Financial Services: ISA update

On 18th May 1998, HM Treasury published the first concrete proposals on the ISA entitled "Making Saving Easy". This explains the way in which ISAs will receive a CAT benchmark. CAT stands for reasonable Charges, easy Access and fair Terms.

The CAT benchmark

Any product which meets or betters standards set by the Treasury will receive a CAT benchmark. It is intended that this will be an indication to consumers that the product is basically sound and unlikely to be unsuitable.

It is intended that there will be 3 separate standards, one for each type of ISA.

• Cash ISAs The interest rate must be no lower than a fixed minimum. The minimum subscription must be no higher than a fixed maximum. Withdrawals must be available within a maximum number of days. There must be no other requirements placed upon the investor.
• Insurance ISA Charges must not exceed a fixed maximum percentage of the funds invested per year, and there must be no other type of charge. The minimum premium must be no higher than a fixed maximum for lump sums, or a fixed maximum instalment level per month. After a certain number of years, the surrender value must be at least equal to the level of premiums paid.
• Stocks and shares ISA Charges must be no more than a fixed percentage per year, and there must be no other type of charge. The minimum subscription level must be no higher than a fixed minimum for lump sums or a fixed minimum monthly contribution for regular savings. The product must be a unit trust or OEIC. The product must track a general UK-based index. Shares or units are to be single priced. Market risk should be highlighted in marketing literature.

In addition, there will be a number of common themes which will be required from all ISAs in order to meet CAT standards.

• Clear straightforward advertising in plain English.
• No bundling of products
• A commitment to consistently meet the benchmark standards.

In each case, the Treasury is consulting on the fixed minimum and maximum levels described above. There will be no requirement for ISAs to meet the CAT standards, and indeed the Treasury is keen to encourage the development of sophisticated ISA products outside CAT standards which would be aimed at sophisticated investors.

Regulation of ISAs

Companies planning to offer ISAs will need to be authorised to conduct investment business under the Financial Services Act.

The FSA will shortly publish a consultation paper on product disclosure for insurance and managed fund ISAs. The plan is that the key features documents must compare the ISA terms against the CAT standards whether or not the ISA meets those standards. In relation to cash ISAs, the Treasury plans to ensure that providers meet the terms of the Banking Code.

The regulators accept that some ISAs will be packaged by ISA managers who will charge customers for this service. In order to meet the CAT standard, it will be a requirement that the ISA meets that standard in the savers hands, and therefore management charges must be taken into account when determining CAT compliance.

The requirement that stocks and shares CAT ISAs must track a UK based index is likely to prove controversial. Product providers will still be able to provide managed ISAs, but they will not be able to receive the CAT benchmark and this is expected to prove to be a disincentive to potential investors in managed fund ISAs. However, the Treasury is convinced that CAT standard stock and share ISAs should suit medium and long term savers who seek good value without excess risk, and therefore the charging structure and investment nature of managed funds is unlikely to appeal to less sophisticated investors.

Tax implications of the ISA

In May 1998, the Inland Revenue issued draft tax regulations for the new ISA. This follows extensive consultation and discussion with interested parties over recent months.

• The key features of these regulations are:
• ISA managers will be approved by the Inland Revenue to enable them to carry out certain administrative functions prior to 6th April 1999 to ease the transitionary burden.
• It will be possible for a person other than the investor to pay into an ISA account (e.g. a gift).
• Savers with TESSAs which mature in the month leading up to 5th April 1999 will have the option to transfer their capital into an ISA after 5th April rather than taking out a further TESSA.
• For unit trusts the open market price will be taken as the creation price.
• There will be no distinction between single year and continuous applications, so that all applications can have effect for successive years.
• Communication between the investor and the provider can be electronic or by telephone, as well as in writing.
• Whole or partial transfers between providers will be possible after the year of subscription.

The Revenue has accepted that there are a number of matters which require further discussion with interested parties, such as:

• The role of credit unions and industrial and provident societies in the ISA.
• Whether a simpler procedure dealing with invalid ISAs can be developed.
• How the Government's objective of excluding from the stocks and shares component investments which are essentially substitutes for cash deposits can best be met, and in particular whether there should be a test to restrict substantial investment in "short dated" interest bearing securities, and how the regulations can avoid circumvention through off-shore companies.