Millions of savers are set to benefit from a major shake-up of the cash Isa market announced by the Office of Fair Trading (OFT) today.
Banks and building societies have agreed to cut the time it takes for savers to switch money between accounts to 15 days in response to a super complaint about the Isa market which was submitted to the OFT by Consumer Focus in March.
Under current industry rules, banks and building societies have up to five weeks to move a customers money between accounts.
The OFT has said that the consumers should suffer any days of lost interest during the process of switching accounts.
Consumer Focus has said the new transfer rule, which will come into effect by the end of the year, means savers would pocket £14.5 million in interest that had previously vanished during the transfer process.
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Banks and building societies are also to be required to include the interest rate paid to savers on annual statements for the first time from the beginning of 2012. Currently only 15 per cent of the UK’s 17.5 million Isa savers are told of the return on their account.
Consumer Focus alleged that cash Isas pay derisory rates of interest and that banks use unfair obstacles to stop people from switching to better deals.
It criticised banks and building societies for the difficulty consumers faced when trying to switch to a more competitive rate with another provider, in what it described as a “poor and bureaucratic processes”.
The OFT has recommended that the Financial Services Authority, the City watchdog, changes its current industry guidance and takes regulatory action against banks and building societies if the agreed timescales are not met.
Clive Maxwell, the OFT’s Senior Director for Services, said: “Our work over the past 90 days has revealed that, whilst there is often strong competition between providers in this market to win new savings, the transfer of cash Isas is taking too long and there is not enough transparency over interest rates.
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“The voluntary changes announced today will give consumers a fairer deal and drive stronger competition. We are grateful to Consumer Focus for bringing these issues to our attention.”
In its complaint in March, Consumer Focus also highlighted the practice of luring in customers with headline-grabbing interest rates, only to dramatically reduce the return after a year.
However, the OFT has decided not to act on the wide-spread use of introductory bonuses, arguing that the problem would be sufficiently countered by the inclusion of interest rates on annual statements and an improved switching time, making it easier for customers to change providers if a rate falls too quickly.
Wendy Alcock of MoneySavingExpert.com, the consumer website, said: “These new measures are great news for savers, many earning pitiful interest, who need much clearer information on their accounts.
“Even for savvy savers who can plot a path through the intricate information, the process of transferring between cash Isas to increase your rate is a nightmare, so it’s to be hoped the OFT’s intervention will mark a change of tide for transfers, making them far smoother.”
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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.
Consumer Focus found that in many cases the tax benefit of an Isa account is more than offset by the poor rate of interest. The average cash Isa pays interest of 0.41 per cent, it said. The current rate of inflation, with the consumer price index at 3.4 per cent, means that millions of nest-eggs are actually shrinking in real terms.
Mike O’Connor, chief executive of Consumer Focus, said at the time of the original super-complaint in March: “It beggars belief that in 21st century Britain it takes a month to transfer information and funds from one bank to another.
“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.”
Isas, or individual savings accounts, were announced by Gordon Brown in 1998 and introduced the following year.