ISA providers face consumer super-complaint

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The Independent Online

A consumer group made a super-complaint against ISA providers today, claiming that savers were losing out on up to £3 billion of interest because of the way the market operated.

Consumer Focus accused cash ISA providers of using headline-grabbing rates to lure in savers, but these were typically slashed after the first year, leaving people with uncompetitive returns over the long term.



It said consumers also faced unfair obstacles if they tried to transfer their account to another provider, due to what it described as "poor and bureaucratic processes".



Research carried out by the group found that in a third of cases it took more than five weeks for people to transfer their accounts, with only one in 10 transfers completed in less than two weeks.



At the same time, it said it was often difficult for savers to find out how much interest they were receiving, as people often did not know the name of their account, particularly if they had had it for many years and it had been renamed or superseded.



The average ISA is currently paying returns of 0.41%, but the rates available range from 0.05% to 4.6% for a five-year fixed-rate ISA.



But despite the large differences between the returns on offer, only 12% of ISA holders switched provider during the past tax year.



Mike O'Connor, chief executive of Consumer Focus, said: "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 group has submitted a super-complaint to the Office of Fair Trading, which now has 90 days in which to respond.



It is calling on the OFT to address the unnecessary delays people face when transferring ISAs, and to put an end to what it terms price-baiting, under which consumers are lured into products by introductory rates which soon fall.



It also wants all ISA statements to contain the name, issue number and current interest rate of the account, as well as the date at which any introductory bonus ends, to make it easier for consumers to monitor the returns they are getting and to shop around.



Consumer Focus also wants to see an end to the current practice under which many ISA providers will not allow people to transfer money they have built up during previous tax years into accounts which are paying the most attractive rates.



ISAs were introduced in 1999 to encourage long-term saving. Around a third of people have an ISA in which they collectively have £158 billion saved.



People can currently save up to £7,200 into an ISA each tax year, half of which can be held in cash.



The annual limit was increased to £10,200, of which £5,100 can be held in cash, for the over-50s in October last year and will come into force for other savers from April 6.



Chancellor Alistair Darling announced in his Budget last week that the annual ISA allowance would rise in line with inflation each year.



Adam Phillips, chairman of the Financial Services Consumer Panel, said: "Here is yet another example of banks being more interested in making money than in their customers getting a fair deal.



"We have seen it with sales of payment protection insurance, with unauthorised overdraft charges, and now with cash ISAs.



"We fully support the action of Consumer Focus issuing a super-complaint to the OFT on the basis that the market is not working for consumers. At the same time we will press the FSA to take action."



But the British bankers' Association criticised Consumer Focus' approach.



A spokesman said: "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.



"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."



"The industry introduced best practice guidelines for cash ISA transfers in 2008 and these clearly set out the out timescales for action to be taken by the old ISA manager and the new one. Providers will aim not just to meet them but to better them as much as possible."

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