Savers face poorer deals with this year's ISAs
New rules on cash transfers mean many providers are reluctant to offer best-buy deals to customers looking to change allegiance
Sunday 30 January 2011
If record low interest rates weren't bad enough, Britain's hard-pressed savers are being warned that they face some of the poorest deals ever in advance of the individual savings account deadline on 5 April.
As a result, even savvy ISA savers who shop around for the best deals will be left with returns which are unlikely to keep pace with inflation.
Market watchers argue that providers may be reluctant to offer best-buy rates because of fears that they will not be able to comply with new rules over the speed at which ISA cash is transferred from one account to another.
These FSA rules set a strict time limit of 15 days on ISA transfers: "The Office of Fair Trading says at present it's taking firms an average of 26 days to transfer an ISA, so 15 is a big ask," said Michelle Slade from financial information site Moneyfacts.
The scale of the challenge and the potential of missing the 15-day deadline are forcing some providers to review their plans. "There is definitely a feeling that some big players are waiting and seeing whether or not they offer a competitively priced cash ISA up to the April deadline," said Ivan Gould, the chief executive of the Buckingham Building Society.
One senior executive at a leading ISA provider, who wished to remain anonymous, put it more bluntly: "No one wants to be out there with a best-buy ISA account attracting loads of account applications from consumers and ending up missing the FSA's 15-day deadline. That could result in fines, compensation payouts and masses of bad publicity." Instead, the source added, providers were likely to reserve their best deals for brand new ISA subscriptions rather than ISA transfers, as was frequently seen last year.
Andrew Hagger from Moneynet said: "It's possible that providers will do this, preferring a large number of brand new accounts opened with new subscriptions rather than accepting cash from customers bringing in money from accounts they have had for several years. Some big providers chose to do this last year and it gets around the problem of having to ensure the transfer is done in 15 days."
But Mr Hagger adds that he thinks it's too soon to say that there will be far fewer good rate offers for ISA transfer customers this year than last.
"Things don't normally heat up in the ISA market until the end of February. It is only then we will be able to tell if the pre-ISA deadline rates are a bit of a dud or not."
But Ms Slade is more equivocal. "It could be that some ISA providers choose not to offer such competitive rates in order to maintain the flow of money coming in at a manageable level. We may also see an increased number of ISAs not accepting transfers in," she said.
If some providers do run scared from offering best-buy rates, Mr Gould thinks they could be missing a trick. "ISA cash is good cash for an institution to have. If a provider attracts £5m of new ISA money it needs to hold only 10 per cent of this in such safe investments as government bonds. Whereas with a standard non-ISA account, the requirement is to hold 20 per cent in ultra-safe investments.
This means that the potential to make a good return on ISA cash is greater than on standard deposit account monies. (Ultra-safe investments tend to produce lower returns.) This is one reason why we have made sure that we are geared up for ISA transfers, but not everyone is in the same boat."
However, Mr Gould, like several senior executives in the industry is still smarting at the introduction of the 15-day ISA transfer rule.
"If it takes 20 days for another provider to transfer a customer's cash to us, we have to ensure that the new account holder receives any lost interest by the delay. Now, under FSA rules, we can claim this back but in practice that is going to be both difficult and complex.
"What may end up happening is that we end up using our own members' cash to cover a shortfall caused by the poor administration of a rival. That seems unfair."
Some of the bigger providers – the Halifax and Nationwide – have chosen to bite the bullet over ISA transfers and promise that they will start paying interest not after 15 days but as soon as a signed ISA application has been received, regardless of whether or not that have received the cash from the provider the customer is transferring from.
"The key message is not to be put off going for any deal because you are worried about the ISA transfer process," Mr Hagger said.
"In this low-rate time, it's crucial to shop around and find the best deal. And remember, with the FSA 15-day safeguard in place, you should be receiving interest even if the cash hasn't physically moved from one institution to the other."
However, the soundings from the market suggest that the number of competitive rates on offer this year may be less than in previous years.
Michelle Slade, Moneyfacts
Each ISA provider has to advise the FSA over how long each transfer takes, and if they fail to meet the deadline, they have to explain why. Savers will be able to claim interest for the time the money is delayed and providers are likely to be held to account if they persistently fail to meet the 15-day deadline.
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