Cash ISAs: Response to supercomplaint

Cash ISAs: Response to supercomplaint by Consumer Focus June 2010 *Under strict embargo until 1100 on 29 June 2010* OFT1246

Crown copyright 2010 This publication (excluding the OFT logo) may be reproduced free of charge in any format or medium provided that it is reproduced accurately and not used in a misleading context. The material must be acknowledged as crown copyright and the title of the publication specified.

CONTENTS Chapter/Annexe Page 1 Executive summary 4 2 Introduction 15 3 Cash ISA regulation 19 4 Competition in the cash ISA market 27 5 Transferring a cash ISA 45 6 Transparency of interest rates on cash ISAs 61 7 Bonus rates on cash ISAs 72 8 Conclusion 80 A Parties consulted 88 B Cash ISA omnibus survey 91

1 EXECUTIVE SUMMARY 1.1 Consumers save money through a variety of means and for many purposes. Financial institutions that receive those savings are able to lend that money out to others, helping consumers and businesses to invest. It is therefore important for consumers, but also the wider macroeconomy, that savings markets work well. 1.2 Cash Individual Savings Accounts (cash ISAs) are a tax-advantaged form of savings account, introduced in the UK in 1999. Interest earned on cash ISA deposits is not subject to income tax. Cash ISAs are an important part of consumers' savings in the UK, with approximately 17.5 million consumers having a total of 143 billion saved in cash ISAs in 2008. 1 They are the second most popular low-risk savings product after standard savings accounts. 2 1.3 On 31 March 2010, Consumer Focus submitted a super-complaint regarding cash ISAs to the Office of Fair Trading (OFT). Consumer Focus raised a number of concerns, but the executive summary noted '[t]he main grounds of this super-complaint centre on the apparent exploitation by providers of consumer inertia and confusion in the market.' 3 Their concerns can be summarised into the following three areas: 4 1 The market value of cash ISA funds had risen to 158 billion by 5 April 2009 see www.hmrc.gov.uk/stats/isa/table9-6-onwards.pdf. The number of consumers with a cash ISA in 2008 was 17.5 million see www.hmrc.gov.uk/stats/isa/table9-10-07-08.pdf. 2 Consumer Focus super-complaint: Cash ISAs, Table 1 on page 8. 3 Consumer Focus super-complaint: Cash ISAs, page 4. 4 In the conclusion of the super-complaint (page 27), Consumer Focus raised six issues that it wanted the OFT to address. These are all addressed in this report. The super-complaint, Consumer Focus super-complaint: Cash ISAs, is available here www.consumerfocus.org.uk/assets/1/files/2010/03/consumer-focus-super-complaint-cashisas1.pdf. OFT1246 4

transferring cash ISAs was taking too long and there were arbitrary rules preventing transfers into some of the most attractive accounts interest rates were not sufficiently transparent, and consumers were being attracted by temporary bonus rates that subsequently fell substantially. 5 1.4 Consumer Focus concluded that 'the result of these apparent abuses is that providers have been able to reduce the average interest rate paid on cash ISAs, after the initial 'bonus' period, at a rate faster than for other saving accounts and mortgage accounts.' 6 The cash ISA market 1.5 The cash ISA market has become more concentrated in recent years as a result of retail bank mergers, leading to a moderate level of concentration. However, there do not appear to be any major barriers to entry or expansion that are dampening competition. 1.6 The nature of competition in the market is largely focused on interest rates offered. Our analysis shows that while the interest rates offered on cash ISAs have declined since 2008, they have not fallen by more than the Bank of England base rate has fallen. Interest rates on other savings products have fallen by less than cash ISAs, but this is because they typically started at a lower level and cannot fall below zero. 1.7 On this basis, it does not appear that the structure of the market is substantially harming consumers. 5 Consumer Focus super-complaint: Cash ISAs, page 4. 6 Consumer Focus super-complaint: Cash ISAs, page 4. OFT1246 5

