Warning £5k tax-free British ISA plans 'risk causing more harm than good'

The proposed British ISA "risks causing more harm than good" and could potentially impact savers nationwide, according to experts. Earlier this year, Chancellor Jeremy Hunt confirmed plans to introduce the savings product following a consultation period that concluded on June 6.

Both Labour and the Conservative Party have expressed their support for the new ISA. However, experts are now warning that a British ISA could potentially violate existing Consumer Duty rules established by the Financial Conduct Authority (FCA).

In July 2023, the country's financial services regulator introduced these rules, which require firms to provide fair value and positive customer outcomes. These rules apply to products such as savings accounts, current accounts, mortgages, insurance, and investments.

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Banks, building societies, advisers, and investment firms are required to clearly communicate to customers how each product operates and keep them informed of any changes.

Tom Selby, the director of public policy at AJ Bell, has suggested that the current British ISA proposals "risk causing more harm than good and damaging the successful ISA brand", despite support from both Labour and the Tories.

He explained: "Our research shows that when presented with the choice of a British ISA or a Stocks and Shares ISA, almost a third of potential investors would opt for the British ISA for their first subscription despite the fact they could access identical investments and more besides for the same price in a Stocks and Shares ISA.

"This would be a poor consumer outcome and means firms would almost certainly need to wrap any British ISA in risk warnings to comply with the FCA's Consumer Duty rules.

"As investors tend to naturally favour UK investments anyway, it would be much simpler to increase the overall ISA allowance to £25,000, a move which would likely achieve similar results to a British ISA but without the extra complexity."

Under this new ISA, British savers would get an extra £5,000 tax-free allowance on top of their existing £20,000 across every type of the savings product.

This is part of the Government's wider plan to encourage people to invest in UK assets and create a bigger investing culture in the UK.

Furthermore, Hunt hopes the British ISA will increase capital available to businesses and drive more interest in the UK stock market among taxpayers.

As part of the Government's initial proposal, investments in the new product will be restricted to British-based stocks and shares and trusts that have at least 75 per cent of their assets in UK companies or bonds of UK-listed companies and gilts.