How to make cash Isas better

The Government’s consumer watchdog, Consumer Focus, has filed a ‘super-complaint’ with the Office of Fair Trading about Individual Savings Accounts (Isas). They are complaining that cash Isa providers place a number of ‘unfair obstacles’ in place to stop savers moving their money to Isas paying better rates.

Consumer Focus has shone a light on a system that – like so many financial schemes – is shrouded in unnecessary complications and regulations.
One of the problems Consumer Focus have complained to the Office of Fair Trading about is the length of time it takes to switch Isa providers. Government guidelines recommend that a transfer should take no more than 28 days. But 28 days is ludicrous – the banks insist they need that much time to do the paperwork and transfer the money. But given that they are perfectly capable of transferring money between themselves in a matter of hours when needs be, that seems unlikely.

Admittedly, customers don’t suffer too much – most banks receiving an Isa transfer will credit interest from the day they received the application rather than the day the funds arrived. But the length of time it takes is boring and off putting: most of us like our transfers to happen fast – we don’t want to still be double-checking accounts a month later.

But this isn’t the only thing that prevents people moving out of accounts with very low interest rates and into better ones. Fear plays a part too –fear of losing your money’s tax-free status by mistake.

If you see an Isa rate you like and don’t follow the strict Isa transfer rules when moving your money, you can all too easily find you have shifted it out of its tax wrapper and that you can’t reinvest it without using up your current year’s Isa limit.
The upshot of all this is that – despite the fact that the average rate paid on a cash Isa is 0.41% – only 12% of Isa holders switched provider last year.

All this means that a shake-up of the Isa industry is desperately needed. But what kind of shake-up? Consumer Focus are keen on transparency and on faster transfers. But surely an altogether simpler system where people can move their money in much the same way as a standard bank transfer is the way forward.