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Sunday, 3 April 2011

Cash ISAs: How banks can pinch 92% of your savings income, and the Office of Fair Trading says it's ok

There are few actions under the sky that cannot be spun and woven into a tissue of good intentions. Even the most wicked action can have a benevolent reason behind it. Whipping a horse may be to prove it is still a good runner, and save it from the glue factory. Inflicting pain and death on laboratory animals may result in the development of medical products and procedures to improve health, or test cosmetics which make your loved ones less…well…ugly. The political decision to massacre a civilian population may save more lives by the bloody example hastening the end of a war. Monstrous individuals through history and fiction have excused themselves as being resolute bulwarks against greater monstrosities.

Among those few actions that can have no benevolent purpose whatsoever, other than enriching the perpetrators, is the habit of banks quietly cutting interest rates on savings accounts. Not quite none whatsoever. This does have one positive result – providing one of the clear pieces of evidence of the complicity between regulators and the financial services industry.

As we enter the start of the new financial year, Banks offer eye-catching interest rates on Cash ISAs that last for the first 12 months, and are then cut to as little as 0.05%. The teaser rate is advertised in large font and eye-grabbing colour, and the reduction is announced quietly, if at all, in the form of an email. The impact of this can devastate what should be a great way of saving:


Using the average savings interest rates for each year since 1999, a saver investing the Cash ISA limit of £3,000 in that year would have earned £1,976.81. Using the banks’ scam of dropping the interest rate to 0.1% after the first year, the saver would have earned just £162.05. By this scam, the saver has lost £1,814.73, or 92% of his income.







The figures for a saver who invested her full allowance in a Cash ISA each year since 1999 would be:
  • Interest earned, being paid the average savings account interest for each year
    • £11,739
  • Interest earned, being paid the average savings account interest only for the first year, and 0.1% for subsequent years
    • £1,916
  • A loss of
    • £9,823
The basis of the Orifice of Fair Trading’s dismal record can be seen in black and white in the reasoning of their decision to do nothing about this rip-off:

  • information on interest rates is readily available to those consumers who want to find it online, at branches and over the telephone, but most consumers do not know what their interest rate is
  • From 1 May 2010, most consumers have received notification when any bonus rate period ends. The notification of the end of bonus rates does not apply to those cash ISAs designated as 'payment accounts'.
  • At the time of writing, only a limited number [around 15 percent] of the major cash ISA providers place interest rate information on cash ISA statements.
  • 83% of consumers questioned in our survey have never transferred their Cash ISA
Perhaps the OFT team saw it as a great victory when they got an undertaking from the British Bankers Association to


Perhaps the team decided not to dwell on Mervyn King, the Governor of the Bank of England’s, comment about banks the tactics of the british banking sector:


Or Sir Howard Davies, outgoing Chairman of the FSA in 2003, who said


Or Peter Vickery-Smith, the chief executive of Which?, the leading UK consumer affairs organisation, who commented in January 2011 about financial services


Perhaps, thanking the Bankers for this kick in the crotch of the pants, the OFT team took the tradesmen’s exit and slunk back to their office of fair trading to draft their courageous decision:

The OFT think it is inappropriate to require cash ISA providers to automatically transfer consumers off the 0.1% rates? In heavens name why is it inappropriate? There is no complexity here. Just a rip-off.

Consumers in Britain are regarded by the OFT as fair game.  So long as information is made available it doesn’t need to be made accessible.

Q: How do you know if information is available?
A: By seeing if people can in principle get to it.

Q: How do you know if information is accessible?
A: By seeing if people actually access it. The OFT’s own statement most consumers do not know what their interest rate is proves it is not accessible.

For the OFT, Available but not Accessible = Acceptable. 


For the banks, Kerching!


What is the size of this problem? According to the Consumer Focus super-complaint

- About a third of the population has Cash ISA accounts
- This amounts to about £158billion in total
 They are losing between £1.5billion to £3billion per year




What reason is there for a saver to want to leave their cash in an account paying derisory interest? There is no purpose like the saver making a choice on ‘risk aversion’ or ‘ethics’ or stuff like that. All the product does is pay interest. There is precisely zero reason anyone would choose to do this.

What reason is there for banks to drop interest to derisory levels at the end of 12 months? There is no question here of innovating the product, changing the mix, tweaking the risk or other dynamic stuff like that. All the product does is pay interest. There is just one reason – to rip-off Britons.

4 comments:

  1. Love it when you pack a few punches! The consumer is so undervalued in markets which are critical to basic human survival: finance, property, energy, water, food even.

    That's why http://zero-credit.co.uk exists as cooperative of debtors and consumers of borrowing. It might interest you to note that in the BIS invitation to comment on the Consumer Credit review, savers were not included as a stakeholder group.

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  2. Thanks for the compliment.

    And thanks for the tip about the BIS invitation. I'll check that out. I notice their announcement, http://www.bis.gov.uk/policies/consumer-issues/consumer-credit-and-debt, says "Consumers are key to a thriving and robust UK economy". A bit like "Hens are key to a thriving fried chicken economy". What's good for the economy isn't necessarily good for us chickens!

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  3. I'm getting tired of all the scams and all the inaction. What protection is really in place for consumers- apparently NONE

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  4. No protection from scams for consumers, no regulation that seems to have any teeth, no speedy resolution to complaints and no political will. Reform politics and a lot of these problems would be resolved because 'they' work for you and 'they' rule by consent. There is no political will and the public have no real platform to pressure for change. These days I would say there is very little, if any, representation of the public at any level of society - well except the level that doesn't have to answer to anyone of course.

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