Fur flies over CAT-mark Standards guarantee proposal could change in light of industry opposition

As proposed, the CAT-mark would give consumers a Government-backed ''guarantee'' to tracker funds - but exclude all other unit or investment trusts.

Angela Knight, the former Treasury Minister who is now head of the Association of Private Client Managers and Stockbrokers, told Money World: ''The industry believes - and this is widespread right across the industry - that this is a big mistake. There is a lot of lobbying taking place and we could see another shift.''

Knight said in many cases a CAT-marked fund would be ''distinctly misleading for the investor''. She added: ''Tracker funds are untried in a bear market or in turbulent circumstances. The way it is being constructed means you could not produce a CAT-marked equity Isa and also offer advice.''

ProShare, the independent group promoting share ownership, said this week it would carry out market research into the proposed standards which ''may not meet the needs of the majority of savers whom the Government is trying to encourage into investment''.

ProShare said its previous research earlier this year had found that low income and novice investors would be attracted by share-based products that offered steady performance, an element of guarantee to downside risk, and advice, which they were prepared to pay for. Charges were not a prime concern providing the product met other needs. ''The currently proposed CAT standards do not take into account these findings.''

Bob Hayle of the unit trust industry body, AUTIF, said benchmarking exclusively tracker funds would give consumers a false sense of security.

''People will think it has the Government's seal of approval. But this is a risk investment. A much better approach is to label the product according to risk. A deposit account would be labelled as safe, a guaranteed equity fund as guaranteeing your money back after so many years, while all equity-based Isas would be labelled risky.''

The Association of Investment Trust Managers said it was in favour of benchmarking but big international general trusts should not be discriminated against. AITC figures show #1000 invested in the average international general trust 10 years ago would now be worth #4538 compared with #4149 if it had been invested in the FTSE Actuaries All-Share Index.

AITC chairman Andrew Barker said the average investor would be steered away from the benefit of the low charges and long-term performance of investment trusts, which spread the risks over a number of different stock markets.

The Government has introduced the concept of benchmarking in the run-up to the launch of the Isa next April. The industry is now studying Treasury Ministry Helen Liddell's Isa consultative paper, launched last week, which includes her ideas on the benchmark. Liddell will complete the consultation by the beginning of July.

One of the Government's main aims in introducing Isas is to encourage those on low incomes to acquire the savings habit. However, the Government is worried that fear of being ripped off could prevent this happening. By benchmarking Isas that meet certain criteria, consumers can be confident that charges are being kept to the minimum and that there are no nasties lurking in the small print.

Isas go on sale for the first time in April 1999, when they will replace Peps and Tessas, which will no longer be sold. Isas can invest in cash, life insurance, and stocks and shares including unit trusts and investment trusts. The maximum that can be invested is #5000 each year, with an introductory #7000 in the first year.

Under the current proposals, only the following Isas will qualify for the CAT-mark, which stands for: reasonable cost, easy access, and decent terms.

CASH ISAS

Cash Isas must pay an interest rate no lower than a set percentage below base rate; there should be a minimum subscription and withdrawals should be available within a set number of days, and there must be no other restrictions on withdrawal or hidden terms.

INSURANCE ISAS

The charges on insurance Isas must be a set percentage a year and there is to be no other charge, there is a set minimum investment for both regular and lump sum premiums and the surrender value should not be less than the premiums paid after a set period of years.

STOCKS AND SHARES ISAS

The charges on stocks and shares Isas are to be set and no other charges will be allowed, and there will be a set minimum payment. Unit trusts and the new style open-ended investment trusts must track a general UK index, shares and units must have a single price, and market risk is to be highlighted.

There will be other rules that will apply to all CAT benchmarked Isas covering advertising, which must be clear and straightforward and in plain English; tying in, which makes the purchase of one type of saving contingent on buying another, won't be allowed; and consistency.

Companies whose products don't meet the benchmark standard, which includes most unit trust and investment trusts, are still free to sell their products as Isas. But they must explain the risks and they obviously won't carry the CAT standard, and as a result will be aimed at the more sophisticated investors.

Low-cost producers like Virgin Direct, which has pioneered a low-cost, no-frills tracker fund Pep, are delighted. Virgin has claimed that if all Peps sold over the past year had been up to the benchmark standard consumers would be #3200m better off.

Virgin Direct's chief executive, Rowan Gormley, said he believed Isa benchmarking marked the beginning of a campaign to restore consumer confidence in financial services.

''The stakeholder pension looks set to be benchmarked and there is little to stop the same approach with other areas, such as banking, where the consumer still gets a raw deal.''