- Investment platform AJ Bell calls on government to go back to the drawing board on ISA reform, with a transparent approach to consultation
- It comes as the business publishes results of behavioural trials conducted by Drs Richard Whittle and Stuart Mills testing the impact of a combined ISA landscape blending cash and investments into a single account
- Findings show integrated ISA can help reduce aversion to investment, increase satisfaction with investment performance and may lessen tendency to sell during market downturns
- Key barriers to investing such as fear of loss and liquidity preference remain, illustrating the importance of a multi-pronged approach to increasing participation in retail investing
- Government reportedly considering cutting Cash ISA allowance at next week’s Budget, a measure likely to add friction to the market
AJ Bell is calling on the government to go back to the drawing board on ISA reform and deliver a long-term review of the market aimed at supporting retail investor engagement in the UK’s flagship savings and investment product.
It comes as the business releases new findings from behavioural trials studying the impact of combining the ISA system into a joint cash and investments account. The research, conducted by Drs Richard Whittle and Stuart Mills and supported by AJ Bell, uses data from a large-scale structured survey with 2,400 participants to examine the impact of combining two components – cash and investments – into a single ISA account.
It finds that a ‘Combined ISA’, a single pot with both a cash and investment component, can make it easier for people to start investing and increases the likelihood they continue to invest once they begin, when compared to ‘Current ISA’ products in which cash and investments are held in separate products.
This research complements an earlier review published this year which concluded the existing design of the ISA system creates friction and complexity, deterring longer-term investments and presenting the Cash ISA as the ‘easy’ choice.
AJ Bell has long argued for reform of the ISA system focussed on simplification, making it easier for people to save and invest and reducing friction in the market. The business believes measures reportedly under consideration, such as a cash ISA allowance reduction or compelling investors to hold UK assets, will do little to support UK markets and may discourage savers from switching to investments.
AJ Bell CEO, Michael Summersgill, says:
“Government is right to try and get more people investing, but will miss the opportunity to transform the market unless it ditches some of the ill-conceived ideas currently on the table and takes a more transparent, long-term approach to reform.
“Rather than developing policy in a Whitehall bubble, with scant evidence or real-world knowledge to underpin the debate, it should instead go back to the drawing board. A government Green Paper or independent commission on ISAs, similar to that setup on pensions, would help build evidenced-based consensus on the case for reform and encourage a multi-pronged approach to supporting retail investors, which includes measures like Targeted Support.
“That process must place consumers at the heart of the discussion, aiming to make it as easy as possible for people to save and invest. These behavioural trials show an integrated cash and investing ISA system could remove friction, reduce inertia and help consumers navigate what today looks like a binary choice between cash or investments.”
Dr Richard Whittle says:
“The design of the UK ISA system presents cash as safe ‘savings’ and stocks and shares as riskier ‘investments’, forcing people into an immediate binary decision where the safety of cash usually wins out. Smarter ISA design can help to overcome this helping people achieve good financial outcomes.”
Dr Stuart Mills adds:
"Psychological barriers to risk-taking remain an important challenge for the UK consumer finance market to overcome. We know that UK savers are receptive to the higher returns offered through share-based investments. It is critical that financial institutions design their products to support customers in achieving their financial objectives, and that these institutions are supported by government policy to do so."
Research
A full copy of the report (‘What could be the effects of combining the UK cash, and stocks and share ISA into a single product?’) is available on request.
Introduction
The current UK ISA landscape is fragmented, with separate Cash ISAs and Stocks and Shares ISAs often siloed across providers. This structural separation requires consumers to make early, binary decisions about products.
Evidence suggests that this complexity creates confusion, disengagement, and inertia among savers. Many default to cash-only products in the current ISA system.
The report explores the potential effects of simplifying the system by combining Cash and Stocks and Shares ISAs into a single, unified product.
The evidence gathered through the behavioural trial has been submitted to government in support of the case for a simplified ISA system combining both investments and cash into a single account, moving away from the siloed nature of the UK’s existing Cash ISA and Stocks and Shares ISA.
Key findings:
The report finds a number of important barriers that discourage uptake of Stocks and Shares ISAs in the current market. These include:
- fear of losing money
- lack of knowledge and confidence
- limited spare cash and competing priorities
- preference for certainty and liquidity (cash ISAs / fixed rates / Premium Bonds)
- past bad experiences and low trust
While many of these factors cannot be overcome through reforms of ISA system architecture, the research finds a Combined ISA, simultaneously offering cash and investments within an integrated ISA product, can help nudge people toward investing in a variety of ways.
Behavioural trials were conducted through a structured online experiment with 2,400 participants. The trial split participants into two separate groups:
- Half the participants were shown ISAs split equally between separate cash and stocks and shares ISA accounts, simulating the current ISA landscape.
- Half were shown an integrated ISA split equally between cash and stocks and shares, but with both held as a separate sleeves within the same account, simulating a new, Combined ISA landscape
The findings show combining cash and investments into an integrated product nudged behaviours and experience, resulting in:
- Higher satisfaction with positive returns and less dissatisfaction with negative returns
- A modest increase in the overall preference for stocks and shares and a modest reduction in the number of people completely averse to holdings investments
- Increased tendency to take on some investment risk
- Users of a combined product may be more resistant to reactive selling in a market downturn and hold their investments for longer