Another Win for the Banks

A tax break created to encourage millions of people to save has degenerated into a £3 billion a year rip-off that enriches the banks, according to a damning verdict from the statutory consumer watchdog.

Consumer Focus (formerly the National Consumer Council) has made a formal complaint to the Office of Fair Trading alleging that cash Isas pay derisory rates of interest and that banks use unfair obstacles to stop people from switching to better deals. The OFT has 90 days to respond.

“It beggars belief that in 21st century Britain it takes a month to transfer information and funds from one bank to another,” said Mike O’Connor, chief executive of Consumer Focus. “The average Isa saver is getting a poor deal.”

Banks and building societies are currently engaged in a marketing frenzy to persuade people to pile more money into Isas before the end of the tax year on Easter Monday. About 15 million people, a third of all adults, own at least one cash Isa; £158 billion is invested in the product category.

Consumer Focus estimates that cash Isa savers are being denied between £1.5 billion and £3 billion a year in interest payments. In many cases the tax benefit is more than offset by the poor rate of interest. The average cash Isa pays interest of 0.41 per cent, it said. With inflation running at 3 per cent, millions of nest-eggs are therefore shrinking in real terms.

Only 12 per cent of Isa holders switched to better deals last year. One survey showed that 47 per cent of switches took two to five weeks and 33 per cent took longer than five weeks. The watchdog accused banks and building societies of putting hidden barriers in place to make it hard to switch, exploiting customer inertia and manipulating the best-buy tables.

Historically, cash Isas paid higher interest rates than ordinary savings products, but Consumer Focus said that these headline rates were usually dropped after a year. Santander, which owns the old Abbey and Alliance & Leicester brands, offers an Isa with an interest rate of 3.5 per cent that plummets to only 0.5 per cent after a year.

Complaints to the FSA about cash Isas have more than quadrupled over three years to reach more than 48,000 in the first half of 2009.