ISA Eligibility - The need for clarity and automation

Is ISA eligibility and continued monitoring overlooked? Is it misunderstood? Does anyone care?

I don't know whether, like me, you've been on the receiving end of an email from your stockbroker informing you of their error in allowing an ineligible stock to be purchased and held within your ISA?

It's not that long ago that Trading212 had to confess to such errors and caused weeks of endless questions and outrage on their community forum web page.

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It's also came to light that several AJBell YouInvest clients received similar emails in late 2020. Several YouInvest ISA clients'contacted me asking what was going on and if AJBell were correct in their assessment of certain stocks.

Doing some deep dives into a few other brokers' platforms I can spot mistakes. This not only requires the time and effort of recitifcation but also carries untold negative PR. It also suggests procedures and training need strenghting in-house. You buy an asset in good faith into your ISA, make a profit (hopefully) and then be told that you can no longer hold that asset in that tax wrapper. The approaches these platforms take to recitify the situation has, reportedly, been very different. There is certainly potential for the end client to be exposed to unexpected Capital Gains. That's not a conversation you want to be having.

So why does this happen?

The Rules

There's too many answers to that. But, and I'm speculating here, the primary reason is the ISA Guidance rules are too complicated in some areas and too vague in others. The second reason is very few back office operations actively monitor ISA eligibility on an ongoing basis.

Set and forget

Once an asset is set-up and trading on that platform very little attention is paid to that asset. You become reactive to notifications from your chosen data vendor if a Corporate Action is approaching or you receive messages from the Registrar in other certain senarios. Trouble is, the assets you hold on platform can, and do, change without notification. When they do change do your staff know how that change may impact the assets' ISA eligiblity? In some instances the asset you hold for a client can not be assessed for ISA eligiblity in isolation! What does that mean? Take ADRs - American Depositiary Receipts - according to the rules you need to assess an ADRs eligilibity by way of it's "parent" stock. So you need to monitor the parent - but that's not the asset you actually hold. So you need to monitor and pay for the data feeds to monitor an asset you don't hold? Yes, that's correct. Were the parent stock listed on, for example, the NYSE one-day but fell on hard times, fell in price and got demoted from the main board to the OTC market the "parent" stock of your ADR might now have changed the eligible status of the ADR you client holds in your ISA. Phew!

The Data

Finding a data source or multiple data sources to assess eligibility based on HMRCs ISA guidance is tricky. You'll certainly be quite able to assess an ETF on the LSE easily. But your asset universe likely spans thousands of stocks across tens of exchanges. Do you know all your Hong Kong stocks are on the main board and not the GEM segment? Do you know if your Russian stocks (either directly or that support your ADRs) are on a "level" of the MOEX lower than 2? Swiss "Reporting Standards"? How do you identify the "parent" stock of your ADRs? Dual listings? What about the vast array of OTC stocks you trade - where, if anywhere, do they have a primary listing? How do you assess if a "company" is actually a "company"? Sounds wild? It is. Certain entity structures would not meet the HMRCs definition. So it continues - VCTs? GDRs? Is your Korea stock on the Kosdaq or the Kospi? What about the "trades on an EEA Exchange" rule? Can you scan all German Open ('Freiverkehr') Markets? Finding sources of data to assess these datapoint on an ongoing basis is hard.

The Solution

FinKi has developed a system to assess the datapoints required. Almost all exchanges are covered. Almost all stocks are covered. Every datapoint required to ensure continued compliance is available on demand. In API form, on the web or as a simple Excel add-in. Your choice.

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