The Financial Conduct Authority (FCA) has recently dubbed Innovative Finance ISAs (IFISAs) as “high-risk”, emphasising that this type of investment may not be protected by the Financial Service Compensation Scheme (FSCS).

The regulator said IFISAs were being promoted alongside cash ISAs, and warned that the two propositions are very different, with the money held in IFISAs commonly being invested in mini-bonds or peer-2-peer investments.

The FCA urged anyone that is considering investing in an IFISA to “carefully consider where their money is being invested before purchasing an IFISA”.

Commenting, Hargreaves Lansdown personal finance analyst Sarah Coles said: “There’s a good chance that this announcement has been inspired, at least in part, by the collapse of the mini-bond run by London Capital & Finance. This was a highly unusual case, which includes allegations of suspicious transactions, and is currently under investigation.

“However, in the aftermath of the collapse, the FCA has highlighted the risk that some people may not fully understand their IFISA investments.”

Reiterating the point made by the regulator, Coles highlighted that the money savers store in IFISAs is directly lent to businesses, meaning there is “no guarantee they’ll be able to pay interest or repay the loans”.

“Many peer-to-peer businesses spread the money between different loans to reduce the risk, and run safety net funds to lessen the impact of a failure. However, they haven’t yet been through a really tough time, with large numbers of defaults, so we don’t know how they’ll hold up when these safety nets are deployed.”

Despite this, Coles argued that IFISAs are still a “sensible option” as a small part of a wider portfolio for some investors, providing they understand the risks and are comfortable with them.

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