Transferring a cash ISA 1.8 Consumers need to be able to change their provider to ensure that they get the best possible deal. This ability to change provider exerts a degree of competitive constraint upon providers. Consumers can only change their cash ISA by requesting a transfer via the provider of their new cash ISA. They are unable to withdraw their money themselves and put it into a new cash ISA without losing their tax advantage, making the way in which providers handle transfers more important than usual. 1.9 In its super-complaint, Consumer Focus argued that cash ISA providers' processes for transferring savings between cash ISA accounts are unnecessarily bureaucratic and inefficient. It also argued that some cash ISA providers impose arbitrary rules prohibiting transfers into some of the most attractive accounts. It concludes that this prevents consumers switching between products to get the best deal. 1.10 We have found that there are problems in transferring cash ISAs: transferring cash ISAs takes just over 26 calendar days on average and 25 per cent of transfers take longer than 30 calendar days 7 transfers are frequently affected by delays in administration by cash ISA providers and, in some cases, problems such as poorly completed or lost forms, and there can be a gap of up to five days during which interest is not accrued when consumers transfer their cash ISA. 1.11 We also found that the best cash ISA accounts that allow transfers in have offered a slightly lower rate on average than the best accounts that do not, 8 but only 14 per cent of cash ISA accounts placed restrictions on 7 OFT analysis of cash ISA providers' responses to OFT questionnaire based on data covering the period 6 April 2008 to 6 April 2010. 8 Over the last three years, the best cash ISA accounts that allow transfers in have offered 4.15 per cent on average, compared to an interest rate of 4.62 per cent for those that do not allow OFT1246 6

transfers of funds in 2009, 9 there are still many cash ISAs allowing transfers in with interest rates substantially above base rate and there may be reasons why cash ISA providers need to be able to limit access to certain accounts. 1.12 The number of problems faced by consumers in transferring their cash ISA, and the frequently long transfer time even when problems do not arise, may be deterring consumers from moving their funds to another cash ISA. 1.13 During the course of our work we engaged with cash ISA providers to discuss the transfer of cash ISAs. As a result of this process the British Bankers' Association (BBA), the Building Societies Association (BSA) and the Tax Incentivised Savings Association (TISA) have agreed to amend their guidelines to reduce the maximum period for completion of the endto-end process for cash ISA transfers from 23 to 15 working days. The revised guidelines will come into effect on 31 December 2010. The BBA, BSA and TISA have also agreed to explore how best practice can be more widely implemented to reduce the problems that consumers face in transferring their cash ISAs by 31 December 2010. 1.14 In addition, the industry has agreed to produce and publish a consumerfriendly summary of its cash ISA transfer guidelines. This summary will be made available to all consumers from 29 June 2010 through the BBA, BSA and TISA websites. 10 We expect cash ISA providers to use the consumer friendly guide to explain the transfer process to consumers. transfers. Source: OFT analysis of Defaqto cash ISA database 1999-2010. Rate calculated by taking an average of the highest cash ISA rates offered in April 2008, 2009 and 2010. 9 OFT analysis of Defaqto cash ISA database 1999-2010. 10 The publication on 29 June will reflect existing timelines and will be updated on 31 December 2010 when the revised guidelines become effective. OFT1246 7

1.15 Cash ISA providers have agreed to submit to their relevant industry body monthly information on how long cash ISA transfers take. 11 This information will be summarised and reviewed against the new 15 working day limit. Summary information will be sent to the FSA. 1.16 In the past the industry has not always followed the transfer times in its guidelines. It is therefore important that the new guidelines are followed. To ensure this happens, we recommend that: HM Revenue & Customs (HMRC) change its guidance to reflect the new industry guidelines and considers whether the tax rules should similarly be amended the Financial Services Authority (FSA) refers to the new guidelines in the Banking Conduct of Business Sourcebook (BCOBS) 12 and reviews the information on cash ISA transfer times provided to it by the BBA and the BSA, in addition to any information that the FSA receives about relevant complaints, and if the new industry guidelines are not being followed, the FSA considers taking action itself under its Banking Conduct Regime paying consideration to BCOBS 5.1.5. 13 1.17 In order to ensure that consumers are not adversely affected if delays occur, we consider that consumers should receive the interest rate on 11 This does not apply to those cash ISA providers who process less than 5,000 transfers per year. These smaller cash ISA providers, typically, do not take a substantial amount of time to process transfers. 12 BCOBS 5.1.8G currently reads 'A firm may find it helpful to take account of the European Banking Industry Committee Common Principles for Bank Account Switching and the British Bankers' Association/ Building Societies Association/ Tax Incentivised Savings Association Cash ISA Transfers: Guidelines.' 13 BCOBS 5.1.5 states 'A firm must provide a prompt and efficient service to enable a banking customer to move to a retail banking service (including a payment service) provided by another firm.' OFT1246 8

