AJ Bell: British ISA would cause more harm than good

Salford investment platform AJ Bell has warned that proposals to introduce a “British ISA” risk causing more harm than good and “damaging the successful ISA brand.”

AJ Bell said that under plans set out by the UK government before the general election was called, UK savers would be handed an extra £5,000 of ISA allowance through the British ISA — restricted to as-yet-undefined “UK investments.”

AJ Bell said: “Even if every person who subscribes £20,000 to a Stocks and Shares ISA were to open a British ISA and invest the full £5,000 allowance, it would generate a maximum of £4 billion a year for UK equities.

“In the context of a £2 trillion+ UK stock market, this is a drop in the ocean in relative terms.”

In its response to the consultation which is due to close later this week on June 6, AJ Bell warned the proposal will be “ineffective in boosting UK capital markets and potentially add significant complexity to the ISA landscape.”

AJ Bell also called for the merging of Cash and Stocks and Shares ISAs “as a first step for the next government towards wider ISA simplification.”

In addition, independent research commissioned by AJ Bell points to a risk of consumer harm if investors choose any British ISA over a Stocks and Shares ISA for their first subscription of a tax year

“Over a third (35%) said they would choose the British ISA for their first subscription of the tax year – a decision that would almost certainly not be in their best interests …” said AJ Bell.

“In contrast, just 26% said they would choose a Stocks and Shares ISA for their first subscription of the tax year …

“Some 43% said they didn’t know which they would choose, pointing to the confusion extra complexity will inevitably create …”

Tom Selby, director of public policy at AJ Bell, said: “While Rishi Sunak and Keir Starmer are focused on finding political dividing lines ahead of the 4 July general election, 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 put forward by the government before the general election 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.

“What’s more, 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.

“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 …

“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. Ahead of the publication of manifestos, both major 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 which 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.”