In the great panic about the dwindling status of the London Stock Exchange, and the dwindling number of companies listed on it, nothing is off limits, it seems. One lobbying idea doing the rounds before the chancellor’s autumn statement would seek to commandeer Isas, the popular tax-free individual savings accounts that pull in £65bn-plus every year, for national service.
One proposal says the country’s savers should be given a £5,000 or £10,000 add-on that could only be invested in UK-listed companies. Alternatively, say true radicals, the entire £20,000 Isa annual allowance (for cash or shares) should be restricted to UK assets, with the tax-free wrapper itself rebranded as a British Isa, or Brisa.
One can understand the superficial appeal, naturally. Why give tax breaks to UK savers to invest in high-flying US tech companies, global funds or emerging market investment trusts? Yet one hopes Jeremy Hunt firmly resists the calls for flag waving. The Brisa idea is a gimmick that wouldn’t do much to resuscitate the UK stock market anyway.
First, the whole spirit of Isas has been about choice. Other countries do it differently – Japan, Italy and the US incentivise savings in their home markets – but the UK model for the past three decades has been about maximising freedom to roam the investment landscape. One can argue that the £20,000 Isa allowance is too generous, but that’s a different debate. If the aim is to encourage saving, it should not fall to UK retail punters to play a walk-on role in perking up a local stock market whose woes (lack of new listings, undervaluation and so on) have deep causes.
Second, if the Brisa proposal is really about boosting UK economic growth, semi-enforced buying of UK-listed shares is a roundabout route to take. Among FTSE 100 companies, 75% of earnings come from overseas; the UK market is as international as they come. Thus most versions of the Brisa idea tend to advocate investment solely in UK firms worth £1bn or less at the point of investment. But that only leads to a third problem: if everybody’s entire allocation had to be dedicated to such investments, portfolios would end up being massively overweight in higher-risk assets.
That would be less of a problem if the Brisa element comprised only an add-on £5,000 or £10,000 allowance. But, in that case, the total sums of capital might be small because only 7% of savers hit the £20,000 ceiling last year. The average investment in a stocks and shares Isa was £8,690 and the average for a cash Isa was £4,330.
Hunt, then, would be well advised to avoid patriotic fiddles. As it is, about 40% of sums invested in stocks and shares Isas (about half the total) flow to UK companies already, so a degree of home bias exists without official encouragement. The far better reform is the one that Hunt, thankfully, seems to be contemplating: more freedom to switch between Isa providers and more freedom to invest in multiple cash and shares accounts. That all sounds far more likely to produce an overall rise in savings for investment. No need for flag-waving.