the cash ISA to which they are transferring no later than 15 working days after requesting the transfer, whether or not the transfer has been completed. Therefore, we recommend that: consumers complain to their provider if their transfer takes longer than 15 working days, and in resolving these complaints cash ISA providers ensure that consumers are no worse off than would have been the case if the guidance had been followed, whilst not requiring consumers to work out which provider is at fault. 1.18 The new guidance is one of the factors that the Financial Ombudsman Service (FOS) will be able to take into account in settling complaints between consumers and cash ISA providers. 14 1.19 There may be some additional benefit from bringing the transfer time down below 15 working days. We therefore recommend that the industry consider adopting an electronic system for transfers. The BBA, BSA and TISA have committed to undertake a feasibility study to take this recommendation forward. 1.20 The BBA and BSA have agreed to ensure that consumers start to accrue interest no later than two days after the funds are received from the old provider. We do not believe that this is sufficient. We consider that consumers should receive interest for every day during the transfer process since the OFT understands that one of the providers has the consumers' money at all times during the transfer process. We note that a number of providers already backdate interest from the date of closure of the existing cash ISA account. This ensures that consumers receive interest on every day. 14 Under the rules set for the FOS, the Ombudsman decides each complaint based on what the Ombudsman believes is fair and reasonable in all circumstance of the case. This includes taking into account the law, codes of practice, and regulatory rules, guidance and standards that applied at the time. Further information is available at www.financialombudsman.org.uk/publications/technical_notes/qg7.pdf. OFT1246 9

1.21 We recommend that cash ISA providers ensure that consumers receive interest on every day during a cash ISA transfer and that the FSA consider the case for taking action under BCOBS or for amending the BCOBS rules or guidance if providers do not follow this approach. 1.22 Finally, we recommend that consumers review the interest rates being paid on their cash ISAs regularly, comparing them with the rates available from competitors, and consider transferring when better deals can be found. The OFT also recommends that consumers consider the full range of cash ISA providers and cash ISAs available, including providers that do not offer bonus rates and cash ISAs that offer fixed rates. Transparency of interest rates on cash ISAs 1.23 It is important that consumers have all the relevant information to make effective comparisons between different products. In the case of cash ISAs, the interest rate is a key piece of information. 1.24 Consumer Focus highlighted an apparent lack of transparency around the provision of interest rate information for cash ISAs, making it difficult for consumers to compare providers to get the best deal. Consumer Focus noted that, since 1 May 2010, most consumers receive notification when any bonus interest rate ends and when there is a material adverse change in the interest rate. However, it also noted that there remains no requirement to indicate the prevailing interest rate on statements. 1.25 We have found that: 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, and are therefore not motivated to 'shop around' for the best deals. 1.26 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'. OFT1246 10

Through our discussions, the BBA 15 has agreed that its members will voluntarily send the same bonus rate notifications to holders of payment accounts as to holders of non-payment accounts. This will take effect from 1 July 2010. We welcome this development. 1.27 At the time of writing, only a limited number of the major cash ISA providers place interest rate information on cash ISA statements. Our analysis suggests that those providers that put interest rates on statements cover around 15 per cent of the market. We consider that providing interest rates on statements makes it significantly more likely that consumers are aware of their rate. 1.28 The OFT has worked closely with the industry to extend the provision of interest rates on cash ISA statements. The BBA and BSA have agreed that their members will, on a voluntary basis, provide interest rates on cash ISA statements delivered in paper and/or electronic format. National Savings & Investments (NS&I) have also agreed to put interest rates on their statements. These changes will be implemented in time for the 2012 ISA 'season' 16 at the latest, though we expect some providers may do so earlier. 1.29 Many of the arguments for interest rates being on cash ISA statements are likely to apply to other savings accounts as well. The FSA may therefore wish to consider amending its guidance that firms 'consider' putting interest rates on statements to state that firms 'should' do so. 17 Bonus rates on cash ISAs 1.30 Some cash ISA products offer bonus rates of interest, that is a higher level of interest for a specified period of time, often a year. Whilst these 15 Building societies do not treat any of their cash ISA accounts as payment accounts and therefore this issue does not apply to them. 16 The cash ISA 'season' is generally thought to be between February and May. 17 See BCOBS 4.2.1R. OFT1246 11

