Volume 1, Issue 8 1st July 1998

CAT amongst the Pigeons
The Government has unveiled plans to apply a standard to financial products - a system of kitemarking similar to the "Woolmark" for woollen products and "Hallmark" for precious metals. If the Government gets its way this will apply in future to Individual Savings Accounts or ISAs and possibly other financial services products. ISAs are the tax-free replacement for PEPs and TESSAs.

Under the benchmark proposals given the title "CATmarking", products will have to be cheap (the C in CAT), accessible (the A in Access) and offer reasonable terms (the T in Terms) to qualify. The Government’s aim is to encourage millions who do not save to start the habit of saving and they believe millions of people are put off by too many ‘unknowns’ in the PEP. They want to put that right with ISAs.

Not surprisingly the plans have attracted a deluge of criticism from the Unit Trust Industry for fear of not being granted the Seal of Government Approval either because of inflexibility or over charging.

Already the new boss of the super regulator, the Financial Services Authority (FSA), has recently come out in favour of this Government initiative because the system of CATmarking is believed will introduce industry benchmarks on price and flexibility. The FSA are shortly to publish their proposals in relation to the regulation of ISAs and the greater marketing freedom which CATmarking will provide.

This might all seem very confusing and possibly irrelevant to the average person in the street unless, of course, the customer thinks that greater marketing freedom will mean more pressure selling. Not a welcome prospect. So why, if there are fewer marketing restrictions, would the Unit Trust Industry be so worried?

 The whole argument comes down to money or rather the fear of the loss of profits which have been pretty good for PEP plan Managers.

The fact of the matter is that CATmarking is only going to be applied to Index Tracking products and virtually every unit trust manager except those recently established like Virgin, Direct Line and, of course, netPEP, manage funds on an active basis. Tracker fund fees and charges are a fraction of those for managed funds hence tracker funds represent only 5% of total Industry Funds under management. But in terms of actual sales, trackers accounted for 20% of PEP sales in 1997 which indicates that the general public want cheaper and easier to understand products.

The Unit Trust Industry therefore has a dilemma. What will the long-established unit trust managers do with all those expensive funds and products which generate good profits to feed highly paid fund managers, sales support staff and advisors?

Right now there are no answers largely because the performance of over 95% of these expensively managed funds have failed to beat the FTSE 100 Index, not just over the last year but over the last 3 years as well.

Critics of the CATmarking system reckon that trackers are a form of financial levelling or "dumbing" down. But if the managed funds can’t beat the performance of trackers and everybody switches to trackers, the customer will be paying much less for the same or a better service.

This document is issued by MBO Advisory Partners who are regulated by the SFA. Any opinions expressed herein reflect best judgment and information at the time of writing and are subject to change without notice. Reference(s) to any investment(s) in this document is/are not an offer or solicitation to buy or sell by MBO Advisory Partners or any named contributors to this document. Remember the price of units and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. PEP and ISA tax reliefs may change in the future and their value will depend on your individual circumstances.
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