The government’s decision to abandon plans for a dedicated individual savings account (Isa) for UK shares has sparked discussions about the complexity of the Isa landscape for private investors. However, another type of Isa that already exists, the innovative finance Isa (Ifisa), is facing its own challenges and dwindling popularity.

Introduced in 2016, the Ifisa experienced a surge in popularity in 2019-20, with nearly £1bn in assets and £434mn in subscriptions across 34,000 accounts. Fast forward to 2021-22, and the total value held had dropped by almost half to £563mn, with only £144mn in subscriptions across 17,000 accounts. Furthermore, the number of licensed providers offering Ifisas has decreased from 83 to 64, with several providers no longer active due to administration, dormancy, or regulatory issues.

Various factors have contributed to the decline of the Ifisa. Regulatory changes, improved cash interest returns, and a strong global stock market have all played a role. Ifisas are primarily used for peer-to-peer (P2P) lending, where investors lend money through a platform to individuals or businesses in need of funding. However, the P2P lending space has faced challenges, with platforms like Zopa pivoting to focus on banking due to trust issues and regulatory constraints.

Instances of fraud and platform failures in the P2P lending sector have highlighted the risks associated with Ifisas. Borrowers are at a higher risk of default, and investments are not protected by the Financial Services Compensation Scheme. In a landscape of higher interest rates, savers can achieve better returns on their cash with lower risk investment options such as bond funds or equities.

While Ifisas now allow for investment in certain funds focusing on alternative assets, the popularity of these options remains uncertain. Private investors can access similar assets through investment trusts in their stocks-and-shares Isas, providing a more liquid and diversified investment approach.

In conclusion, the decline of the Ifisa underscores the importance of understanding the risks and rewards associated with different investment options. Private investors should carefully consider their investment goals and risk tolerance before choosing to invest in complex financial products like Ifisas.