Few would argue that achieving the levels of economic growth necessary to reinvigorate the economy and repair the public finances will need a much greater level of investment in the UK Stock Exchange.
This was the central tenet of Chancellor Rachel Reeves’ Mansion House speech last week, although it was an address which was most notable for what it didn’t contain: the much-heralded but ultimately once-again delayed reduction in the annual cash ISA allowance.
When ISAs were introduced in 1999, there was a £3,000 cap on cash investment, within the overall limit of £7,000. It was George Osborne who merged the allowances in 2015, giving savers the freedom to allocate their investments as they wished.
If reports are to be believed, Mrs Reeves is keen to encourage us all to invest our savings in UK businesses, with a paring back of the freedom to put the entire annual allowance into a cash ISA.
However, it would seem that once again she has listened to lobbying from banks and building societies, which make the claim – which many suggest doesn’t hold water – that cash ISAs are vital to maintain the liquidity needed to fund the mortgage market.
So the Chancellor has again decided to leave the cash ISA limit alone, and instead announced measures to reduce regulation on the financial services sector and a campaign to try to convince Britons of the benefits of investing in stocks and shares.
No-one would argue that the sector needed much tighter regulation in the aftermath of the 2008/9 banking crisis, but it is probably fair to say that the pendulum swung too far the other way, especially given the calmer and more responsible approach taken by financial institutions in the 17 years since the crash.
Too often excessive regulation is a boot on the neck of innovation. At a time when the government is crying out for the financial services sector to innovate, attempts to do so frequently come up against regulatory barriers. Doing something new is often too hard and/or too expensive, and so it doesn’t happen.
If we are to encourage people, and especially private investors, to put their money into stocks and shares, we have to be more proactive about selling the benefits, and perhaps a little less shouty about the risks.
Every conversation with a potential new investor starts with a lengthy conversation about their attitude to risk, and that kind of sets the tone. No wonder cash investments are so popular, even if history shows they give smaller long-term returns than investing in stocks and shares.
This risk-aversion is unfortunately a national trait, and it’s not confined to finance. Even as children, we are increasingly discouraged from taking risks, so it’s small wonder that as adults we are generally less capable of weighing up the risk/benefit equation.
Such reluctance to take even calculated risk endangers the economy in other ways, too. If we raise a generation too timid to run the risk of failure, where will the next cohort of entrepreneurs come from?
Despite kicking the cash ISA issue can down the road, it is likely that the Chancellor will eventually bite the bullet and reduce the annual limit, perhaps as early as this autumn’s Budget.
That could be an effective stick to force investors to look for other homes for their money, but unless the carrot of increased returns and a sensible risk/reward balance is adequately communicated to timid investors, it’s likely that they will swerve the stock market and simply find another cash-based alternative for their investment.