Letter to HMRC Relating to the ISA (Amendment No.2) Regulations 2016 {Approved}

8/20/2019 Letter to HMRC Relating to the ISA (Amendment No.2) Regulations 2016 {Approved}

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BY EMAIL ONLY

HM Revenue & CustomsEuston Tower268 Euston RoadLondon NW1 3UL

January 2016

Response to consultation relating to the new Innovative Finance Individual Savings Account

We refer to the consultation published on 8 December 2015, relating to establishing the new InnovativeFinance ISA ("IFISA") through the Individual Savings Account (Amendment No.2) Regulations 2016(the "ISA Amendment Regulations"). The proposals will amend the Individual Savings AccountRegulations 1998 ("ISA Regulations").

Following our discussions at the end of last year by email, this letter contains our detailed response tothe consultation relating to the ISA Amendment Regulations.

Proposed amendments to Regulation 14 of the ISA Regulations – ISA account managerqualifications

We understand that the current draft ISA Amendment Regulations envisage it being possible foroperators of peer-to-peer ("P2P") lending platforms, which are authorised to carry out Article 36Hactivities under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the"RAO"), would be able to obtain approval from HMRC to become an IFISA manager ("Authorised P2PProvider").

As you are aware, it will be possible for each ISA investor to take out a single IFISA. Therefore, thecurrent proposals will likely require each ISA investor to choose to open an individual IFISA with a single

Authorised P2P Provider.

In the Draft Explanatory Memorandum to the ISA Amendment Regulations (document TNA/EM/10-2015), one of the reasons given for the proposed legislation is to "increase choice for ISA investors byintroducing a new form of tax-advantaged account". In this respect, it seems that this choice will begreatly limited by requiring an ISA investor to only gain an exposure to the investments offered througha single Authorised P2P Provider (as each Authorised P2P Provider is likely to only permit its own loanarrangements to be held through its own IFISA, rather than those of its competitors).

As the P2P lending industry develops, it is likely that customer demands and advancements intechnology will lead to the establishment of so-called "aggregator platforms". In summary, anaggregator platform would not operate a P2P lending platform itself but, instead, would make availableloans that can then be entered into by the investor through various Authorised P2P Providers. This is,in essence, similar to the existing arrangements in place in respect of stocks and shares ISAs, whereby

investors can gain exposure to a range of eligible securities from different providers but through a singleplatform (ie a wrap platform, fund supermarket, direct to investor share trading site).

At the current time, aggregator platforms are unlikely to carry on the regulated activity of operating anelectronic system in relation to lending as set out in Article 36H of the RAO (depending on the exactstructure that is involved). On this basis, our understanding is that the current draft ISA AmendmentRegulations would not permit aggregator platforms to satisfy the requirements in Regulation 14 of theISA Regulations and become registered as an ISA account manager.

By way of analogy, we have compared the proposed rules with the longstanding approach to stocks andshares ISA managers. Under the existing stocks and shares ISA regime, a company that only issuesits own shares cannot register as an ISA account manager (as it would not generally carry on any of theregulated activities listed in Regulation 14 of the ISA Regulations). However, a firm that offers the shares

issued by a number of companies would be eligible to register as an ISA manager (on the basis that itgenerally would carry on one or more of the regulated activities listed in Regulation 14 of the ISARegulations). Our understanding of the current proposals is that the opposite would be true in relation


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to the IFISA. An Authorised P2P Provider, that only offers investors the loan opportunities on its ownplatform, would be eligible to register as an ISA manager. However, an aggregator platform that offersloans provided by a number of Authorised P2P Providers is unlikely to be eligible to register as an ISAmanager.

In view of this, we would suggest that further thought be given to allowing aggregator platforms tobecome registered as IFISA managers. This would have a number of benefits, including:

1. encouraging price and non-price competition between Authorised P2P Providers, to the benefitof consumers, and ultimately the industry. This would force platforms to focus on both rates, butalso service and user experience;

2. ISA investors being able to "spread their risk" by investing in loans provided through different Authorised P2P Providers. For example, aggregator platforms would allow ISA investors tobetter manage the risks posed by investing in IFISAs, as they will let ISA investors pick balancedIFISA portfolios, with varied risk ratings. By way of example, some P2P platforms focus oninvestors providing loans to property opportunities (even though a large amount of the averageusers wealth may be attributable to their primary residence), individuals or businesses. Ofcourse, these different investment types carry different risk profiles. IFISA aggregators that allowinvestors to spread their risk across different P2P investment classes will allow investors to

manage risk in a more intelligent manner;

