Aegon UK, AJ Bell, Quilter and Saxo UK believe proposed plans for a British ISA “fall short” of what is needed to bolster the UK companies and the performance of the stockmarket, ahead of the consultation deadline today (6 June). They also warn that the proposed product could fall foul of Consumer Duty rules.
Calls to revamp, or in some cases scrap, the concept of a British ISA come a week after Labour also committed to implementing the new tax-free wrapper. Which, under current guidelines, will allow investors who have used their maximum £20,000 tax-free ISA allowance to invest up to a further £5,000 in UK equities.
According to the latest statistics from the UK Government, 7% of ISA users – equating to 1.6 million people – typically use up their maximum £20,000 allowance. Providing this percentage stays the same, and every user were to invest the maximum £5,000 allowances into UK companies, this would inject £8bn into the UK stockmarket. According to data from Statista, the market capitalisation of the London Stock Exchange stands at £3.5trn as at the end of last year.
Steven Cameron, pensions director at Aegon said: “The UK ISA, as proposed in the HM Treasury consultation, is unlikely to deliver any significant boost to investment in UK businesses and will also fail to have widespread appeal with consumers.
“With the Treasury unlikely to review responses ahead of the Election, we hope whoever is in power on 5th July will be open to exploring alternatives.”
While he understands the desire to encourage greater investment from UK retail investors into the economy, Cameron argued that a majority of UK companies’ underlying revenue is generated overseas, so investing in UK stocks “isn’t necessarily the same as investing in the UK”.
“Furthermore, we do not see the UK ISA as having widespread appeal,” he continued. “Its target market will be the small proportion of retail investors who regularly max out their current ISA allowance in stocks and shares ISAs and who are particularly attracted to UK investments.
“There may be alternative approaches which would attract a wider range of UK retail investors to ‘buy British’ such as requiring all retail funds and products to provide clear upfront disclosures of the proportion of UK investments held.”
See also: Platforms call for UK government to resist launching ‘retrograde’ British ISAs
Therefore, Cameron said Aegon “urge[s] HM Treasury to consider fully how the new product will fit with FCA Consumer Duty requirements”.
“This includes designing a product for a specific target market and avoiding foreseeable harm, which could easily be caused if customers were allowed to transfer general ISAs into the UK ISA and then be ‘stuck’ with no ability to transfer back.
“It also requires firms to ensure fair value, making it important to avoid creating costly new monitoring obligations on any party.”
William Marsters, senior sales trader at Saxo UK, agreed the current British ISA plans will do little to inject significant capital into the UK economy.
He said: “Regardless of how positive the intentions are, the British ISA does seem to fall short as effective. Less than 10% of ISA holders max out their annual allowance, so an extra £5,000 is unlikely to be widely utilised. Plus, it is estimated only 42% of the UK population have an ISA, compared to circa 85% who have private pensions. The government could get more bang for their buck if their efforts were focused there.”
Consumer Duty concerns
Tom Selby, director of public policy at AJ Bell, goes as far as to say current British ISA proposals “risk causing more harm than good and damaging the successful ISA brand”.
“Our research shows that when presented with the choice of a British ISA or a Stocks and Shares ISA, almost a third of potential investors would opt for the British ISA for their first subscription – despite the fact they could access identical investments and more besides for the same price in a Stocks and Shares ISA,” he pointed out. “This would be a poor consumer outcome and means firms would almost certainly need to wrap any British ISA in risk warnings to comply with the FCA’s Consumer Duty rules.
“As investors tend to naturally favour UK investments anyway, it would be much simpler to increase the overall ISA allowance to £25,000, a move which would likely achieve similar results to a British ISA but without the extra complexity.”
In addition, Selby said other hurdles include the fact that impact on capital markets will be “extremely limited”, that there are complexities surrounding whether the new wrapper will allow for collective vehicles such as trusts and funds, and questions as to whether customers would be able to transfer out of a British ISA.
See also: PA ANALYSIS: Would a BRISA be a silver bullet for UK equities?
He explained: “Savers could, for example, simply max out their British ISA subscription and then transfer their funds to a Stocks and Shares ISA, therefore benefiting from a £25,000 overall subscription limit without ever having to expose a certain amount of their funds to UK investments.
“It is therefore hard to conceive of a situation where transfers out of a British ISA are allowed.”
Will Labour give the British ISA a facelift?
Rachael Griffin, tax and financial planning expert at Quilter, said should Labour come to power after the elections come 5 July, the party has an opportunity to “drastically improve” current proposals.
“The ISA is a simple idea, a tax efficient place to grow your wealth. However, with various additions over the years it has now become a confusing area of personal finance. Should it win the election, Labour must use those principles of simplicity when designing the British ISA,” she explained.
“Current proposals run the risk of consumer confusion or poor outcomes – for example, limiting the ability to transfer out of a British ISA to a different ISA may not be fully understood at the time of opening.
“Furthermore, the investment universe of a British ISA will be naturally limited, but more can be done to appeal to a wider set of investors, such as including cash and fixed income investments or lowering the minimum UK equity requirement. The closer the British ISA is aligned to the current Stocks and Shares ISA when it comes to investment vehicles permitted, the better.”
She added that ultimately, “so few people use their total ISA allowance”, that current proposals are “unlikely to scratch the surface” when it comes to boosting the beleaguered UK stockmarket.
“The reality is, the UK has a cash savings problem and too much money is sat in low-yielding cash ISAs, doing very little to help them or the economy. Finding ways to get that money invested for the long-term would be far more beneficial.”
What are the solutions?
If the British ISA goes ahead as planned, investors agree there are ways in which to improve current plans.
Aegon’s Cameron said: “If implemented, we generally favour keeping the rules as aligned as possible with other forms of ISA, to avoid going against the aims of simplifying the wider ISA regime. While a ban on transferring from a UK ISA to a general ISA is essential to avoid abusing the additional £5000 allowance, we need to avoid unnecessary complexities elsewhere, such as special treatment of cash holdings.”
See also: Spring Budget 2024: British Isa announcement receives mixed reactions
Quilter’s Griffin agreed simplicity is key, adding: “It is important simplicity and attractiveness of the idea are put first. The British ISA’s success hinges on its ability to serve the needs of a diverse investor base. The more people we get investing, both in the UK and more generally, the more the economy will naturally come to benefit.”
Despite widespread scepticism, Premier Miton’s CEO Mike O’Shea “broadly welcomes” the UK government’s proposals for the British ISA, as well as the Labour Party’s decision to back it.
“In our consultation response, we’ve called on HM Treasury to keep the proposals simple and focused on the core policy objective: capitalising UK companies,” he epxplained. “With these guiding principles, the UK ISA will be attractive and accessible to UK investors and an efficient flow for capital into UK companies.”
