Cash ISA rates "scandal" to be investigated as savers lose £3bn every year

Cash ISA market "not working", says consumer group

By Elliot Wright, 31st March 2010

A major probe into cash ISAs will be launched today after it emerged that 15 million savers could be unfairly losing out on £3bn worth of interest every year.

Consumer Focus will join forces with the Office of Fair Trading to launch a 'super-complaint' after an investigation revealed the £158bn cash ISA industry to be "not working" for consumers.

A survey by the independent consumer champion found the average cash ISA holder to be on a meagre interest rate of less than 0.5%, far below the eye-catching rates of over 3% which ISA holders usually begin on.

The average cash ISA holder is on a meagre interest rate of less than 0.5%

It found the 'bonus' headline cash ISA savings rates to usually drop after a year, leaving savers on uncompetitive deals. Savers could enjoy higher rates if they switched, but Consumer Focus also discovered that cash ISA holders face unfair obstacles when trying to transfer accounts, due to providers' often inadequate and complex switching services.

It says that by not switching, savers can lose out on between 1 and 2% interest on their savings. This equates to between £1.5 and £3bn every year for every cash ISA holder collectively.

"At less than half of one percent interest the average ISA saver is getting a poor deal," said Mike O'Connor CBE, Chief Executive of Consumer Focus.

"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," he added.

The 'super-complaint' will address a number of failings Consumer Focus found in the cash ISA market:

• The unnecessary and costly delays people face when transferring accounts.
• 'Bait pricing' - 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.
• Lack of clarity, making 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.

Consumer magazine Which? welcomed the investigation. Chief executive Peter Vicary-Smith said: "For the market to function properly, consumers need to know what interest they are receiving and to be able to shop around and transfer their money in order to get 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."

Claims Financial