The Innovative Finance ISA became effective from 6 April 2016 and is available to investors aged 18 or over. Along with loan repayments, interest and gains from peer-to-peer loans are eligible to be held within this new type of ISA, without being subject to tax.

Peer-to-peer loans are estimated to have totalled £4.4bn in the final quarter of 2015, up from close to zero five years ago.

In correspondence with Tracey McDermott, chief executive of the Financial Conduct Authority (FCA), and Andrew Bailey, deputy governor of the Bank of England for prudential regulation, Tyrie raised the prospect of further regulation of the peer-to-peer lending market.

In particular, he queried whether the tax break associated with the Innovated Investment ISA could lead to poorly-informed investors taking unnecessary risks.

‘Government policy, letting peer-to-peer investments form part of an ISA allowance for instance, represents a form of official support for investments that may be inherently higher risk,’ Tyrie said following the correspondence.

‘Whether and, if so, to what extent investors would benefit from stronger consumer protection now needs careful thought. Poorly informed investors may be left with a false sense of security about the balance of risks versus returns,’ he said.

‘But greater regulation is not necessarily the answer,’ he added. ‘If this market can substantially increase competition it may offer benefits to the consumer. It is crucial that the regulator is doing what it can to find the right balance between these risks and opportunities.’

Tyrie went on to suggest the prudential impact of the financial sector’s increasing exposure to unsecured loans through crowdfunding platforms ‘also warrants closer scrutiny’.

‘The sector’s ability to see through an orderly decline should be considered sooner rather than later,’ he said.

Tyrie’s correspondence with McDermott and Bailey can be viewed here and here respectively.