Restrict Isas to invest only in British companies? Spare us the flag-waving gimmick

Nils Pratley





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 tomorrow would seek to commandeer Isas – the tax-free individual savings accounts that pull in more than £65bn 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 be invested only in UKlisted 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 UK savers tax breaks to invest in high-flying US tech firms, global equity funds or emerging market investment trusts? Yet one hopes that 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 could 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 (a 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 the FTSE 100 companies, 75% of their 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, their 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 allowance of £5,000 or £10,000. But, in that case, the total capital invested in British business is likely to 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, so a degree of home bias already exists without official encouragement. Thankfully, Hunt seems to be contemplating far better reforms: more freedom to switch between Isa providers and more freedom to invest in multiple cash and shares accounts. That sounds far more likely to produce an overall rise in savings for investment. No need for flag-waving.