£3bn Battle Royal Looms on ISAs

The Office of Fair Trading is preparing to rule on a super-complaint that millions of ISA-holders are losing-out at the hands of the banks.

The British Bankers Association (BBA) is “surprised and disappointed” by the super-complaint lodged with the Office of Fair Trading alleging that some 15 million holders of cash ISAs may be losing up to £3bn-worth of interest each year because of the way banks and building societies manipulate the market.

As the BBA vigorously challenges the grounds for the super-complaint by the lobby group Consumer Focus, the OFT has until the end of June to decide what action it plans. Consumer Focus highlights five complaints about the UK’s £158bn cash ISA market:
• “unnecessary and costly” delays when people are transferring ISA accounts
• “bait pricing” to lure new customers with misleading “bonus” headline rates that lapse, leaving the long-term saver on uncompetitive rates
• “lack of clarity” makes it difficult for consumers to find out their interest rate, especially on older accounts
• “account confusion” caused by a proliferation of similar (and similarly-named) products
• “arbitrary rules” by cash ISA providers prevent transfers into more attractive accounts.

Consumer Focus wants it to be mandatory for banks’ cash ISA statements to give the name and issue number of the account, the current rate of interest and the date at which any bonus period ends.

It says its investigation shows that, on average, ISA holders are getting less than 0.5 per cent in interest despite the “eye catching” introductory rates of three per cent-plus which “usually drop after a year”.

“People could vote with their feet and switch to the three per cent deals currently on offer,” agrees Mike O’Connor, Chief Executive of Consumer Focus, “but we’re concerned that the cumbersome transfer process and poor information provided by the banks inhibits doing this.

“There’s 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. Providers are using consumer inertia and confusion to drop ISA rates faster than on other accounts.”

For the British Bankers Association, spokesman Brian Capon says: “Our understanding is that the super-complaint is virtually a last resort once every other channel of complaint had been exhausted. We’re surprised and disappointed that Consumer Focus launched this super-complaint without talking to anyone in the banking sector at all.

“If they’d spoken to us, we’d have been able to put their minds at rest by explaining what we’re already doing to help ISA customers. From this May, for instance, customers will be given advance notification of any material reduction in interest rates on a cash ISA, as well as being alerted to when any introductory bonus is due to come to an end. And we’ve produced guidelines giving step-by-step timescales for ISA transfers.”

The BBA also questions the validity of the Consumer Focus investigation. “It appears to have been an online poll of just over 400 people from the MoneySavingExpert website rather than the statistically valid sample of randomly selected people which we understand the OFT would normally expect.”

But MoneySavingExpert’s Martin Lewis hit back, saying: “We desperately need action against companies who profit by keeping savers in the dark; they deliberately avoid printing the interest rate on paper and online statements to stymie competition, and launch many similarly named accounts, so even looking up the rate is an exercise in confusion – over 30,000 signed our petition objecting to this practice.“

Even if you do get through that mish-mash, the process of transferring to increase rates, especially in the cash ISA market, is a nightmare. It’s a delight that Consumer Focus has decided enough is enough and are going to tackle this head on.”

Support also comes from the consumer watchdog Which? Chief executive Peter Vicary-Smith says that, for the market to function properly, consumers need to know what interest they’re receiving and be able to shop around for the best deals. “For too long, consumers have had to endure savings rates being reduced by stealth and lengthy delays in transferring between ISAs to get a better interest rate.”

Adam Phillips, Chairman of the Financial Services Consumer Panel, adds that, like PPI sales and charges for unauthorized overdrafts, this also showed banks were more interested in making money than in giving their customers a fair deal. “It cannot be 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.”

Meanwhile, research by Clydesdale and Yorkshire Banks shows that UK savers think it’s unfair for banks and building societies to offer lower rates on ISAs than on other savings accounts. Almost three quarters (73%) of savers want providers to offer at least the same rate of interest on ISAs as they do on the equivalent standard savings account, which incur tax on interest.

“The message to banks and building societies is quite clear – play fair on ISAs,” comments Steven Reid, Retail Director at Clydesdale Bank. “Paying at least the same on ISAs as similar standard accounts means that savers get the full benefit of the tax-free status.”

The OFT will now consider the issues to establish whether any feature may be significantly harming the interests of consumers. It will shortly invite interested parties to provide evidence for this assessment. It will publish a response by the end of June.

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