So we finally know the Labour government’s plans regarding saving and investing. Although there was no specific mention of Individual Savings accounts in the Spring Statement, the intention to reform and simplify ISAs is clear.
Reading between the lines of a document released by the Treasury to accompany the Chancellor’s statement, the £20,000 allowance for cash ISAs is unlikely to last for very much longer.
This is what the Treasury document says: “The government is looking at options for reforms to Individual Savings Accounts that get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission.
“Alongside this, the government is working closely with the Financial Conduct Authority to deliver a system of targeted support to give people the confidence to invest.”
The Good News
There is much to like about these stated aims. Crucially important though it is that everyone has a cash buffer, there’s no doubt that most people should have more exposure to equities than they do. Incentivising them to redress the balance makes perfect sense.
The plan to boost the culture of retail investment sounds very promising, too. I’m a frequent visitor to the US, and I’m always struck by how big a part investing plays in people’s lives there compared to here. We need to close that gap.
It’s also pleasing to learn that ministers want the FCA to target support at those who lack the confidence to invest, which has long been a big problem.
A More Ominous Notion
I am, however, far less comfortable with the notion that the government wants the ISA structure to “support the growth mission” and the way it conflates this with earning better returns for investors. Those are two very different things.
Of course, we all want to see a healthy economy and, ideally, a bigger UK stock market, but it’s not the job of investors to deliver economic growth or increase the number of London listings. Investors’ primary responsibility is to themselves and achieving their personal financial goals.
If the government and the FCA are as serious as they say they are about improving people’s investment returns, they should surely focus on encouraging greater use of low-cost index funds, which, in the long run, outperform the vast majority of active funds on a properly cost- and risk-adjusted basis. That would give people more money in their pockets to spend in the real economy.
Conflicts of Interest
Why don’t governments do that? Because the more people index, the less the asset management industry generates in fees, and both Labour and the Conservatives are so reliant on City donors that they just can’t afford to alienate them. Also, the Treasury is now so used to the tax revenue the City provides that it too is reluctant to rock the boat.
At the same time, the FCA is being leaned on by politicians and by the fund industry lobby to encourage investment in private equity and venture capital. Again, that might be good for the economy, and means higher fee revenue and profits for asset managers, but it only adds risk for investors.
Of course, investing in unlisted, start-up companies may have the potential to deliver higher returns. But the risks are much higher than they are for listed stocks. Other downsides include illiquidity, opaque performance reporting and higher fees.
In short, we simply don’t yet have enough detail to make a judgment on the government’s plans. Ultimately, though, investors need to put their own interests, and not the country’s or the government’s interests, first. They are much better off taking investment advice from competent, regulated financial planners than from ministers or regulators.
This article is produced by us for Financial Advisers who may choose to share it with their clients. Timeline Planning and Timeline Portfolios do not offer direct-to-consumer products.
ROBIN POWELL is a freelance journalist and edits The Evidence-Based Investor.
