ISA savers £3 billion out of pocket
Millions of ISA savers are losing out on interest worth up to £3 billion each year because banks and other providers are not offering them a fair deal on products, rates or service.
New research shows the average ISA saver is earning less than 0.5% in interest despite the eye-catching rates offered when products are first launched.
Independent consumer group Consumer Focus says the ISA market is not working for consumers – and as such has submitted a so-called super complaint to the Office of Fair Trading (OFT).
A super-complaint is a request that the OFT undertake a full investigation into a market to determine whether it is significantly harming consumer interests. The regulator must respond to Consumer Focus’ super complaint within 90 days with a decision on what action it plans to take to tackle the problem.
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Mike O'Connor, chief executive of Consumer Focus, says: “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.”
The super complaint raises a number of issues:
• The “unnecessary and costly delays” people face when transferring ISAs.
• ‘Bait pricing' - the practice of luring in new customers with bonus interest rates, which lapse, leaving the long-term saver on uncompetitive rates of interest.
• A lack of clarity that makes it difficult for consumers to find out their interest rate, especially on older accounts.
• Confusion about which account a saver has, owing to the proliferation of similar (and similarly-named) products.
• “Arbitrary” rules imposed by cash ISA providers forbidding transfers into some of the most attractive accounts - the best paying accounts often don't accept transfers from previous years' ISA allowances.
For example, the two leading instant-access ISA accounts currently on the market – from Santander and Barclays – do not accept transfers. This means savers with cash ISAs from previous tax years must either settle for a less competitive rate or leave their savings where they are, earning a token rate of interest.
“There is evidence that very few people do actually switch their accounts,” says O'Connor. “It beggars belief that in 21st century Britain it takes a month to transfer information and funds from one bank to another.”
Consumer groups have welcomed the super complaint.
Adam Phillips, chairman of the Financial Services Consumer Panel, says that, when it comes to ISAs, banks are “more interested in making money than in their customers getting a fair deal”.
Phillips adds: “We have seen it with sales of payment protection insurance, with unauthorised overdraft charges, and now with cash ISAs. It cannot be a fair outcome for consumers – or what the government wanted to achieve in providing this tax incentive – that people end up with little more interest from their tax-free account than they would get from an ordinary account.”
Which? agrees that consumers are being disadvantaged by banks reducing savings rates by stealth as well as lengthy delays in transferring ISAs.
But the British Bankers’ Association (BBA) has slammed the complaint.
It argues that the sector is already making changes to help ISA customers. For example, 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.
It also claims the investigation carried out my Consumer Focus is “misleading”, as it is based on an online poll of just over 400 people.
"Interest rates in general are low, but banks still want to offer competitive rates and attract new customers,” the BBA adds. “From time-to-time they will launch new accounts with different features that might include higher interest rates or fixed interest for a set period. We would always encourage customers to shop around for the best deals."
Banks are already obliged to follow the Financial Service Authority’s rules on providing a prompt and efficient service to customers wishing to switch their cash ISA.
The OFT has confirmed the super complaint and says it will now consider the issues raised. It will also invite interested parties to provide any evidence which may be useful to the OFT's assessment.
A complaint made in the UK by a government-approved watchdog or consumer organisation on behalf of consumers which is then fast-tracked by the Office of Fair Trading (OFT). For a super complaint to be valid, it has to be about a “market feature, or combination of features, such as the structure of a market or the conduct of those operating within it, that is or appears to be significantly harming the interests of consumers”. In March 2011, the OFT received a super complaint from consumer watchdog Which? asking the regulator to investigate excessive surcharges imposed by issuers of credit and debit cards.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.