3. reducing platform dependency and failure risk. Although many platforms now have in placeincreasingly robust resolution plans, the risk of the failure of an Authorised P2P Provider is stillsubstantial. By providing consumers the ability to invest across a number of platforms, witheasy and from a single place, this will enable them to quickly and efficiently invest acrossmultiple platforms, thus reducing this risk;

4. meeting apparent market demand. Related to point 2 above, market leading Authorised P2PProviders have indicated that typical P2P investors will invest between £6,200 and £8,000

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any one P2P platform. This is below the ISA limit and indicates a certain risk appetite amongstconsumers. Rather than forcing consumers to invest their full IFISA allowance with one

Authorised P2P Provider, that has a certain risk profile, aggregator sites will allow users to

review multiple opportunities and spread their risks. We believe this will better meet investorrisk appetite;

5. providing consumers with a single point of contact when it comes to arranging IFISA Transferrequirements will present a significant administrative burden for P2P platforms. If this role wastaken on by a specialist aggregator platform, which has the correct infrastructure to processtransfer requests, then this burden will be taken away from P2P platforms. This will allow themto focus on their P2P business and lead to increase quality and technical proficiency in relationto the administration of IFISAs;

6. giving consumers the means to quickly compare the offerings made by a number of P2Pplatforms easily and in one place. This will thereby improve the ease and accessibility of theindustry for many. For example, this will increase consumer choice and allow consumers to form

balanced P2P portfolios, as well as enhancing competition in the market;

7. creating greater alignment with the current ISA regime, which better suits the risk appetites ofindividual investors. The current ISA regime tends to group ISAs into low, medium and highrisk portfolios. We believe that P2P aggregator platforms will be best placed to offer userssimilar portfolios in IFISAs, due to their being able to collate P2P investment opportunities froma wide range of P2P providers, and therefore provide more suitable products for users;

8. enabling existing ISA managers to offer IFISA investments. This would enable a new segmentof investors (and intermediaries) to participate in IFISAs, improve the distribution capability ofthe P2P lending platforms and increase the ease with which investors can invest. The risk with

1 Indicative data from leading players in the P2P market


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single platform IFISAs are that the tax benefits offered by IFISAs will be focused on the existingearly adopters of the industry rather than increasing participation in the industry;

9. fostering innovation and competition across the P2P lending sector. By enabling investors toput their investments with more than one Authorised P2P Provider, investors would beencouraged to invest at least part of their ISA portfolio via smaller, niche platforms that oftenfocus on specific sectors of the lending market. These platforms are often highly specialised,

experienced and well suited to credit assessment within their specific sectors (ie ABLrate(offering aircraft leasing), Growth Street (offering business overdrafts), Archover (receivablesfinance). It is important that these platforms are given fair access to incoming ISA funds; and

10. encouraging the growth of a broad based P2P sector regardless of marketing budgets. As thearrangements stand, the best capitalised Authorised P2P Providers are likely to spend asignificantly larger amount on promotional activity, over both the short and long term, to secureISA investment than some of the smaller, newer, entrants. This may have the self-perpetuatingaffect of fuelling the growth of these already large platforms, at the expense of the smallerplatforms who won’t be able to secure any ISA funding, as it will all be transferred/invested viaone of the larger Authorised P2P Providers. This will encourage competition amongst

Authorised P2P Providers.

If HMRC continue to believe that an aggregator platform should not be eligible to register as an IFISAmanager, we feel that it would be useful for HMRC to clarify the role that could be fulfilled by anaggregator platform in relation to the IFISA as we strongly believe that it is both the interests of existinginvestors and that it will help the industry to attract new investors. Therefore, we strongly believe that itis in the interest of the industry for the current draft ISA Amendment Regulations to be amended tosupport new forms of distribution. We would note that these forms of distribution are tried, tested andproven to operate effectively in the stocks and shares sector.

Conclusion

We note that, in the HM Treasury consultation paper on ISA qualifying investments, it is explicitly stated

that the government "wants to increase the choice of investments available to ISA investors". Webelieve that the changes to the ISA Amendment Regulation, which we propose above, are necessary inorder to meet this objective. In particular, the role of aggregator platforms for IFISAs will increaseconsumer choice and provide greater transparency between the offerings of different P2P platforms.

We are also of the opinion that the current draft ISA Amendment Regulations exclude certain businessmodels, which would be beneficial for consumers and the P2P market in general. Additionally, webelieve that the role of aggregator platforms, and existing online ISA managers (such as wrap platforms),should be considered and addressed in the ISA Amendment Regulations.

I hope the comments in this letter are helpful. If you wish to discuss this further, please contact me at [email protected].

Yours sincerely,

Jake Wombwell-Povey

GOJI HOLDINGS LIMITED

Documents

Letter to HMRC Relating to the ISA (Amendment No.2) Regulations 2016 {Approved}