A survey suggests that 5 per cent of ISA holders have broken the rules by buying the two different versions of the product. As a result the Government faces pressure to tighten the rules on financial advice to halt the mis- selling.
About 4.5 million people have bought ISAs since their launch in April, when they replaced PEPs and Tessas. Investors can buy mini-ISAs containing either shares, cash or insurance, or a maxi-ISA able to contain a combination of all three, but they are not allowed to buy both types.
A Mori poll for the Building Societies Association found that 19 per cent of buyers were not able to say which type they had bought. Of those that could, 26 per cent have a maxi-ISA, 44 per cent have a mini-ISA, and 5 per cent have both.
The Inland Revenue said it would demand that savers closed down second ISAs taken out in breach of the rules when it caught up with them at the end of the tax year. It would then be up to the firm that mis-sold the ISA to resolve how to convert it into another form of investment or savings account.
"If people have already had the benefit of interest free of tax, then they will also be liable to pay that tax back," the Inland Revenue said. The Association of Unit Trusts and Investment Funds (AUTIF) hopes to persuade the Revenue to be flexible, perhaps treating some maxi-ISAs as minis. That would bring taxpayers with a maxi-ISA containing just equity investments of up to pounds 3,000 back within the rules.
Philip Warland, AUTIF director-general, said part of the problem was that tough laws on the quality of financial advice for equity and insurance sales did not apply to cash-only ISAs. "It would be good if the Banking Code be made as strong as the advertising code," he said.
Christine Farnish, director of consumer relations at the FSA, said it had no role in regulating the quality of advice given to people buying cash-only mini-ISAs. "We have got a product here that doesn't fit with the regulations the way they have been designed up to now," she said.
Adrian Coles, Building Societies Association director-general, said Mori's survey was commissioned as many societies are concerned that ISAs are too complex. "This is evidence of misunderstanding, beyond a shadow of a doubt. It either suggests there has to be some changes made to ISAs, or that ISA providers need to give more information to customers."
Both the Treasury, which designed the ISA system, and the Financial Services Authority, which regulates it, says ISA sellers must make greater efforts to ensure customers know exactly what the ISA rules are before they buy. A Treasury spokesman said: "These are professional advice providers and they have a responsibility to understand the product they are selling."
Ms Farnish warned that the FSA would keep a close eye on the way customers who were mis-sold ISAs are dealt with or compensated when the scale of the problem is clear in April.