INDIVIDUAL SAVINGS ACCOUNTS: PROPOSED REFORMS - BSA RESPONSE

1.     The BSA welcomes the opportunity to comment on the Treasury’s proposals to amend the regime for Individual Savings Accounts (ISAs).

2.     The Building Societies Association (BSA) represents all 60 building societies in the United Kingdom.  Building societies have total assets in excess of £305 billion and hold residential mortgages of over £200 billion, approximately 18% of the total outstanding in the UK.  Societies hold over £190 billion of retail deposits, accounting for about 19% of all such deposits in the UK.  Building societies employ almost 50,000 full and part-time staff and operate through around 2,150 branches.

3.     Building societies are major providers of ISAs and in respect of cash ISAs, societies are market leaders, accounting for 37% of cash ISA balances (£46 billion out of £124 billion in August 2006).  This is more than double building societies’ share of the market for cash-based savings as a whole and demonstrates both building societies’ commitment to the cash ISA market and their success in attracting funds to this important product.

4.     The BSA has the following comments on the proposals set out in Treasury’s consultation paper.

Removing the Mini/Maxi Distinction

5.     The proposal to remove the distinction between mini and maxi ISAs is welcome and is a reform the BSA called for in our submission to the Treasury’s review of ISAs last year. It does, however, give rise to operational challenges that will need to be addressed.

6.     The Treasury proposes that providers will continue to be required to monitor the £3,000 cash limit and the £7,000 stocks & shares limit on their accounts.  Investors who use different providers for each component will need to check that they are within the limits and HMRC will continue to monitor the subscription limits to identify investors who over-subscribe.  These new rules are likely to result in greater numbers of investors breaking the subscription rules – leading to an increased volume of void accounts.  This will create additional work for ISA providers and frustration for the individuals concerned.  Since stocks & shares ISA providers have most to gain from the package of reforms proposed by the Treasury, it will be appropriate that they should also bear the brunt of the voiding provisions: ie a cash component should be left to stand with the stocks & shares component being voided even if the stocks & shares investment pre-dated the cash deposit.

Effective date for the changes to the ISA regime

7.     The package of changes proposed by the Treasury will require significant development work on the systems operated by building societies – substantial amendment to product literature will also be needed.  There is also a need to familiarise consumers with the new arrangements so as to minimise the scope for customer confusion.  In view of the lead times necessary to effect such changes, it seems unrealistic to expect these to be implemented in time for the fiscal year 2007-08.  It would be much more appropriate to aim for an effective date of 6 April 2008.

Allowing transfers from cash into stocks and shares

8.     The Treasury’s plan to allow transfers from cash ISAs to stocks and shares ISAs, but not to allow transfers the other way, is a source of considerable concern to building societies. The problems with such an asymmetrical approach are as follows:

9.     People will inevitably make mistakes about transferring from cash to equities.  These may be due to errors of judgement by the ISA holder – or, in some instances, inadequate advice. 

10.     One-way transfers will potentially disadvantage smaller institutions, such as smaller building societies, that provide only the cash ISA component. 

11.     As the Treasury proposals stand, errors of judgement or bad advice could not be rectified within the ISA wrapper.  The BSA considers it essential that transfers from equity ISAs into cash ISAs are allowed.  This would allow mistakes to be rectified.

12.     Moreover, allowing two-way transfers would make ‘lifestyling’ of portfolios much easier.  This was one of the key points made by the BSA in its recent submission to Treasury ministers in advance of the December 2006 Pre-Budget Report.  Allowing transfers from stocks and shares ISAs to cash ISAs would allow savers to diversify their assets and benefit from the lower volatility offered by cash holdings.  Increasingly, people are seeking, sensibly, to diversify their retirement savings and ISAs are being held for the longer term.  People nearing retirement who wish to change their asset allocation to match more closely their liabilities would be able to convert some of their equity holdings to cash without losing the benefit of the tax exemption available within an ISA wrapper.

13.     Allowing two-way transfers would also assist those on lower incomes: stocks and shares ISAs are of benefit only to higher rate taxpayers: there is no tax benefit to those on lower incomes holding equities inside - as opposed to outside - an ISA.  Cash ISAs give tax breaks to all taxpayers, including those on lower incomes. 

Conclusion

14.     The BSA supports the Government’s aim of engendering a long-term savings culture.  Most of the ISA reforms proposed by the Government will assist in this. However, some are problematic and we hope the Government can be persuaded to reconsider its position in relation to the issues highlighted above.  The new ISA requirements need to be introduced over a realistic timescale that gives providers sufficient time to implement the necessary systems changes and consumers time to get used to the new rules.

The Building Societies Association
Contact: Brian Morris, Head of Savings Policy brian.morris@bsa.org.uk 020 7440 2248