Helen Liddell, the Treasury minister responsible for financial services, has a reputation for being a tough cookie. I hope she is, for she will certainly need a thick hide if she is to see off the howl of industry protests that have greeted the Government's latest proposals for ISAs (individual savings accounts).
The Treasury this week produced its second consultation document on the subject, including details for the first time of the voluntary benchmarks which it hopes consumers will use for guidance when deciding which ISA to pick. The Government's idea is to set minimum standards for cost and simplicity against which each ISA can be judged. If an ISA does not meet those standards - for example because it costs more than the benchmark annual management fee - it can still be offered for sale and qualify for tax-free status. But what it won't qualify for is the government stamp of approval, which the so-called CAT standard will inevitably be seen as. Now it doesn't take a genius to work out that any ISAs which don't qualify for this kind of approval are going to be a lot harder to sell than those which are.
Philip Warland, the director general of Autif, the unit trust industry's trade body, was so incensed by what the Government is proposing that he felt moved to describe this week's proposals as "economically illiterate, politically inept and lethal for some consumers".
Meanwhile, over at the regulators' corner, both Howard Davies, the head of the Financial Services Authority, and Peter Dean, the Investment Ombudsman, expressed doubts about the wisdom of trying to set standards for any kind of equity-based investment product. Their concern seems to be that, by implicitly endorsing products which by their nature are not risk-free, the Government is in danger of raising public expectations and finding itself blamed for inducing people to put their money into something that turns out to have been ill-advised, or even to have cost them money.
They have a point, though quite why anyone should ever regard a Government endorsement for a financial product as implying any sort of guarantee of performance has always baffled me. (You only have to think back to War Loan or indeed gilts for most of the post-war period to realise that the last person you should ever buy a financial promise from is a democratically elected government, which is prone to expensive inflationary habits).
Most of what the Government had to say in its consultation document this week was, however, admirable common sense. What it is trying to promote is what every consumer also should want - which is low cost, trustworthy, financial savings products where they have some assurance they will not be ripped off. The biggest talking point was its proposal to make the benchmark standards for equity-based funds so restrictive. Its proposal is to allow only index-tracking funds and funds which offer single pricing (as opposed to the traditional unit trust bid-offer spread) to qualify. No actively managed funds, therefore, and - equally surprisingly - no investment trusts at all (even index-tracking funds). The Government has yet to spell out the kind of management fee it has in mind for ISAs, but it seems to be thinking in terms of a 1 per cent annual fee.
Well, high-minded it may be, but it is hard to think of a more calculated affront to the marketing departments of the fund management industry. Unit trusts in particular are used to charging much higher fees on average for their actively managed funds (and profiting hugely from them), and have been looking forward to pitching into the new ISA market with gusto. No wonder that Mr Warland was so affronted. Heavens, before long the Government will be saying that the average actively managed unit trust does not offer good value for money. And where we would be then?
Well, regular readers of this column will not be surprised to hear me say that I think the Government is on the right track, at least as far as this element of its plans is concerned. For someone who has made the decision to invest in the equity market for the medium to long-term period, then an index-tracking fund is the first place that he or she should think about putting their money.
Not necessarily the only place, mind you, but definitely the first place. In fact, with charges where they are today, I would go so far as to say that the Government would be irresponsible if it implicitly or explicitly tried to steer such a person into most actively managed funds in those circumstances.
Given that the whole point of ISAs is meant to be to encourage people who do not ordinarily save at all to do so for the first time, then the case for sticking to index funds is a powerful one. (Of course it is always open to the industry to try and come up with an actively managed fund which is as cheap as a tracker fund - since if my reading of the consultative document is right, it is the value of money that is as much sticking point for actively managed funds as the underlying principle of how they are run).
By its own lights, therefore, the Government has probably acted sensibly. But that will not be enough to stop it running into a wall of flak from an industry that has realised the danger of being excluded from a great potential marketing opportunity - nor from unhappy wealthier savers who have profited nicely over the years from the PEPs and Tessas experience and would understandably like to continue the experience. Whether the Government is wise to start meddling in this issue at all, however, is quite another matter.
It is creating a lot of rods for its own back - and one has to wonder whether it will come to regret trying to be prescriptive at all in this potential minefield. With the stock market where it is, the potential for trouble ahead is huge. Let nobody accuse Mrs Liddell of lacking courage, however.Reuse content