MSE News: OFT announces crackdown on cash Isa rates and transfers

MarkyMarkD

The OFT "ruling" is scarcely a "crackdown" and nor is it the great victory for Consumer Focus that the news article seems to suggest.

In fact, most of Consumer Focus's poorly expressed and ill-thought-out views were dismissed outright by the OFT, as indeed they should have been.

Let's look at the key points in Consumer Focus's conclusion, and what the OFT thought of them:

Low levels of switching, caused by inertia, are observed in other financial markets. But the problem is worse in the cash ISA market because of the regulatory paper trail requirements. OFT verdict: no changes needed. The regulatory paper trail requirements are necessary.

Low levels of switching, caused by inertia, are observed in other financial markets. But the problem is worse in the cash ISA market because of the lack of investment in electronic systems for transferring funds between providers. OFT verdict: no mandatory changes, although providers can look into implementing an electronic solution. (And, as others have said, this isn't likely to happen any time soon).

Low levels of switching, caused by inertia, are observed in other financial markets. But the problem is worse in the cash ISA market because of the fact many cash ISA providers do not accept transfers into their most attractive products which makes it impossible for customers to consolidate their holdings into a single account. OFT verdict: this point totally rejected. Only a small minority of products (11% if I recall) do not allow transfers in. Lots of products paying attractive rates DO allow transfers in.

Cash ISA providers have exploited the low level of switching by eroding the interest rate paid on cash ISAs compared to other saving products and the interest rate homeowners pay on their mortgages. The rate of interest paid on cash ISAs has fallen dramatically compared to the interest rates customers pay or receive on other retail financial products. OFT verdict: this point is true, but obvious. ISA rates are higher than other savings rates (on average); savings rates cannot go negative; so other savings rates could not fall as much as ISA rates. Also, ISA rates have fallen pretty much in line with BBR and LIBOR. Mortgage rates have not fallen by as much, because the costs (of capital etc.) have increased significantly in the period.

The issues that we would like the OFT to address in collaboration with FSA and HMRC are: Use of ‘bait’ pricing with misleading headline interest rates used to lure in consumers. OFT verdict: no action required. Bonus rates are fine and benefit consumers. BCOBS rules require notification of the end of bonuses from 1 May 2010 in any case.

The issues that we would like the OFT to address in collaboration with FSA and HMRC are: The frequent creation of (but lack of automatic transfer to) new accounts which are similar to existing accounts in all respects other than the interest rate. OFT verdict: no action required. Multiple versions of new accounts is a form of product innovation. There is no obligation on providers to move customers to new accounts although they may choose to offer them.

The issues that we would like the OFT to address in collaboration with FSA and HMRC are: Confusion about which account a saver has, owing to the proliferation of similar (and similarly-named) products. OFT verdict: no action required. Multiple versions of new accounts is a form of product innovation. The OFT's view was that generally it was easy to find out the rates payable either by contacting the provider, or looking at their website. Also noted that most statements show the full product name. Only real action here was to require statements to show rates from April 2012 onwards - wow - it's one point to Consumer Focus!

The issues that we would like the OFT to address in collaboration with FSA and HMRC are: Unnecessarily bureaucratic and lengthy processes for transferring savings between cash ISA accounts used to prevent switching. OFT verdict: The process does take too long and the maximum time should be reduced from 23 working days to 15 working days. Scarcely a vindication of Consumer Focus's view - but I'll give them half a point.

The issues that we would like the OFT to address in collaboration with FSA and HMRC are: Arbitrary rules imposed by cash ISA providers forbidding transfers into some of the most attractive accounts. OFT verdict: Providers are free to exclude transfers for legitimate business reasons. No action required.

The issues that we would like the OFT to address in collaboration with FSA and HMRC are: Difficulty in accessing the prevailing interest rate being earned on savings accounts, including cash ISA account, especially of older accounts. OFT verdict: Require statements to show rates from April 2012 onwards - can't give Consumer Focus a point for this one as I've already counted it above!

We do not think it unreasonable, for example, to expect providers to commit to managing transfers within five working days. OFT verdict: don't be silly.

We would like the OFT to explore the case for an automatic transfer in circumstances where an old account is effectively replaced by another one with the same key features paying a higher interest rate. OFT verdict: don't be silly.

All in all, I am not surprised by the outcome, mainly because CF's arguments were not supported by the facts - to a large extent.

Actually, coming back to the original post, MSE Guy has it quite right:

"Providers will have to display the interest rate paid on statements, while they must also speed up switching times ..."

and not much else. No need to read the rest of the article as the OFT didn't rule anything else.

afwone

A small step, but it is in the right direction.

Still a need for MSE and others to keep shining a light into the murky world of retail savings accounts.

999pez

'Interest must be paid by the new provider within two days of receiving funds, from 31 December this year, down from the current five-day lag'.
This only reduces lost interest at the new provider. Most interest is lost from the old provider as when they do the transfer they stop interest when they print the cheque. Then it is posted 2nd class (probably on the next working day as print runs are usually overnight). Then there is the 4 day delay whilst the cheque clears. Until the cheque has cleared the old provider still has your money and you are paid no interest during this slow process.
In this day and age, why do they send the balance by cheque anyway? And the OFT is happy with this?

juicyjude

So basically, things will probably remain the same. Chaos and the customer misses out on interest! dum de dum

MarkyMarkD

999pez wrote: »

In this day and age, why do they send the balance by cheque anyway? And the OFT is happy with this?

As I've posted many times on this subject, they post the balance by cheque because they have to provide lots of information to the new provider, as well as the money.

If they sent the money by BACS and the information by post, the new provider would have to match the two up. Lots of times, one would arrive and not the other, and one without the other is useless as they cannot apply the funds to a new account without the certificate information.

