Savers looking at the big returns on offer with innovative finance ISAs should "carefully consider" where their money goes before buying one, the City regulator has warned.
The Financial Conduct Authority (FCA) said it has seen evidence the products are being promoted alongside traditional cash ISAs, but warned they shouldn't be seen as the same thing.
In a statement, 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.
What are innovative finance ISAs?
Back in April, 2016, the UK Government introduced the innovative finance ISA (IFISA) – and there are now dozens of providers, many offering tax-free returns of 10% or more.
Put simply, IFISAs take your money and then lend it out directly to people and businesses in the UK.
It's the model banks were built on, just without the banks, and that means you get a rate much closer to the ones offered borrowers - rather than a tiny fraction of it.
That means returns of more than 10% are possible, but there are mores risks too.
Firstly, your money isn't protected like it is in a traditional cash ISA - where you get £85,000 worth of cover for each bank you have money in from the Financial Services Compensation Scheme.
Secondly, there's a chance the people you lend to won't pay you back.
A statement from the UK Crowdfunding Association (UKCFA) said: "The problem is not the need to 'rein in' the (innovative finance ISA) - if providers follow the existing rules it should be abundantly clear to potential investors that the (innovative finance ISA) is not a cash product.
"The problem is that the existing rules need to be enforced in a timely and more public way."
The Association said existing regulations around innovative finance ISAs "are working well".
The ISA paying 10 times as much that MILLIONS of savers have never heard of
The good news for people looking for better returns
Sarah Coles, a personal finance analyst at Hargreaves Lansdown, 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."
She said innovative finance ISAs work differently from 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".
