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Simple hearted

It is fair to say that 1999 will be remembered by most of us for a number

of reasons. Isas arrived, yet more new pension arrangements were on the

drawing board, pricing regulation in the form of Cat-marking came back to

the UK after more than a decade away, product league tables were proposed

and English cricket maintained a steady position in the world game.

In many senses, the world became a more complex place in 1999 when

simplicity is one of the most cherished commodities around. Simplicity is

easy in principle but, in reality, after the rules are defined to cover all

eventualities, it is rarely achieved. The key to simplicity is to reduce

the number of moving parts.

The Isa has not, contrary to all the forecasts of doom and gloom, been a

failure – with one exception. The reality is that equity Isa sales alone

have recovered to the same point as Peps in 1998. Catmarks are here on

nearly one in four products and advisers are selling them.

The only downside to the start of the Isa has been the significant fall

off in the number of regular savings customers. In the case where these are

savings to back a mortgage repayment, this is a very serious issue for

which providers, advisers and regulators will not be thanked in years to


Isas can head for the realm of simplicity but the path will not be without

difficult choices for providers, regulators and the Government. It has to

be true that the more variables there are in the equation, then increased

complexity is inevitable. It is the product design equivalent of the

square-cubed rule. The product has three components in two structures. In

that each of these components is different and each structure needs to

relate to the other, then simplicity will always be challenged.

If the limits are made consistent, then there is a danger of tax leakage

for the Treasury. If life insurance is dropped, then providers of this

component will be robbed of an opportunity to compete in the high-volume,

tax-wrapped, discretionary savings market.

If both these changes are made, we are back to Peps and Tessas, albeit in

one umbrella rather than two. This may be unacceptable to Government due to

a desire to separate new products from those created by previous


The other area where simplicity can be developed is in the relationship

not just within products but between products. Rules are generally needed

when it is necessary to define the relationship between two objects. The

more similar the two objects, the less likely that a rule will be needed to

define the treatment of any differences.

The collective investment industry has only been around, in volume terms,

for a decade. In this time, business has been strong and the focus has been

on growth. In sectors which have been around for a while, legacy becomes

more of an issue as the ratio of new business to existing business evens

out and the size and cost of legacy becomes more significant.

Different investment rules govern Peps and the equity portion of the Isa.

At the moment, as Isas are small and new business is still strong, this may

not feel such an issue. However, when millions of customers have Isas and

millions of customers have Peps and, guess what, these millions are the

same people, then customers will want simplicity.

The simplest solution must be to equalise the rules at little or no cost

or a better long-term solution would be to convert Peps to Isas

unconditionally at the lowest common denominator.

Another area of inter-relationship, which is more relevant now than it

ever has been is that between discretionary savings and retirement savings

products. As individuals take more control of retirement planning, they

will want their underlying products to interact. The save to invest culture

will be strong.

In this regard, the proposals on portable pension investments are

critical, not just from a parochial investment management perspective but

because they cut out unnecessary legal infrastructure and represent a

common component between retirement and discretionary savings. The need to

resolve the taxation harmonisation with PPIs is great.

An area that should merit tighter scrutiny is Catmarks. On Isas, Catmarked

charges are 1 per cent including product, fund management and advice. On

stakeholder, they are 1 per cent for product and fund but with an

additional 0.5 per cent for advice. The latter gives greater chance of

ensuring clients get the products they need and that these remain good


There is no solution to these issues that will not disadvantage someone.

Matthew Fink, president of the US Investment Companies Institute, has said

US individuals will save more if simplicity is achieved. This is in a

country where mutual funds account for more than 30 per cent of savings

compared with 5 per cent in the UK and which has a range of retirement

savings products to which we are merely aspiring at the moment.


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