The introduction of a UK ISA risks creating “more harm than good”, investment specialists have warned.
Under plans set out by the government, investors would be provided with an extra £5,000 of ISA allowance through the UK ISA, restricted to as-yet-undefined UK investments.
As the HM Treasury consultation on the UK ISA closes, Aegon said the proposed product will fail to meet Government objectives or generate consumer demand.
Steven Cameron, pensions director at Aegon, said: “The UK ISA is unlikely to deliver any significant boost to investment in UK businesses and will also fail to have widespread appeal with consumers.
“We understand why any future Government would wish to encourage greater investment by UK retail investors in the UK economy but the global reach of the UK stock market means investing in UK-listed companies isn’t necessarily the same as investing in the UK.”
Cameron said that the target market for the new product will be a “small proportion” of retail investors who regularly max out their current ISA allowance in stocks and shares ISAs.
Aegon has urged the government to consider 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 Aegon warns could easily be caused if customers were allowed to transfer general ISAs into a UK ISA and become stuck with no ability to transfer back.
“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 general ISA is essential to avoid abusing the additional £5,000 allowance, we need to avoid unnecessary complexities elsewhere, such as special treatment of cash holdings.”
AJ Bell echoed the sentiment that the proposed ISA will add more complexity to the investment landscape.
Tom Selby, director of public policy at AJ Bell, said: “The Conservatives and Labour are pretty much in lockstep over the need to boost UK capital markets as part of wider efforts to increase productivity. The British ISA was meant to help shift the dial on that front. However, the proposal risks causing more harm than good over the long-term by creating extra complexity for ISA investors.”
Research by the investment platform revealed that over a third (35%) of potential investors would opt for the British ISA for their first subscription of the tax year, a decision Selby warned would be a “poor consumer outcome” and means firms would almost certainly need to wrap any British ISA in risk warnings to comply with Consumer Duty rules.
Selby added: “Given the Conservatives and Labour have both committed to ISA simplification, it is hard to understand how creating a new, complex ISA fits in with that goal. Both parties need to reflect on the obvious problems with this idea and go back to the drawing board, with a clear-eyed focus on long-term reform.
“AJ Bell has long campaigned for the ISA landscape to be simplified by combining the best features of the existing six types into a single ‘One ISA’. As a first step, the next government should look at merging Cash and Stocks and Shares ISAs, the two main ISA products used by investors. This move would make it simpler for investors to shift between cash and investments and move us towards a world where investments are simply a feature of ISAs, rather than a defining characteristic.”
