Over the next few hundred years, life speeded up significantly and eventually, in 1944, the Inland Revenue introduced weekly and monthly taxation in the form of PAYE. Whilst tax was deducted (and handed to the taxman) much more regularly, reporting of the figures to HMRC continued to be done annually until 2013 and the rest of the tax regime continues to operate on an annual cycle.
The reason for mentioning this is that the Financial Services industry is inextricably bound up with the tax system; apart from the odd millionaire, the majority of UK investors entrust their cash to asset managers, at least in part, to benefit from favourable tax treatment. Whether it’s a pension, ISA, bond or VCT, the wrappers which house the majority of UK retail investments attract money because they offer to reduce the tax we pay.
This symbiosis between product wrappers and the tax regime has, in turn, caused many providers’ processes to operate at a similar speed to the tax cycle. For example, statements are typically produced annually, portfolios are rebalanced monthly, switching can take a week and many product providers can only handle regular payments on a particular day of the month.
For many years none of this mattered very much as most other common tasks happened at a similar pace. Letters took days to arrive, news was printed daily and, if you wanted to watch a favourite film, you’d take a trip to the rental store and hire it for the weekend. Now we have dozens of ways to instantly message each other, we get news updates to the palm of our hand in real time and we can watch pretty much any film ever made whenever we like. Suddenly the timescales of Financial Services seem out of step with the rest of our lives.
This mismatch reared its head recently with the advent of Pension Freedoms. With apparently very little consultation, the Chancellor of the Exchequer decided that it would be a great idea to remove the decades-old requirement to buy an annuity with your pension pot and allow people to spend it however they liked, whenever they liked.
IT systems which had evolved steadily over the years to cope with ever more arcane rules around when a pension could be turned into a monthly income stream (with correspondingly steady tax receipts to HMRC), faced meltdown. Suddenly, they needed to let consumers withdraw any sum they chose from their pension pot, whenever they liked and with the right level of tax deducted. Not surprisingly, many providers failed to support the full spectrum of freedoms, whilst others saw an opportunity to promote their own niche pension consolidation services.
A few software companies (including Altus) saw an opportunity to plug the gap with modern solutions which could support flexible payment arrangements over multiple pensions and apply PAYE tax across all of them. These systems represent a significant step forward in technology, but they are still limited by the speed of the PAYE system itself as they rely on knowing up to date tax codes and details for payees. Currently the process for checking and changing a tax code is manual and takes days or weeks to complete.
Financial Services systems will only be liberated from the shackles of tax history when the HMRC finally embraces the API economy and enables modern systems to track and update citizens’ tax details in real-time. The HMRC does have a “Making Tax digital” programme which may one day drag their systems into the 21st Century but, for the foreseeable future, tax will remain in the technology slow lane.
Until someone radically rethinks UK taxation, much of the rest of the Financial Services industry will be stuck there with them as they crawl along behind a very sluggish tax juggernaut.