The alternative finance sector set to become less 'alternative'.

The crowdfunding sector is fuelling the innovative drive in the transformation of relationships between finance and British savers, essentially, taking control away from the banks and putting it into the hands of the people.  And with new exciting retail friendly ways of investing via crowdfunding platforms, with potentially greater savings and rewards, it’s easy to see why UK crowdfunding is growing at such an extreme pace with the Alternative Finance market to be an estimated 1.78 billion (1) in 2015 with 168% year-on year growth (2).


Even if we were to disregard this natural growth in the AltFi sector, crowdfunding is set to see a game changing boost with the recent ISA announcement – that is, a new type of ISA, the Innovative Finance ISA, which will be launching as of April 2016 for loans arranged via a P2P platform.  Why is this ‘Innovative Finance ISA’ significant? Because unexpectedly, the results of the public consultation went on to agree inclusion of debt securities offered via crowdfunding platforms within the ISA eligible investment ambit.  A revelation for crowdfunders and further demonstrating how the UK are leading innovators in the world of FinTech and AltFi.


In brief, the Innovative Finance ISA means that the £15,240 annual limit of an individual’s savings could be lent to businesses and sheltered from tax.  The new ISA will help retail consumers choose how they use this tax-free savings pot each year, allowing savers to make the most of their funds with the natural transparency of crowdfunding that they would not get from the banks.


ISAs already hold 400 billion plus of British savings, with 2014/15 seeing nearly 80 billion ISA investments made, so, even if a small percentage of this near 80 billion ISA investments is redirected through crowdfunding, it will be a huge for everyone - savers and businesses, and a massive step for the crowdfunding sector itself, one which will help crowdfunding become a more mainstream choice for consumers. Because the public generally understand what ISAs are, the inclusion of the innovative finance ISA is bound to transform and increase the public’s awareness and trust in crowdfunding. More investors will enter the market as a consequence, so will the SMEs.


Furthermore, a 2015 survey of British savers suggested that 62% (3) would consider using crowdfunding as a mechanism to get returns. Bearing in mind that Money.co.uk recently discovered only 6% of savers had used peer-to-peer, showing the massive opportunity just waiting to be milked.  However, it is notable that of those 62% most would consider only if those returns were tax free (enter, the Innovative Finance ISA). If these statistics prove correct, 2016 will see crowdfunding, as a genuine and sensible alternative to saving with banks.


To date, crowdfunding has not come within the ISA ambit, something which is seriously disadvantageous to the sector and those who invest via crowdfunding platforms. A separate ISA specifically for crowdfunding has long been called for by leaders of this industry, this ISA would need to be treated as a different asset class to the Cash ISA and the Stocks & Shares ISA. Having a separate crowdfunding ISA (Innovative Finance ISA) would mean that the separate risk and reward profile for P2P lending and other crowdfunding areas which, by their very nature, must be obvious and clear to the consumers, is appropriately considered by the ISA regulations.


As mentioned earlier, the alternative finance market has seen 168% year-on-year growth, demonstrating that there are already more and more savvy British savers realising the benefits of investing within the crowdfundning world.  New debt products mean that individuals can benefit from the increased APR (between 6-15%) whilst investing in brands they love and can rally behind, with an added bonus of often receiving rewards from said brands.


Overall, if these statistics prove correct and boost the crowdfunding sector is as much as anticipated, there are more than just the savers and businesses who will benefit, the natural knock on effect will be a positive boost to the British economy.


(1)    The size of the UK alternative finance market in 2014 was estimated to be £1.74bn by the joint Nesta- Cambridge Understanding Alternative Finance industry report. This figure is then revised upwards to £1.78bn due to new and additional data obtained on UK platforms through European benchmarking research. The exchange rate used throughout the report was 1.3111447 (Pound to Euro).


(2)    The UK online platform-based alternative finance industry reached an impressive £1.78bn in 2014 with a 168% year-on-year growth rate. ‘Moving Mainstream’ The European Alternative Finance Benchmarking Report, February 2015


(3)    P2P Association

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