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Cat Market

Back when Isas arrived in 1999, the Government was anxious to offer some

reassurance to the new investor that he or she was not going to be ripped

off.

Regardless of whether you agree with the Government&#39s view of the savings

industry,it is understandable that they would want to offer some

encouragement and guidance to the concept of saving for newcomers,

particularly (but not exclusively) saving linked to stockmarket investments.

But is the Cat living up to expectations? Earlier this year, Market Minder

told us that 64 per cent of the investors they had surveyed did not know

what a Catmark was. Hardly an indication that Catmarks are proving a

valuable tool for the investor.

Still, lack of public awareness aside, Cats are not all bad and certainly

have their good points.

Each Isa component, of course, has a matching Cat standard. Here is a

brief overview of each.

Cash Cat

This is probably the least criticised of the three Isa Cat standards.

While you can have unit trusts (money market funds) and certain National

Savings in a cash Isa, these would not, by definition, meet the Cat

standard.

To meet the Cat standard, a cash Isa must be a deposit account – most are.

In addition, there must be no one-off or regular charges of any kind

although managers can make a charge if the investor loses his plastic card

or requests duplicate statements.

The manager cannot require a minimum transaction size greater than

£10 and the investor must be able to withdraw his cash within seven

working days.

Interest rates must be no lower than 2 per cent below base rate and must

follow any upward movement of the base rate within one calendar month.

There should be no limits on frequency of withdrawals or any other

conditions applied to the account.

In practice, many providers pay more than base less 2 per cent and the

huge popularity of mini cash Isas is demonstrated by the fact that

£11.5bn was placed in them during the 1999/2000 tax year. Whether this

represented new savings or the movement of existing savings from older less

favourable deposit accounts remains to be seen. Official figures show that

subscriptions to mini cash Isas in the first half of 2000/01 at just under

£7bn were up by almost 16 per cent on the 1999/2000 figures for the

same period.

Because the Catmark scheme is voluntary and the Government does not

collect statistics on them specifically, we do not know the proportion of

cash Isas that are in Cat-standard products but, given that 97 per cent of

all cash Isas are of the potentially qualifying deposit account type and

that the other 3 per cent are most likely to be held in the cash components

of maxi Isas, it seems logical to assume that a high proportion of the

£11.5bn is held in Cat-standard products.

Insurance Cat

The insurance component of the Isa is singularly unloved with less than

0.25 per cent of all Isa subscriptions in 1999/ 2000 being directed into it.

There is, however, a Cat standard for insurance Isas limiting annual

charges to 3 per cent and guaranteeing that surrender values should at

least return the premium after three years.

Stocks & shares Cat

The Cat standard for the stocks and shares component is the one that has

attracted the most criticism, perhaps some of it justified. This is where

the investor is most likely to need advice and, some would say, where he is

least likely to get it.

The Cat standard requires that the annual charge should be no more than 1

per cent of net asset value and that no other charges should be paid by the

investor. It should be possible to save modest amounts because any minimum

saving levels that the manager may set can be no greater than £500 for

a lump sum, or £50 a month for regular savings.

The investments that may be held within a Catmarked stocks and shares Isa

are considerably restricted from the wide range that may be held in stocks

and shares Isas generally.

The Cat standard limits them to unit trusts, Oeics, or investment trusts

where the underlying investments are at least 50 per cent invested in

shares and securities which are listed on EU stock exchanges.

This looks very much like insisting that they invest in collective

vehicles that meet the old (about to be abandoned) Pep rules. Many in the

industry have questioned why a benchmark that is designed to cover charges,

access and terms should stray into the area of determining investment

policy.

At a stroke, it rules out the 18 per cent of Isas offering direct holding

of shares or any other qualifying investments. For this reason, you will

not find a stockbroker offering a Catmarked Isa, even if his charges are

under 1 per cent a year.

So have Catmarked Isas really made a mark? The industry concern has always

been, and still remains, that there is a danger that the very investor who

they are intended to help may see them as some sort of guarantee.

They may guarantee “decent” terms (depending on how you define decent) and

“easy” access. Whether they guarantee “fair” charges, as opposed to low

charges, is debatable and they certainly do not guarantee investment

performance. Their obvious attraction is their low charges.

With no guarantee of good performance, the IFA&#39s role is just as important

as ever, particularly for the novice investor. This becomes even more

important when you consider that many Catmarked Isas are trackers, with

only a handful of active funds carrying a Catmark.

Many Isa managers appear to be ignoring the Cat standards for Isas. Out of

almost 2,000 unit trusts, about 38 carry a Catmark.

Even those companies that have Catmarked Isa products do not appear to

promote them very much, presumably because the 1 per cent charge ceiling

leaves very little margin for advertising and/or remuneration to IFAs.

It is this last element of advice that many find really concerning.

Imagine a new investor with absolutely no other savings finding himself in

the position of being able to afford to put away £25 per month. He

sees an advertisement for the XYZ unit trust Catmarked stocks & shares Isa

and signs up as a regular saver.

Who is going to tell him that, in his circumstances, the last thing he

should be doing with his only savings is to put them into a stockmarket

investment – however much the risk is spread – and that he would be better

off putting his savings into a cash mini Isa where they will earn gross

interest and be readily available if at any point in the future he needs to

dip into them in an emergency?

Some supporters of the Cat standards will tell you they should provide the

catalyst to encourage IFAs to switch to a fee-paying structure where

investors pay for the advice they receive quite separately from the cost of

acquiring the investments.

Even then, it is difficult to see whether our new investor will be

prepared to pay for advice before clipping the coupon. The reality is that

most people need financial advice and the worst effect that the Cat

standards could have would be to imply otherwise to the “nervous new

investor” and, indeed, many more that are neither nervous nor particularly

new.

The idea behind the Cat standards is a good one and very few would argue

with the notion of an endorsement of a financial product that is good value

for money.

Let us hope that the Catmark is not seen as something that it certainly is

not – either a kitemark or some sort of seal of approval.

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