When Isas were launched in 1999, the Government was anxious to offer some reassurance to the new inv...
When Isas were launched in 1999, the Government was anxious to offer some reassurance to the new investor that he/she was not going to be ripped off. Whether or not you recognise that Government view of the savings industry, it is understandable that they would want to offer some encouragement and guidance to the concept of saving for newcomers, particularly (but not exclusively) saving linked to stock market investments.
But is the Cat living up to expectations? Earlier this year, Market Minder told us that 64% of the investors they had surveyed did not know what a Cat mark was, hardly an indication that Cat marks are proving a valuable tool for the investor. Still, lack of public awareness aside, Cats are not all bad and certainly have their good points as well.
Each Isa component of course, has a matching Cat standard. Here is a brief overview of each:
This is probably the least criticised of the three Isa Cat standards.
While you can have unit trusts (money market funds) and certain National Savings in a cash Isa, these would not, by definition, meet the Cat standard. To do so, a cash Isa must be a deposit account, as most are.
In addition, there must be no one-off or regular charges of any kind (although managers can make a charge if the investor loses his plastic card or requests duplicate statements). The manager cannot require a minimum transaction size greater than £10 and the investor must be able to withdraw his cash within seven working days. Interest rates must be no lower than 2% below base rate and must follow any upward movement of the base rate within one calendar month.
There should be no limits on frequency of withdrawals or any other conditions applied to the account.
In practice, many providers pay more than base less 2% and the huge popularity of mini cash Isas is demonstrated by the fact that £11.5bn was placed in them during the 1999/2000 tax year.
Whether this represented new savings or the movement of existing savings from older less favourable deposit accounts remains to be seen. Official figures show that subscriptions to mini cash Isas in the first half of 2000/1, at just under £7bn, were up by almost 16% on the 1999/2000 figures for the same period.
Because the Cat mark scheme is voluntary and the Government does not collect statistics on them specifically, we do not know the proportion of cash Isas that are in Cat standard products. Given that 97% of all cash Isas are of the potentially qualifying deposit account type and the other 3% are most likely to be held in the cash components of maxi Isas, it seems logical to assume that a high proportion of the £11.5bn is held in Cat standard products.
The insurance component of the Isa is singularly unloved with less than 0.25% of all Isa subscriptions in 1999/2000 being directed into it. There is however a Cat standard for insurance Isas limiting annual charges to 3% and guaranteeing that surrender values should at least return the premium after three years.
Stocks and shares Cat
The Cat standard for the stocks and shares component is the one that has attracted the most criticism, with some of it perhaps justified. This is where investors are most likely to need advice and, some would say, where they are least likely to get it.
The Cat standard requires that the annual charge should be no more than 1% of net asset value and that no other charges should be paid by the investor. It should be possible to save modest amounts because any minimum saving levels that the manager may set can be no greater than £500 for a lump sum, or £50 a month for regular savings.
The investments that may be held within a Cat-marked stocks and shares Isa are considerably more restricted from the wide range that may be held in stocks & shares Isas generally.
The Cat standard limits them to unit trusts, Oeics, or investment trusts where the underlying investments are at least 50% invested in shares and securities that are listed on EU stock exchanges. This looks very much like insisting that they invest in collective vehicles that meet the old (about to be abandoned) Pep rules.
Many in the industry have questioned why a benchmark that is designed to cover charges, access, and terms should stray into the area of determining investment policy. At a stroke, it rules out the 18% of Isas offering direct holding of shares or any other qualifying investments. For this reason, you will not find a stockbroker offering a Cat-marked Isa, even if his charges are under 1% per annum.
So do Cat-marked Isas stand up to scrutiny? The industry concern remains that there is a danger the very investors they are intended to help may see them as some sort of guarantee.
They may guarantee decent terms (depending on how you define decent) and easy access. Whether they guarantee fair charges (as opposed to low charges) is debatable and they certainly do not guarantee investment performance. Their obvious attraction is their low charges; but with no guarantee of good performance, the IFA's role is just as important as ever, particularly for the novice investor.
This is even more so as many Cat-marked Isas are trackers with only a handful of active funds carrying a Cat mark.
Many Isa managers appear to be ignoring the Cat standards for Isas. Out of almost 2,000 unit trusts, about 38 carry a Cat mark. Even those companies that do have Cat-marked Isa products do not appear to promote them very much, presumably because the 1% charge ceiling leaves very little margin for advertising and/or remuneration to IFAs.
It is this last element of advice that many find really concerning.
Imagine new investors with absolutely no other savings finding themselves in the position of being able to afford to put away £25 per month. The investor sees an advert for the XYZ unit trust Cat-marked stocks and shares Isa and signs up as a regular saver.
Who is going to tell this person that, in their circumstances, the last thing they should be doing with their only savings is to put them into a stock market investment (however much the risk is spread). They would be better off putting savings into a cash mini Isa where the money will earn gross interest and be readily available if at any point in the future the investor needs to dip into it in an emergency?
Some supporters of the Cat standards will tell you that they should provide the catalyst to encourage IFAs to switch to a fee paying structure where investors pay for the advice they receive quite separately from the cost of acquiring the investments.
Even then it is difficult to see whether our new investor will be prepared to pay for advice before clipping the coupon.
The reality is that most people need financial advice and the worst effect the Cat standards could have would be to imply otherwise to the nervous new investor and indeed many more that are neither nervous nor particularly new.
The idea behind the Cat standards is a good one and very few would argue with the notion of an endorsement of a financial product that is good value for money. Let us hope that the Cat-mark is not seen as something that it certainly is not, either a kitemark or some sort of Good Housekeeping Seal of Approval.
Peter Shipp is chief executive of the Pep and Isa Managers' Association (Pima)