of these outcomes would have economic benefits. Overall, the policy is likely to ease credit conditions for business and consumers. While the figures may be small in the context of overall GDP, effects on consumption and investment are likely to be positive.
10.3 Impact on individuals and households
ISA investment and peer-to-peer lending are voluntary activities. Those that choose to invest in peer-to-peer lending and place their loans into ISAs will benefit from the tax advantages provided by the ISA wrapper. Although the tax-advantaged nature of ISA returns generally means gains are greater for higher rate taxpayers than basic rate taxpayers, industry data indicates that most gainers will be basic rate taxpayers as they are more likely to have space in their ISA allowances. The average annual gain is expected to be around £75 per person.
10.4 Equalities impacts
ISA investment and peer-to-peer lending are voluntary activities. Industry data indicates that overall around 80% of those who choose to invest in peer-to-peer lending are male; this percentage is higher when looking just at the additional or higher rate taxpayer group (90%) and lower when looking just at the basic rate or non-taxpayer group (76%). There is no evidence to suggest that ISA eligibility is likely to alter this. It is not expected that this measure will have any adverse impacts on groups with protected characteristics.
10.5 Impact on business including civil society organisations
The ability to offer peer-to-peer lending within ISAs will likely require considerable technical work on the part of industry and increased administration for peer-to-peer platforms if they choose to become ISA managers. However no peer-to-peer platform will be forced to become an ISA manager and existing ISA managers and advisors will be free to choose whether to advise upon peer-to-peer loans and/or accept them into ISAs they manage. Administrative costs will be considered further based on information provided by responses to the consultation. Offering peer-to-peer loans within ISA has the potential to increase business for both sectors.
10.6 Operational impact
This measure could impose new compliance costs and requirements upon HMRC. Further assessment will be informed by responses to this consultation and details of the proposed change.
10.7 Other impacts
If the measure increases the rate of growth of the peer-to-peer industry (as seems likely) then it may indirectly impact on banks and other financial institutions offering loans to businesses or consumers, by increasing access to alternative finance options.
(Statutory Instrument 1998/1870) ↩
Transitional arrangements are in place conferring an interim permission on persons who were carrying on that activity immediately before 1 April 2014 and held a licence issued by the Office of Fair Trading under the Consumer Credit Act 1974. ↩
This is to facilitate debt recovery action on behalf of the investor where a loan is in default. ↩
The firm operating the platform will ascertain the identity of the borrower at the time the loan is made. ↩
The credit agreements themselves may be subject to regulation under the Consumer Credit Act, and individual investors may need a credit permission for lending (Article 60B of the Regulated Activities Order) if they are doing so by way of business. ↩