The birth of the ISA: The CAT fight brewing in the world of ISAs
The Government's efforts to simplify investment could lead to even more confusion. By Katharine Lewis
A CATmark is actually a label that financial services companies can use to show their Individual Savings Account (ISA) complies with certain standards. The Government's idea is to give guidance to new or unsophisticated investors. But many financial experts fear that the CATmarked ISA product will cause a lot of confusion. At its worst, CATmarks could lead to another scandal of misguided buying like the personal pensions disaster the industry is sorting out at the moment, or so it is alleged.
CAT stands for charges, access and terms. Each ISA product with a CATmark must meet the standards for each of these terms, which vary depending on whether the ISA invests in cash, stocks and shares or insurance.
In general the label shows that the charges are particularly low and that investors can access their money at any time and without penalty. The pricing of the fund's units must be simple to understand and the minimum investment must be low.
The CAT standards for an ISA investing in stocks and shares, for example, require the ISA to have no initial charge and a total annual charge of no more than 1 per cent. The minimum lump-sum investment must be no more than pounds 500 and the minimum regular savings investment must be set no higher than pounds 50 a month. The units of the fund must be quoted at a single price, rather than the confusing bid/offer spread used by unit trusts in PEPs in the past.
All this seems very worthwhile. The CAT standard is aimed at sparking greater interest in the stockmarket and collective investments, but according to Autif (the Association of Unit Trusts and Investment Funds) this is exactly the problem.
Philip Warland, director general of Autif says: "CAT standards are like electricity. Potentially, they are very good and useful, but if you handle them wrong you will get burnt. Because of this, we are strongly against them."
Mr Warland believes that while CATmarked ISAs offer security against crippling charges, they can offer no guarantee of performance. But the public may not understand this distinction. "And evidence shows there is not a lot of correlation between cost and performance in unit trusts," he adds.
Mr Warland fears that CATmarked ISAs could lead to a misguidance scandal because most of these products will be sold directly to the public and not through independent financial advisers. Investors will therefore not be getting advice about performance. This is because the low CAT charges cannot supply enough income to pay advisers for giving advice to their customers.
Many top PEP and ISA providers agree with Autif's stance on ISAs and have decided not to launch CATmarked products. "We think most investors need advice, so we are not going to launch a CAT product. Moreover, I think CAT standards will confuse investors. ISAs are complicated enough already," says Roger Cornick, marketing director at Perpetual, a leading fund management firm.
But Virgin disagrees. It has launched a CAT-standard ISA based on its FTSE All-Share tracker. "We want all our ISAs to be CATmarked. We are 100 per cent committed to CAT standards," says Gordon Maw, marketing manager at Virgin.
Mr Maw believes that knowing that charges will not be excessive will take out one of the risk elements, leaving investors free to decide about performance.
Mr Warland concedes that CAT standards are useful for cash funds because they guarantee an interest rate that is not less than two percentage points below the base rate. "But," he says, "there is no way you can create a CAT standard for stocks and shares ISAs that takes performance into account because, as all investment companies say, `the past is no guide to the future'."
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