FCA warns savers to carefully consider ‘high-risk’ Isas before they invest

Savers considering an innovative finance Isa should “carefully consider” where their money is invested before buying one, the City regulator has warned.

The Financial Conduct Authority (FCA) said it has seen evidence that the products are being promoted alongside cash Isas.

Innovative finance Isas allow people to save with peer-to-peer lenders in a tax-efficient Isa.

Peer-to-peer lenders match up people who have money they want to invest with borrowers.

While the potential returns may be higher than with a cash Isa, innovative finance Isas are generally seen as riskier.

In a statement on its website, the FCA said investments held in innovative finance Isas are “high risk”.

It said: “These types of investments may not be protected by the Financial Service Compensation Scheme so customers may lose the money invested or find it hard to get back.”

It said anyone considering investing in an innovative finance Isa “should carefully consider where their money is being invested” before purchasing one.

The statement was made as the new tax year approaches, when people may be considering moving their money around.

Sarah Coles, a personal finance analyst at Hargreaves Lansdown, said: “Savers who are disillusioned with the low rates on cash Isas may see the high target interest rates on these Isas and assume they’re a similar safe haven for their life savings.”

She said innovative finance Isas work differently to cash Isas and “are still a sensible option as a small part of a wider portfolio for some investors – as long as they understand the risks and are comfortable with them”.

Ms Coles said the “good news” for savers looking for a cash Isa is that rates have picked up.

She said: “They’re still not going to make you rich overnight, but you can currently earn up to 1.46% in an easy access cash Isa, 1.77% by fixing for a year, and 1.94% with a two-year fix.”