Millions losing out in cash ISA debacle as banks make it hard to switch to better rates

News - Savings

Written by Ray Clancy

Wednesday, 31 March 2010 08:50

Some 15 million cash ISA holders in the UK could be losing out on interest worth up to £158 million as banks drop savings rates after a year and make it hard for them to switch.

The claim is part of a super complaint to the Office of Fair Trading by Consumer Focus who says that the market is not working in favour of ISA holders.

The complaint is being made under the terms of the Enterprise Act 2002 and obliges the OFT to respond within 90 days with a decision on what action it plans to take.

An investigation by the consumer champion shows that a third of the UK population has a cash ISA and consumers view them as safe and reliable accounts suitable for long term saving. But on average ISA holders are getting less than 0.5% in interest despite the eye catching rates, currently in excess of 3%, at which they are often brought into the market.

These ‘bonus' headline savings rates usually drop after a year, often leaving savers with uncompetitive long term rates. People could get higher rates if they switched more often but they face unfair obstacles in transferring their accounts, due to poor and bureaucratic processes used by providers.

Consumer Focus found that a third of people said switching their cash ISAs took longer than five weeks. Only one in 10 transferred in less than two weeks. Consumers are also baffled by a lack of communication making it difficult to compare accounts. Often savers do not know their interest rate or even the name of their account, especially if it is an old account, which may have been re-named or superseded. In the last tax year only 12% of cash ISA holders switched their account.

‘At less than half of one percent interest the average ISA saver is getting a poor deal. Of course, people could vote with their feet and switch to the 3% deals currently on offer but we are concerned that the cumbersome transfer process and poor information provided by the banks inhibits doing this. There is evidence that very few people do actually switch their accounts. It beggars belief that in 21st century Britain it takes a month to transfer information and funds from one bank to another,’ said Mike O’Connor, chief executive of Consumer Focus

‘Cash ISAs are designed to encourage long term saving but many people find their rates slashed to next to nothing after a relatively short time. Providers are using consumer inertia and confusion to drop ISA rates faster than on other accounts. The way providers inform customers about their accounts makes it difficult to get the best deal,’ he added.

He is calling on the OFT to address a number of issues including: unnecessary and costly delays people face when transferring accounts; the practice of luring in new customers with misleading bonus headline interest rates, which lapse, leaving the long term saver on uncompetitive rates of interest; and a lack of clarity that makes it difficult for consumers to find out their interest rate, especially on older accounts..

It is also concerned about the confusion about which account a saver has, owing to the proliferation of similar and similarly-named products and arbitrary rules imposed by cash ISA providers forbidding transfers into some of the most attractive accounts. For example, it says that the best paying accounts often don’t accept transfers from previous years’ ISA allowances.

‘We want all cash ISA statements to give the name and issue number of the account, as well as the current rate of interest and the date at which any bonus period ends. The Banking Code only asks banks to consider providing this information, we are calling for it to be mandatory,’ added O’Connor.

But the British Bankers’ Association hit out at the complaint. ‘Consumer Focus has chosen to launch its super complaint without any discussions with the banking sector. If we had been given the chance, we could have explained the work we are already doing with the regulator to help ISA customers,’ it said in a statement.

‘From May, customers will be given advanced notification of any material reduction in the interest rate on a cash ISA, plus advance notice of the end of any bonus or introductory rate. Consumer Focus erroneously refers to the Banking Code rules on this issue, but these were superseded by Financial Services Authority rules last November.’