Supermarket chiefs are no doubt rubbing their hands with glee. The Treasury has offered them, in the guise of Individual Savings Accounts, an unprecedented marketing platform. In effect, they have carte blanche to capitalise on state endorsement of their already redoutable forays into high street finance. Seemingly they cannot go wrong.
For ISAs are, in principle, a wonderful thing. As ‘the people’s savings scheme’ they redress the balance of years of perceived Ã©litism, in which only the rich were able to exploit the tax-free advantages of PEPs and Tessas. They broaden the range of financial products which can be sheltered. And most importantly, they will communicate – through a relentless marketing barrage – the wisdom of universal thrift. Which is only sensible, now that the state is abdicating responsibility for pension provision.
But all that glisters is not gold. The ISA proposals, grand in their sweep, are weak in detail and conceal some unpleasant pitfalls for the naive. Though not necessarily the ones which have received the most public attention so far.
Debate has focused on the assertion that the poor cannot afford to save, let alone benefit from tax breaks. True enough, but this does not invalidate ISAs as a concept. They are broadly based enough to attract a wider range of savers than the tax-free schemes currently on offer. And that alone makes their positioning attractive to ‘populist’ outlets such as supermarkets and petrol retailers.
A more serious issue for this new breed of financial marketers is whether they will be profitable. The Treasury has been coy on little matters like implementation, and probably for good reason. A new financial services bureaucracy will be called upon to police these complicated new products (how else will anyone know whether the various savings ceilings have been transgressed?). And where there is bureaucracy, there are hidden costs. Since the Government is unlikely to pick these up, it is a fair bet that they will fall on the financial services industry.
Which will already be coping with the problem of swollen administration costs caused by the complexity of these new products. The dilemma is this. Should the industry treat ISAs as a loss leader and swallow these costs – in the hope that economies of scale which eventually come to its aid? Or take a shorter-term, more cynical, view and pass the costs on to the saver in the form of a fat management fee?
One course of action promises paper-thin profits. The other will disillusion savers, who will not take kindly to the notion of exorbitant fees undermining the advantages of tax exemption.
Either way, the new breed of financial services retailers will need to think very carefully about what they are doing. And to be meticulous about the advice they will be passing on to their often financially unsophisticated customers.
Cover Story, page 38