Sparkly marketing often has us at a disadvantage.
In a busy world, ram packed with conflicting research, speedy decisions are necessary, but can be very expensive after the event.
‘Who would have thought that would have happened?’ is no defence to a large hole in your money.
Often investors are caught by headlines and marketing blurb and none can be more so than that of Innovative Finance ISA’s (IFISA).
Let’s be clear, an ISA is a very tax efficient way to invest money. As an example, take an investment of £100,000 growing tax-free at 7% for 20 years, versus one that paid 20% tax as it grew. The difference is £89,611 over the period.
Those rushing to move into an ISA could easily dart into a plan which although tax-free, may have a ‘tax-free loss’, so being careful of what you are exposed to is essential.
Last year, easyMoney (using the Easy (jet) brand), re-launched and offered an IFISA. Clearly a trusted brand, the product is aimed at customers who are dejected by near zero interest rates (especially after inflation) looking to make a return on their hard earned savings.
The brand can easily capture you, but remember it’s a brand, a colour on paper, a feeling.
Whilst many of the easy brands have been profitable, easyCinema and easyInternetcafé failed, with the latter losing over £100m. easyMoney is the trading name of E-money Capital Ltd, of which Stelios is not a Director.
easyMoney offer three ISA’s at 4.05%, 7.28% and 8% target rate of interest, all of which are very attractive in comparison to the high street.
The ‘target’ is achieved by taking your money and lending to borrowers who could be individuals, businesses or infrastructure projects. easyMoney lends at one rate, takes a slice and gives you the gap in between.
Where are the risks?
Firstly and most importantly, such schemes are not protected by the Financial Services Compensation Scheme. This scheme protects your money up to £85,000 but does not apply to IFISAs. If the borrower defaults on the payment, the property falls below the loan to value or the peer-to-peer company collapses, you could lose the lot.
A scan of E-money Capital’s last set of accounts shows a considerable loss of over £1.4m which is attributed to material costs and platform development.
Consider where you might be investing. It is understood that easyMoney charges c8% and pays out 4.05%. You might wonder who would pay an 8% interest rate when banks are offering rates much lower than this to borrowers.
That is a key risk which isn’t easily quantifiable as an investor, i.e. who are you lending to? The higher the rate, normally the closer the loan is to the value, or the inferior standard of the borrower’s financial situation, so I ask again, who would be accepting a borrowing cost of 8%?
Faced with a no deal Brexit and its myriad of financial complications that could drive inflation and, in turn, interest rates north, may mean that exposing your cash to the aforementioned downside risks is a bit beyond a deposit-based investor.
It seems more than logical to me that the investor here is the person in E-money capital who is underwriting the lending.
We spend years studying investment managers ability to manage money to ensure they are taking the least risk for the return you want, but here we have a new underwriter making decisions from the get go without any understanding of their previous experience.
Imagine the scenario in a downturn that the project you are effectively funding cannot find a buyer, or a development couldn’t be completed. You might be faced with no income and no potential of accessing your capital for a while.
easyMoney are one of many IFISA’s in the market but they should all be seen as a speculation rather than how they appear, i.e. interest on an investment secured against a property.
About the author
Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
If you have a question on your savings or investments please call 01872 222422 or visit WWFP.net.Last modified: June 10, 2021