There was an article in the FT yesterday that said:
What the 'markets' want is a single ISA scheme now, with which I have no problem.
But I do have massive problems with the reasons why they want this. They want people with ISAs to buy lots more 'British' shares, by which they mean shares listed in the City of London, because there is no reason at all why such shares have anything at all to do with the UK, and many of them have literally almost no real trading link at all.
This plan has three goals:
- To send more money for the City to earn ill-gotten gains from.
- To boost the value of UK shares to, in turn, boost the payout of the executives of companies listed on the London Stock Exchange, some of whom are fund managers.
- To encourage UK investors to make poor and irrational investment decisions.
As the article notes, billions of funds are shifting from UK-listed shares into those listed on other markets. That may well be because that is where any value is to be found when all the London Stock Exchange, by and large, rewards are those companies best at financial engineering and not actually generating real profits.
And, as the article also notes:
So, these so-called investment advisers want people to move their funds, which they rationally hold in cash because those doing so are, no doubt, appropriately risk averse and know their own investment objectives, into the wholly inappropriate for many people Ponzi-style scheme that is the London Stock Exchange, where absolutely no future value can be guaranteed - as every investment adviser is required to make clear by law.
I doubt that nothing done to ISAs will encourage more people to buy shares. Most people can spot a con trick when they see one.
So, the real question is what ISA reform is required. Unsurprisingly, I recommend the proposal made in my Taxing Wealth Report, in which I suggest:
This [Report] proposes that existing ISA savings arrangements should be scrapped because they provide almost no overall economic return to the country as a whole, very largely subsidise the savings of the already wealthy, and divert funds away from much more constructive use.
Green ISAs are proposed in place of existing ISA savings arrangements. These Green ISAs would have to be invested in either government-backed savings accounts or bonds or private sector equivalent accounts, all of which funds would be required to invest the proceeds of sums raised in:
- The transition to net zero that this country requires.
- Social infrastructure, such as new housing.
- Related activities such as education, training and appropriate support services.
The option of simply leaving cash in moribund bank accounts or of speculating funds on stock markets, which is how the £700 billion or more now saved in ISA accounts is currently used, would disappear over time as existing ISA account arrangements expired and new ones took their place. £70 billion a year goes into ISA accounts at present, the main appeal being their tax-free status.
The creation of a new source of capital for public investment from this source would, as a result, turn the current £3.7 billion (and rising) annual cost of subsidising such accounts from being lost money into a valuable source of funding for new investments that would in themselves generate new taxation revenues. At the very least, the entire cost of the tax subsidy for these accounts would be saved by the tax paid on that new investment (with the actual sum generated likely to be very much higher). As such, it is suggested that at least £3.7 billion of tax cost will be saved a year as a result of these changes.
We agree that ISAs need to be reformed. The choice is, do we reform them for the benefit of society, actual investment, and future generations, or to boost speculative opprtunities from which the City of London alone will ultimately gain? Which way will Labour jump?
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This seems to be driven by AJ Bell and Hargreaves Lansdown, who have an interest in the sector, as investment institutions. The FT article quotes Summersgill (Bell’s CEO), and this sets the purpose out clearly: “In AJ Bell’s policy paper, Summersgill said the overall Isa allowance should be increased from £20,000 to £25,000, as this would ‘naturally drive more money towards UK plc’.”
Do rightly risk averse people (because they are not professionals, in a tough environment they know nothing about) really wish to be “naturally driven” toward UKplc (and is UKplc worth the risk – or is this some sort of implicit duty we are supposed to have to assist investment companies). What does ‘naturally driven’ even mean? And just what the risk averse investor is dealing with, can be found by checking what any FCA authorised investment firm has to remind investors (I took this from just such a firm):
“Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at any time. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance. Information on risks involved for specific Investments can be found on the Website”.
Thanks
Thank you and well said, John.
The, ahem, gentlemen you cite had meetings with the shadow Treasury team last year. The Investment (Management) Association has, too, bending Labour’s ear about the need to prop up UK plc. As was asked about Wall Street a hundred years ago, “Where are the customers’ yachts?”
Well said
They are very clearly bending Labour’s ear
I have a cash ISA. If they make it into a share-based one I’ll withdraw it and put it somewhere that’s safer.
A green ISA would be brilliant.
Thanks
Hi Richard,
It would seem that the changes to ISAs that you propose, would cover the cost of removing the 2 child cap.
Surely a win win for a progressive government?
Regards
Indeed…..
Honestly what a load of nonsense. So essentially you are saying that no social good comes from companies being able to raise finance cheaply via equity finance? No wonder companies have been decamping en-mass to the US to raise finance there, which might also explain why the US economy has been performing so much better.
Forcing investment into government bonds is essentially one of the main reasons that Defined Benefit pensions are now dead, except to a lucky few in the private sector. The divestment of funds from UK equities by UK pension funds is one of the main reasons for the moribund performance of the UK stock market and why institutions and individuals now invest so much in overseas equities. Yet this proposal will likely make this exodus of funds worse.
As for forcing consumers to buy “green bonds” I couldn’t think of a bigger misselling disaster in the making. Unless the returns were very attractive I can’t see anyone bothering.
First, almost no quoted company now raises equity to fund investment – it makes no sense to do so in our tax system. Please don’t tell me otherwise: you will make a fool of yourself.
Second, in that case I am stopping money going into Ponzi scheme artificially inflating the value of existing shares.
Third, read what I proposed. I would be creating real jobs and investment, the foundations of growth.
And will people bother buying government backed bonds guaranteed to fund investment in their communities? By their tens of billions, I suggest.
First of all, thanks for posting my comment, and apologies for the hyperbolic first sentence.
I don’t doubt that you are correct, but with the low valuations in London, together with the tax treatment of debt is it hardly a surprise that nobody raises money in London? I think, however, that you are wrong to say that equity markets are a Ponzi scheme, you seem to imply that the country would be better off without a functioning equity market?
I think that you over estimate people’s altruism when it comes to their savings. Investment in bonds can be incredibly risky, as those recently coming up to retirement have found out to their cost when their investments have been “lifestyled” into bonds. In some cases I believe the losses approached 50% of their pension. Selling these green bonds as a safe investment, equivalent to money in a deposit account, as implied by a previous poster, is incredibly dangerous and could result in huge misselling because people don’t understand the risk they are taking.
As Keynes suggested, ten minutes trading a day would be enough to allow a functioning stock market
I accept the need for equity trading, but I simultaneously suggest it is abused to hype values at cost to equity savers. That is my argument.
And I believe there is a massive demand for investments people understand
I have been following your thinking on ISA reform through the Taxing Wealth Report and agree with it. I am an ISA holder with both the cash type and S & S type. Given the amount held in cash ISAs by so many I believe vast majority of customers want a simple secure return on their savings. History has suggested something above base interest rates suffices. How much above will depend on the times but generally not much. Government backed cash ISAs where the interest earned is high(ish) and capital is guaranteed is all most customers require. Any Government can do this and use the capital to fund the public good. Capital withdrawals can easily be met.
What is being proposed by the finance “industry” mirrors the robbery of public employer pension schemes in the 1980s – most heinous the miners scheme. Pension funds were transferred to the stock market “experts” on promises of riches. Go ask the miners what happened next!
Thanks
I am sure many agree with us