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Britons! Your market needs you.
UK Chancellor Jeremy Hunt is being urged to summon his inner Kitchener at the Autumn Statement this week, reforming the UK’s tax-free individual savings accounts to direct more money into the nation’s stock market. A British Isa (or Brisa) would revive interest in UK markets, increase the pool of investors and boost economic growth, say proponents.
It’s a reasonable idea — though it seems unlikely to noticeably swell the ranks of plucky British retail investors.
The Kitchener poster in the first world war was an invitation to patriotic self- sacrifice. British investors may feel similarly about this call to arms. Stock market shrinkage is a global phenomenon. But in the UK it is combined with persistently low valuations, shrinking liquidity, high-profile departures and a parade of catastrophic and low-quality listings to create existential angst and a sense of impending doom.
How restrictive a dose of Treasury-prescribed Buy British would feel for Isa savers is a function of design. Hunt isn’t going to mess with the £460bn-odd already invested in stocks and shares of Isas. Having earlier this year dismissed mandating where pension funds should invest their money, switching the entire £20,000 maximum annual Isa savings allowance per person to UK investments also feels a stretch.
But the idea of creating a Brit Isa, or asking that a portion of new investment goes towards UK-listed stocks, shouldn’t be too controversial. The precursor product, personal equity plans or Peps, required 50 per cent investment in UK assets until the 1990s. Home bias is back in fashion. Similar investment vehicles in markets like Japan and Italy have domestic investment requirements built in, notes think-tank New Financial.
In a low-savings nation, Isas are a tax break that largely accrues to wealthy people. There are 27mn Isa holders in the UK, mostly in cash rather than stocks and shares. Three quarters of the money saved overall is held by the top half of the income distribution, according to the Resolution Foundation, another think-tank. That skew will be more pronounced in the 3.9mn adults with a stocks and shares product: less than a million people used their total Isa allowance last year, said New Financial, but they accounted for half the money going into stocks and shares Isas.
This is also the reason why some of the loftier claims here are dubious. A suggestion from business leaders that £68bn a year could be put to work assumes all Isa investments (cash and shares) switch to a Brit stocks model, which they won’t. Stocks and shares Isas already invest about a third in UK equities, estimates New Financial, which reckons a 50 per cent requirement plus a few other tweaks would mean an extra £10bn in new money each year. Simply increasing the allowance by a Brit-focused £5,000, one suggestion, would do less given the small numbers who hit the cap already.
The idea of a direct spillover to the economy is also questionable, unless the Brisa is limited to domestically focused smaller or growth stocks. That would be complex and lessen the impact in terms of improving the London market’s appeal as a destination for international companies, which is, kind of, the point.
It is particularly hard to see how a Brit Isa encourages new savers into the stock market or resuscitates a culture of retail investment. If anything the Isa market needs streamlining, not adding to. Two-thirds of Isa subscriptions in the latest year’s data were cash rather than stocks and shares. A whopping 70 per cent of those taking out a cash Isa have never even considered an investment one, found consultancy Oxera.
To be more than a bumper sticker for retail participation, a Brit Isa would need to come with a broad package of measures. Rule changes, to make it easier to include retail investors in share sales, remain in train years after first being proposed. Where individual investors can invest, and how they access advice, need re-evaluating. Digitising the archaic, paper-based British shareholding system properly is a must — and somewhere the UK has fallen behind.
Another “Tell Sid” moment, some argue, could prompt excitement around share ownership in the same way that the 1980s privatisations did. But the UK government also co-opted large chunks of the adult population into equity markets via pensions auto-enrolment without managing to spark interest or change attitudes: 80 per cent of adults contributing to a defined contribution scheme have never looked at where it is invested; nearly a third say they didn’t know it was being invested at all.
It will take much more than a bit of Brit stocks bias in Isas to get everyone marching in the same direction.
