The government is to consult on how peer-to-peer savings become part of the tax-free savings bracket.
The peer-to-peer industry has thrived in recent years, with increasing numbers of borrowers and savers deciding to cut out the banks and achieve better rates.
There is risk involved, however, as funds are not protected by the Financial Services Compensation Scheme in the same way as traditional savings accounts.
Savers can lose their cash if borrowers default on their payments, though peer-to-peer sites have worked hard to minimise the risks. The sector is also regulated by the Financial Conduct Authority (FCA), which ensures that sites are clear about the risks involved.
Find out more about keeping your savings safe.
Almost £2 billion in loans has been processed by peer-to-peer sites, and industry chiefs believe this will rise exponentially.
“ISA inclusion will see the sector grow from £2 billion to £45 billion within the next few years”, said Ratesetter chief executive, Rhydian Lewis.
Now the government is trying to work out how these funds should be included within the tax-free ISA bracket.
New ISA rules introduced this year have already added far greater flexibility to the tax-free accounts.
Previously, savers could place only half of their annual allowance into a cash ISA and faced restrictions on how they could transfer their funds between cash and stock ISAs. Both of these restrictions were lifted in July.
Find out more about the new 'NISA' accounts.
But the next step is more complicated. The lack of security for peer-to-peer savers is one obstacle that prevents cash invested in these schemes from coming under the traditional cash ISA wrapper.
Another option is for peer-to-peer funds to become part of the existing ‘stock ISA’ or ‘investment ISA’ category. Equally, a new category could be created especially for funds invested in peer-to-peer sites.
Christine Farnish, chair of the Peer-to-Peer Finance Association, said the progress on bringing peer-to-peer funds into the tax-free bracket, demonstrated how important an option it had become for savers.
“This is a vote of confidence from government in our industry which is bringing much needed competition to the banking sector,” she said.
Are you a borrower? Compare peer-to-peer lending rates here.
Are you a saver? Compare peer-to-peer saving rates here.