Could customer understanding be another thorn in the side of government ISA plans?
ISA reform on the horizon
ISAs could be changing. There’s been lots of talk about tinkering with the system and it’s widely expected the government will consult on changes.
Suggestions have included lowering the amount people can save in cash ISAs tax free from the current £20,000 or even limiting ISAs to just investment.
A push toward investment
What’s the rationale? The pursuit of growth. The theory is that by making cash ISA options less attractive, people are more likely to invest in stocks and shares.
These ideas have had lots of industry attention, with many arguing that this theory is flawed or not in the interest of normal consumers.
Where’s customer understanding in the debate?
Customer understanding has not been a focus of the debate – but it has potential to ruin the theory that ISA reform will generate growth.
If people don’t clearly understand an option, they’re unlikely to take it. Or, if they do, they’ll find it difficult to make the most of it.
Confusion could derail behaviour change
That’s likely to mean making cash ISAs less attractive doesn’t drive people to investment. It may actually pull them towards simpler savings options like standard savings accounts or worryingly just keeping savings in their current account earning no interest.
The savings landscape is already more complex than the financial sector might realise. The wide variety of options is like a maze of complexity, with numbers around every corner.
Tax efficiency, risk levels, estimated returns, interest rates – they’re all important in making the most of your money. And they’re just a few of the concepts that are less well understood than we might assume.
The more things change, the more the best decision for each individual consumer changes and the more complicated making that decision comes.
The role of communication - and familiarity
There is lots of work to be done on the way that savings options, including Cash ISAs, and their benefits are explained to customers irrespective of changes. At Plain Numbers we’re working with many providers to do that.
Still, the current ISA system benefits from familiarity with at least some customers. And is fair to say that Cash ISAs would be considered among the simpler options for customers to understand.
On the other hand, investment options are currently more complicated and can be overwhelming. Improving the way these are communicated must be part of the answer to encouraging investment for those whose circumstances suit it. As does regulatory change and implementation of “targeted support” to help people truly understand decisions.
Rightly or wrongly, many savers will see pivoting to a stocks and shares ISA or other investment options as confusing, risky and undesirable. If that happens, people can only lose out without any significant impact on the numbers of people investing and so not helping the growth agenda at all.
Simplifying the system itself
There is nothing wrong with the Chancellor’s aim to improve the culture around investing, but to do that we’ll need to make investments easier for people to get their head around, not make cash savings less fruitful.
Part of that is in the control of firms around communicating the way things work better. But the system itself could be simpler too. It’s harder than it needs to be for people to get the right mix of cash savings and investment. Simpler ways people can transfer could be a part of the answer here.
Understanding is the key to better outcomes
Whatever happens with ISA reform, if anything at all, people’s ability to get the most out of their savings relies on good understanding of their options. People are being held back by confusion. Firms should take the opportunity to improve the way they communicate about savings by applying the Plain Numbers Method to customer communications – which can double the number of customers who understand the information.