bonuses can increase the return that consumers receive, it is important that they do not prevent consumers from comparing cash ISAs and making effective decisions about which cash ISA to invest in. 1.31 Consumer Focus argued that the practice of offering bonus rates means that a large number of accounts are paying 'next to no interest'. 18 1.32 We have found that: the number of cash ISAs accounts that have bonus rates has risen since the Bank of England base rate fell to very low levels in 2008 the majority of cash ISAs accounts do not have bonus rates our analysis suggests only 11 per cent of cash ISAs open to new customers offer bonus rates, and 19 it is reasonably clear in advertising and marketing that bonuses are temporary and, as noted above, from 1 May 2010 cash ISA consumers will receive notification when their bonus ends. 1.33 After considering the evidence, we did not find any information suggesting there is substantial harm caused by firms offering temporary bonus rates of interest. We do not consider it appropriate to require cash ISA providers to transfer consumers to identical accounts with higher interest rates automatically. 1.34 Greater transparency of interest rates and better transfer processes should help to reduce the number of consumers either on a low rate without realising it, or on a low rate but unwilling to transfer due to a perception that problems will occur. 1.35 During our consultations with consumer groups and individual consumers, a number of proposals have been put forward to address 18 Consumer Focus super-complaint: Cash ISAs, page 4. 19 OFT analysis of Defaqto data of cash ISA database 1999-2010. OFT1246 12

their concerns around bonus rates. Given that some of these have the risk of unintended consequences, and the lack of evidence of significant harm to consumers from bonus rates, we consider that the most appropriate approach at this time is to improve the transparency of cash ISA interest rates and the transfer process through the initiatives and recommendations outlined above. Conclusion 1.36 As identified by Consumer Focus, for the cash ISA market to work well it is important that consumers have the appropriate information to compare providers and that they are willing to transfer to new providers. The OFT welcomes the constructive engagement that we have had with cash ISA providers to address the shortfalls in transparency and transfers that Consumer Focus highlighted. 1.37 The initiatives and recommendations outlined above should increase consumers awareness of their interest rate and make them more confident in the transfer process, which in turn should alleviate any concerns regarding bonus pricing. For individual customers to make the most of their cash ISA savings, they need to use the information available to shop around for the best account for their needs, and to hold providers to account for delivery of transfers in accordance with the new guidelines. The more active and engaged consumers are, the more pressure will be placed on providers to meet their customers' needs. 1.38 This work has focused on cash ISAs. However, there may be some read across from our findings here to other markets and we would encourage financial service providers to consider this. Many of the issues raised by the super-complaint are similar to those covered in our work on personal current accounts, as is the broad approach used to deal with them. While many financial products will not have the same restrictions around transfers as cash ISAs, the issues raised and solutions identified may be of relevance to products such as pensions and mortgages. We continue to consider that important information should be transparent to consumers across all financial services and that transfer processes should be efficient. OFT1246 13

1.39 We also believe that providers should think more broadly about whether there is asymmetry in their relationships with consumers if they levy fees when consumers miss a payment date for example, but are not prepared to offer redress voluntarily, without being asked, when their own processes are delayed or go wrong. OFT1246 14

