As you may be aware Scottish Friendly have been taking part in the debate on the government’s consultation on allowing CTFs to transfer in to Junior ISA. We remain firmly committed to our initial position here whilst we noted issues with it here. However if asked what we believe is the best option for customers and the industry (and that is precisely what the consultation asks) then Scottish Friendly has a very clear view.
Rather than allow individual (or what we call one-way) transfers from CTF to JISAs the government should merge the two systems to create a wider and more efficient market. The clear danger as we set out below is that the government opts for a policy which is flawed and will only end up being an expensive and unnecessary stepping stone for all involved.
You’ll find the full text of our response below where we set out what we think is a compelling case to get on with it and merge the two regimes.
Do respondents believe that the transfer of funds from a CTF to a Junior ISA should be permitted?
Yes, whilst there is no evidence of a mass demand for this functionality there are clear customer segments that wish to exercise their right to choose the best child savings plan. Whilst there is already considerable choice and competition within the CTF market opening up those choices to include the JISA market can only improve innovation, pricing and client outcomes.
However the proposal to only allow CTF to JISA transfers does not maximize competition, as transfers can only operate in one direction. This would result in a sub-optimal solution which would inevitably lead to the bulk transfer/merger of existing CTFs to JISAs completing the move to an optimally competitive market as well as enabling providers to survive and flourish in this market.
Would allowing CTF funds to be transferred to Junior ISA have any significant impact upon the viability of the wider CTF market, including on the availability of suitable products for children whose funds remain with CTF?
It is likely that the customer segments referred to in Question 1 will tend to be the most active customers in terms of contributions. Many providers of CTF accounts will have based their long term profitability on the book of business being diverse in terms of clients with varying degrees of contributions and on the persistency of the business being high.
It is therefore conceivable that some providers could face considerable difficulties with their higher net worth (and hence more profitable) clients electing to switch out. This could lead to the provider being left with a rump of low value, if not loss making, clients.
We feel that these fears are overdone and in fact miss the point of the effectiveness of the current CTF market. For example this potential situation already exists: CTF clients could easily switch to another CTF provider if they felt they would get a better service and product elsewhere. It is also the case that these high net worth clients are likely to be those clients most likely to exercise their option to switch. There is no evidence, that we are aware of, that this is a problem and this may be because the CTF market is already extremely competitive, especially at the stakeholder end of the market.
We believe therefore that the industry has very little to fear from an increase in competition provided a level playing field is created between CTF and JISA providers.
Consequently we believe that the proposed solution is flawed in that it does not create a level playing field with a one way market, therefore it will not fully free the current CTF providers to compete effectively in the market.
To obtain the ideal customer outcome then the most effective result would be to allow to transfer both ways. This would be politically impossible and only lead to client confusion (as it would effectively give the client a choice of a CTF or a JISA) however a bulk switch/merger of CTFs to JISAs would effectively create this ideal environment and encourage the highest level of competition and in our view the most best industry and client outcome.
A merger of both accounts would enable and encourage existing CTF providers to improve their proposition as they would be able to compete not only for other CTF accounts but also new JISA money. The force of this competition and the economic requirement to maintain a diverse book of business means that CTF providers are likely to be fierce competitors in this market, again improving overall client outcomes.
Therefore by selecting a one way transfer solution (from CTF to JISA only) competition will be denied to the industry resulting in an outcome which is entirely unsatisfactory for providers and consumers.
The market attraction of the optimised competitive outcome plus the need for the legacy CTF providers (from their boxed in market) will eventually force a further change in policy where CTF bulk transfers to JISAs becomes inevitable. Achieving this change in two stages will result in more cost and disruption for the industry and regulator (FCA) with negative consequences for clients as costs are passed on.
Would the proposed approach outlined above under ‘voluntary transfers’ provide a workable basis to allow the transfer of funds from CTF to Junior ISA?
As noted above the proposed solution would likely be a short term solution and one that would result in a less than optimal outcome for the market. It would be an expensive and unnecessary stepping stone to the cleanest, simplest and most beneficial solution of a bulk transfer of all child savings policies to JISAs.
What would be the impact of the proposed approach, including one-off or ongoing costs and benefits for accountholders and providers?
In practice it is likely that few customers will exercise their right to switch but it is likely all account holders will see a raising of standards from their existing providers as they react to the client’s increase in choice. Indeed market pressure is likely to become apparent on the industry as certain CTF providers improve their service and offerings but only those clients lucky enough to have a CTF will be able to transfer to another CTF provider.
This underlines our belief that only a fully competitive market which would result from a bulk transfer/merger would lead to the best client outcome.
CTF providers will face a difficult series of decisions under the proposed solution. Providers can either accept the inevitable slow drip of high value accounts from their book and cut costs and service levels, increasing the likelihood of clients leaving, which will only exacerbate the situation. Alternatively, at cost, they can improve their proposition to stem the loss of business but (because transfers are only one way) the inability to attract new business to compensate for any losses will mean that this route is less likely to be selected by providers. Therefore we believe that policy decisions should aim to create the best possible client outcome and this points clearly to the bulk transfer/merger option over the individual transfer option.
If the Government proceeds with changes to the current rules on transferability, do respondents agree that its proposal to allow the transfer of funds on a voluntary basis is the best course of action?
No, whilst the current proposal will improve the position it will not result in the best client or industry outcome and depending on how long it takes to move to a bulk transfer/merger policy this proposed policy would be an expensive and entirely unnecessary steppingstone.
Are there any circumstances under which a merger of CTF into Junior ISA would be preferable?
It is our view that the merger or bulk transfer of CTFs to JISAs is always the preferable option.
Do respondents agree with the approach to legislate to allow voluntary transfers in the first instance, but also to provide scope for further intervention at a later date, should this prove necessary as a result of developments in the CTF market?
No it is our view that this will simply underline the temporary nature of this decision with all the inevitable and unnecessary costs and disruption to the industry, regulators and providers.