Dodgy bank practices number 94: Isas

March 31st, 2010

The Consumer Focus watchdog has called for an Office of Fair Trading (OFT) investigation into the use of temporary headline interest rates to attract savers to cash Isas.

Tax-free Individual Savings Accounts (Isas) were introduced in the UK 11 years ago to encourage people to save. The average interest rate stands at 0.41%, Consumer Focus said, with many banks and building societies “baiting” customers with short-term higher rates.

Consumer Focus believes that savers are missing out on interest of up to £3bn of interest a year, partly because it is difficult to switch providers. The Office of Fair Trading (OFT) must now consider the complaint, and give a response within the next 90 days.

About 37% of UK households have a cash Isa. A significant proportion of those hold as much as is allowed in these accounts. In April, the amount people can save in an Isa every year will rise from £7,200 to £10,200, of which half can be saved in cash and half, or all, in stocks and shares.

The end of the financial year usually brings a so-called “Isa season” with high levels of marketing by the various providers. But Consumer Focus said that some offered eye-catching rates of more than 3% which dropped after a year to uncompetitive levels.

It is certainly true that at less than 0.5% interest the average Isa saver is getting a poor deal. And while people could switch to one of the 3% deals on offer, many are put off by the cumbersome transfer process.

Consumer Focus points out the evidence that very few people do actually switch their accounts. It is almost unbelievable that in 21st century Britain it takes a month to transfer information and funds from one bank to another.

The British Banking Association has leapt to the defence of its members, unsurprisingly their spokesman does not believe that there is any reason for concern.

From May customers will be given advanced notification of any reduction in the interest rate on a cash ISA, plus advance notice of the end of any bonus or introductory rate. This seems like it should be standard procedure, not a last minute concession in the face of a potential investigation but we should be thankful for small mercies.

As with any banking product, the advice with Isas is clear, shop around, compare as many products as possible before making a decision, after all its hardly rocket science to find a good deal these days. Then read all the small print and read the statements to make sure you are still getting the rate of interest that you think you are.

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Bank accounts for everyone

March 25th, 2010

An interesting and mostly unnoticed section of yesterday’s budget set a precedent by legally obliging banks to provide a basic bank account to everyone.

The move was one of several imposed by the chancellor supposed to improve the way banks do business after years of unprecedented criticism of the sector. The other changes included new targets for lending, with the threat of curbs on pay if they are not met.

According to the Treasury, there are 1.75 million adults in the UK without access to a bank account. The universal banking pledge is aimed at helping these people acquire the first requisite of financial stability.

The basic accounts in question allow customers to receive pension and benefit payments, provide a debit card and let people set up direct debits. However, they do not offer overdrafts and usually do not let people have cheque books.

The British Bankers’ Association has immediately responded by saying that the move is unnecessary because just about everyone can, in any case, have a bank account if they want one.

They seem to be missing the point though. A universal banking pledge is aimed at everyone. ‘Just about everyone’, by the very nature of the term, does not include everyone.

The Budget also said it would promote banking competition by speeding up the licensing process for new entrants. By reducing one of the main barriers to entry to the banking market, the government has ensured that it can more easily remain competitive which is better for the consumer.

The promise to move faster when deciding whether to grant a new banking licence was welcomed by the consumers’ organisation, Which? in a statement. “New entrants in the market offering genuinely competitive products will help bring about the culture change the industry so desperately needs.”

Ordinarily I am against excessive regulation of the markets but the UK banking sector is one area where market failure is clearly occurring and regulation is often the best way to fix it.

As the market becomes more competitive I would hope the need for regulation decreases, but until then the restrictive practices of the small number of very large high street banks in the UK will need constant vigilance.

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How to reclaim the overpaid benefits

March 18th, 2010

The Public Accounts Committee of the House of Commons has this week launched a stinging attack on the government because of its consistent overpaying of benefits and inability to then reclaim the money.

The committee’s figures show that benefit claimants owe £1.85bn in overpayments but the government is recovering less than £300m a year. The public accounts committee is urging the Department for Work and Pensions to significantly improve its efforts to recover the money.

A damning illustration of how serious the situation has become is that more than 30,000 people owe at least £10,000.

Although the committee said that the DWP is gradually improving its debt recovery procedures, the total debt is continuing to rise because overpayments are still larger than repayments.

The situation is also likely to have worsened because of the recession, although the latest figures have not yet been released.

Income Support claims accounted for more than 70% of all debts. Meanwhile, £9.3m of overpayments of less than £65 were written off during 2007/08 because they were considered too small to justify the cost of recovering them.

The new report recommends using text messages, e-mails and phone calls to remind claimants they have to inform benefit offices of changes in their circumstances.

This story is, frankly, incredible. That the DWP overpays so many benefits is a national scandal in the first place, especially at a time when, because of soaring national debt, the government should be finding every way possible of cutting spending.

However, after having overpaid the benefits the government should be making every effort to ensure that it’s recovered. Stopping the further benefits of those who owe money seems a common sense approach to those who refuse to pay it back and, in the very worst cases, custodial sentences should be handed down. That should sharpen their minds a little.

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