Cash ISAs labelled unfair, unclear and poor valueBy Victoria Bischoff Citywire | 00:01:00 | 31 March 2010

Banks are not giving consumers a fair deal on cash ISAs, campaign group Consumer Focus has told the Office of Fair Trading (OFT) today.

Consumer Focus has attacked the cash ISA market for the:

•Difficulty in switching. Very few people are switching between ISAs despite the apparently large number of products available on the market. This is because it can take weeks to go through an unnecessarily bureaucratic and inefficient switching process.
•Lack of transparency. It is often unclear how much interest people are earning on their savings. Rates are hidden in complex tables and it is often hard to find interest rates on old accounts.
•Relative decline in interest rates. Interest rates on cash ISAs have fallen much further than what homeowners pay on their mortgages or even the rate of interest paid on other savings accounts.
•Banks are ‘bait pricing’. Many providers are using ‘bait’ or ‘bonus’ interest rates to attract savers, but after the initial bonus period has finished there is little competition and the products often offer poor value. Meanwhile, banks are secure in the knowledge that when rates plummet consumers are unlikely to switch.
The Financial Services Consumer Panel has welcomed Consumer Focus’ complaint, comparing the way banks sell cash ISAs to payment protection insurance sales and unauthorised overdraft charges.

Adam Phillips, chairman of the Consumer Panel, said: ‘Here is yet another example of banks being more interested in making money than in their customers getting a fair deal’.

‘We will press the FSA to take action. It cannot be a fair outcome for consumers – or what the Government wanted to achieve in providing this tax incentive – that people end up with little more interest from their tax free account than they would get from an ordinary account,’ he added.

However, the British Banker’s Association criticised Consumer Focus for not discussing its complaint with the banking sector, claiming if it had been given the chance it could have explained the work it is already doing with the regulator to help ISA customers.

The BBA said: ‘From May, customers will be given advanced notification of any material reduction in the interest rate on a cash ISA, plus advance notice of the end of any bonus or introductory rate. Consumer Focus erroneously refers to the Banking Code rules on this issue, but these were superseded by Financial Services Authority rules last November’.

BBA has also said the Consumer Focus investigation is ‘misleading’, as it was an online poll of just over 400 www.moneysavingexpert.com users.

Responding Martin Lewis, the founder of Moneysavingexpert.com, accused banks of ‘deliberately confusing’ consumers. He said their lack of transparency is a ‘clever trick’ and claims it is not ‘beyond their wit and wisdom’ to make the details of cash ISA accounts much clearer for consumers.

He advises customers to be more active in their approach to managing their savings accounts and above all 'ditch and switch' to a better account if they are not getting a good deal.

Capital asset pricing model

Capital asset pricing model

In finance, the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

The formula


E(ri) = Rf + βi(E(rm) - Rf)


where:

E(ri) = return required on financial asset i
Rf = risk-free rate of return
βi = beta value for financial asset i
E(rm) = average return on the capital market