Of course, like other kinds of investment, IFIS also carries risk. With this type of investment, borrowers’ might default on their loan repayments, or the peer to peer lending platform could go bust. Since the Innovative Finance ISA is not covered by the Financial Service Compensation Scheme (FSCS), there is no chance of you getting your money back if something adverse happened. However, many p2p firms have set up wind-down plans and have other service providers as a backup who can arrange funds to give back your loan amounts even if the firm is out of business.

How can you assess the risk among Innovative Finance ISA providers?

There are a few risk indicators that you must think about when selecting an IFISA provider. To make help you even further, here is a list of questions that you need to answer to make the right decision.

1. For how long the IFISA provider has been trading?

2. What kind of loans does the provider offer?

3. What are the provider's arrears rates?

4. Will the platform diversify your investment across different loans?

5. What are their default rates?

6. Does the platform offer any protection in case the borrower defaults?

7. Can the firm offer any estimate on the default rates?

8. Will you get compensated if the borrower defaults?

9. What will happen in case the firm goes bust?

10. Are you allowed to access or transfer your IFISA when needed?

It is worth noticing whether the p2p firm showcases all their historical performance on their website and allow lenders to look at the records. If a platform offers such transparency, then you can conduct an analysis yourself and make a well-informed decision when selecting an IFISA provider. Also, you can see their stats to get a good idea of the platforms track record.

Are Innovative Finance ISAs regulated by the Financial Conduct Authority (FCA)?

Peer to peer lending firms need complete authorization from the Financial Conduct Authority to offer IFISA accounts. This is to ensure that the right protection is in place for customers, primarily investors/lenders, and the borrowers.

FCA's authorization also ensures that the platform adheres to the standard rules and that they provide all financial services in a fair, clear, and non-misleading way to the customers. Besides, there are regulations in place about managing the client's funds and complaint procedures.

Are there other risks to be aware of?

The accessibility level to your Innovative ISAs investment has to be taken into consideration. If you wish to withdraw or transfer your funds, it is essential that you know the method, fees and timing involved.

Again, there is no protection from FSCS with p2p investments, so your money is not guaranteed in case of platform failure, even though any money held by the platform itself must be ring-fenced in the client's money account, so they have to be held safely.

Do firms leverage Innovative Finance ISA investments?

Unlike bank investments, Innovative Finance ISA providers assign funds invested by investors to borrowers on a pound to pound basis. Therefore, no funds are leveraged or created, nor is there any type of fractional reserve banking. Such a simple model means there will be less exposure in case of a downturn and less risk to customers as a result.

Investing in IFISA: is it worth the risk?

Again, it is important to remember that IFISA risk profiles are different from firm to firm. Nonetheless, as a rule, IFISA investments are widely accepted as a midpoint in terms of risk and reward between cash ISA and stocks and shares ISA. Whilst your funds are not guaranteed in the way they with the bank, almost all cash ISA pay returns below inflation rate. This means while there is low risk, this is balanced by the fact that funds in IFISA don't lose its value like they do in a cash ISA.

In fact, the majority of experts agree that few peer to peer funding firms provide a relatively low-risk investment. Unlike investing funds into the stock market, investors have steady returns from Innovative Finance ISA to date.

Every investor has their preferences for the risk, and it is important to do your homework. However, a combination of predictable, inflation-beating return and an easy sign-up process means the Innovative Finance ISA is creating an impressive track record.

Who wants to be an IFISA millionaire?

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