Peer-to-peer (P2P) provider Zopa is set to launch its first Innovative Finance Isa (IF Isa), it’s announced today, although the retirement of its “safeguard” fund could leave investors more exposed to bad loans.
The IF Isa first launched in April 2016 but only a handful of smaller providers, such as Abundance, Crowd2Fund, and Crowdstacker, currently offer products.
Zopa has now gained full authorisation from regulator the Financial Conduct Authority (FCA) and will launch its IF Isa on 15 June. However, applications will initially be restricted to existing customers before being rolled out to new customers later in 2017.
Investors have a £20,000 Isa allowance for the 2017/18 tax year. This total can also include Cash Isas and Stocks & Shares Isas, although the combined amount invested during the tax year must not exceed the limit.
Zopa to axe ‘safeguard’ loans
The IF Isa launch will coincide with Zopa refreshing its standard product range, which includes its “safeguard” fund being ditched later in the year.
At present, investors with Zopa have three product choices; Zopa Access, Zopa Classic and Zopa Plus. They offer progressively higher targeted returns, but with increased risk. Zopa Access targets a 2.9% return after fees, Zopa Classic targets 3.7% and Zopa Plus 6.1%.
From 15 June, the Access and Classic propositions will be replaced for new customers by a new Zopa Core product, targeting returns of 3.9% after fees.
The difference is that all investments under Zopa Core will not be covered by Zopa’s safeguard fund, which is used to protect Access and Classic investors in the event of a borrower defaulting.
This fund is designed to cover losses for investors based on typical default rates in normal circumstances. However, this protection is not guaranteed, so in the event of a wider economic shock it’s likely there would not be enough cash in this fund to cover all of the losses.
Peer-to-peer investments are also not protected by the Financial Services Compensation Scheme (FSCS), so bear this in mind before investing.
Zopa Plus already operates in this way.
Existing Access and Classic customers will be able to invest in these products until 1 December 2017, after which date they will be completely closed to everyone. However, all loans made using Zopa Access and Classic will remain protected by the safeguard fund until maturity.
Andrew Lawson, Zopa’s chief product officer, says: “We’re proud of our 12-year track record of prudent lending and have always provided positive returns to our customers.
“Retiring safeguard, allows us to provide greater expected returns to our investors (because on average we over-fund safeguard) whilst making the investor products even easier to understand.
“We’ll continue to maintain the safeguard for the rest of its life [until the final safeguard protected loan has matured], and continue to build on our reputation for world-leading credit risk management.”
We put your question to Zopa and this was the repsonse:
“The money in the fund is not owned by Zopa – it’s held by the Safeguard trust, a not-for-profit organisation called P2PS Limited. It will be at the discretion of the trustees what happens to the money but Zopa expects it to be donated to charity. All money in the Safeguard fund is contributed to by Zopa and exists to cover specific loans. Zopa makes contributions to Safeguard from a combination of borrower up-front fees and their monthly repayments.”
Hi there, the 6.1% return quoted for Zopa Plus is Zopa's own annualised projected return. The 6.36% you quote is the return for matched loans in the last four weeks only, so not directly comparable.