BACS doesn't have space to give the necessary information.

So, electronic means are not yet fit for purpose, and won't be until a specific data and funds interchange system is built. And any cost of that will come off the money providers can use to pay good interest rates.

So, why should those who move their money frequently be subsidised by a reduction in rates across the industry?

davidgmmafan

"As I've posted many times on this subject, they post the balance by cheque because they have to provide lots of information to the new provider, as well as the money."

They've not heard of e-mail then?

"So, why should those who move their money frequently be subsidised by a reduction in rates across the industry? "

Its a competitive market, switching should actually be beneficial as institutions will be forced to compete on price.

Something has got to be done because its just a joke at the moment. They talk about unexpected demand, yet EVERYBODY including the banks themselves know its the ISA season. They even have briefings on it on a morning before the branches open. Its not unexpected, its like Bookie not having any extra staff in on grand national day.

Now this fudge means there are three types of ISA customer. Those who have switched and got away with it ok, those who switched and had a terrible expereience (so probably won't do it again) and those who won't switch through apathy or constantly reading the stories of the category I just metioned.

Who benefits from the latter catergory? Why the banks of course, with low levels of switching there's no need for them to compete on price so the average customer loses. Bravo OFT, once again you've proven totally ineffective. Why do you even exist? I wonder if companies hear the OFT is investigating do they celebrate because they know nothing significant will happen?

Innys

I wholeheartedly agree with davidggmafan.

Having to send other rinformation with a transfer remittance is a poor excuse for doing it by cheque in the (2nd class!!!) post.

You can bet that if banks knew they would be fined by delaying the process by more than, say, one day, they would miraculously have come up with an electronic solution.....

fairtrade

Innys wrote: »

You can bet that if banks knew they would be fined by delaying the process by more than, say, one day, they would miraculously have come up with an electronic solution.....

Please don't let it happen. The Banks are bad enough as it is - can you imagine the nightmare:eek: if they were let loose on an electronic medium?

MarkyMarkD

davidgmmafan wrote: »

"As I've posted many times on this subject, they post the balance by cheque because they have to provide lots of information to the new provider, as well as the money."

They've not heard of e-mail then?

You tried attaching money to an email?

If the money isn't sent in the same envelope as the information, the two have to be matched up. If you (as a bank) are receiving hundreds or thousands of these a day, that is a logistical disaster waiting to happen. And if you open the account without having the paperwork, you have breached the HMRC rules. And get fined.

davidgmmafan wrote: »

"So, why should those who move their money frequently be subsidised by a reduction in rates across the industry? "

Its a competitive market, switching should actually be beneficial as institutions will be forced to compete on price.

It is already a very competitive market. There are hundreds of different accounts available. Increasing costs - and switching incurs costs - doesn't give the banks more money to pay out, it reduces them.

davidgmmafan wrote: »

Something has got to be done because its just a joke at the moment. They talk about unexpected demand, yet EVERYBODY including the banks themselves know its the ISA season. They even have briefings on it on a morning before the branches open. Its not unexpected, its like Bookie not having any extra staff in on grand national day.

Now this fudge means there are three types of ISA customer. Those who have switched and got away with it ok, those who switched and had a terrible expereience (so probably won't do it again) and those who won't switch through apathy or constantly reading the stories of the category I just metioned.

So what? They should employ loads of untrained temps for one month a year to deal with the rush? What a daft notion.

Who benefits from the latter catergory? Why the banks of course, with low levels of switching there's no need for them to compete on price so the average customer loses. Bravo OFT, once again you've proven totally ineffective. Why do you even exist? I wonder if companies hear the OFT is investigating do they celebrate because they know nothing significant will happen?

The low level of switching isn't because there isn't a competitive market. It's primarily because a lot of consumers are stupid, and don't understand that you can move an old ISA at all.

Innys

MarkyMarkD wrote: »

You tried attaching money to an email?

If the money isn't sent in the same envelope as the information, the two have to be matched up. If you (as a bank) are receiving hundreds or thousands of these a day, that is a logistical disaster waiting to happen. And if you open the account without having the paperwork, you have breached the HMRC rules. And get fined.

It is already a very competitive market. There are hundreds of different accounts available. Increasing costs - and switching incurs costs - doesn't give the banks more money to pay out, it reduces them.

So what? They should employ loads of untrained temps for one month a year to deal with the rush? What a daft notion.

The low level of switching isn't because there isn't a competitive market. It's primarily because a lot of consumers are stupid, and don't understand that you can move an old ISA at all.

I don't think the suggestion was attaching the remittance to an e-mail. The idea was sending the money electronically by BACS and an e-mail at the same time from Bank A to Bank B breaking the balance down.

I'm sorry, but are you saying that opening "hundreds or thousands" of these envelopes a day is foolproof? Do me a favour.

It's not rocket science. When Bank A sends a total remittance to Bank B electronically, all they need to do is send a simple encrypted Excel file at the same time listing the names, addresses, NI numbers, individual balances. Obviously, the total of the Excel file equals the value of the electronic remittance.

Then, having checked the control total on the Excel file agrees to the total remittance, the data in the Excel file, Bank B can set up the individual accounts. Indeed, the Excel file itself would probably be a good starting point as it contains all the key information.

Yes, the Excel file could contain an error, say the wrong NI number, but that is also true if the information is sent individually for each account with the cheque.

I don't deny that inertia is the biggest deterrent to switching ISAs for the vast majority of people. However, for those of us that do choose to switch, banks deliberately make it as difficult, awkward and slow as possible. Why are they able to get away with it?

In my view, in the 21st century, there is simply no justification for sending tranfer remittances by cheque other than slowing the transfer of money down. If cheques are the only solution, why are the British Bankers Association themselves are looking at phasing them out?