2 INTRODUCTION 2.1 This chapter sets out the issues raised in the super-complaint submitted by Consumer Focus, the legal basis for making a super-complaint and how the OFT has gone about considering these issues. Issues raised in the super-complaint 2.2 On 31 March 2010, Consumer Focus submitted a super-complaint to the OFT relating to cash ISAs. Consumer Focus regarded aspects of the market for cash ISAs, and the conduct of many providers, to be causing significant harm to consumers. 20 2.3 Consumer Focus raised a number of concerns, but the executive summary noted '[t]he main grounds of this super-complaint centre on the apparent exploitation by providers of consumer inertia and confusion in the market.' 21 Their concerns can be summarised into the following three areas: 22 providers' processes for transferring savings between cash ISA accounts were unnecessarily bureaucratic and inefficient, and some cash ISA providers imposed arbitrary rules prohibiting transfers into some of the most attractive accounts there was a lack of transparency about interest rates for old cash ISA accounts, making it difficult for consumers to compare accounts and get the best deal, and many providers attracted savers with high initial or bonus interest rates which then dropped substantially, leaving savers with uncompetitive long term rates. 20 Consumer Focus super-complaint: Cash ISAs, page 4. 21 Consumer Focus super-complaint: Cash ISAs, page 4. 22 Consumer Focus super-complaint: Cash ISAs, page 4. OFT1246 15

2.4 Consumer Focus concluded that 'the result of these apparent abuses is that providers have been able to reduce the average interest rate paid on cash ISAs, after the initial 'bonus' period, at a rate faster than for other saving accounts and mortgage accounts.' 23 The super-complaint process 2.5 The right to submit a super-complaint was created by section 11 of the Enterprise Act 2002 (EA02). A super-complaint is defined under section 11(1) EA02 as a complaint submitted by a designated consumer body that 'any feature, or combination of features, of a market in the UK for goods or services is or appears to be significantly harming the interests of consumers.' Consumer Focus is a designated consumer body for the purposes of the EA02. 2.6 Section 11(2) EA02 requires the OFT, within 90 days after the day on which it receives a super-complaint, to publish a response saying whether it has decided to take any action, or take no action, in respect of the complaint and, if it has decided to take action, what action it proposes to take. The response must state the reasons for the OFT's proposals (section 11(3) EA02). 2.7 This document represents the OFT's reasoned response to the supercomplaint from Consumer Focus. It focuses on the issues raised in the super-complaint and therefore does not consider other savings products. Information gathering 2.8 We have gathered evidence from a wide range of sources and sought the views of a variety of stakeholders. We reviewed the information in the super-complaint, as well as further information submitted by Consumer Focus, and tested both for their accuracy and relevance. 23 Consumer Focus super-complaint: Cash ISAs, page 4. OFT1246 16

2.9 Interested parties were invited to comment on the super-complaint. As part of this, specific information requests were sent to cash ISA providers. In addition to meetings with the BBA, BSA and TISA, a number of discussions were held with cash ISA providers to discuss their submissions. A full list of the stakeholders consulted can be found in Annexe A. 2.10 We conducted a consumer survey 24 and issued a questionnaire on our website for cash ISA investors to complete. We also reviewed e-mails and letters regarding cash ISAs that we received from individual consumers. A number of meetings were held with consumer groups, such as Which? and Money Saving Expert, in addition to Consumer Focus. 2.11 We have reviewed the regulations and legislation that affect cash ISAs. Meetings were held with the relevant government bodies such as HM Treasury (HMT), HMRC, FSA and FOS. 2.12 We have conducted our own background and in-house research into the cash ISA industry and the issues raised in the super-complaint. We reviewed a number of reports on cash ISAs and drew upon historical data on cash ISAs and their interest rates from the Bank of England and Moneyfacts. 25 A database of all cash ISAs available in each of the past ten years and their main terms and conditions was sourced from Defaqto. 26 Structure of the response 2.13 Chapter 3 provides a brief introduction to the most important regulations that affect cash ISAs. Chapter 4 describes the market for cash ISAs, 24 A summary of the results from the consumer survey can be found in Annexe B. 25 Moneyfacts is a price comparison website that provides data on a number of financial products, including cash ISAs. 26 Defaqto Ltd is a financial research company. OFT1246 17

investigates the interest rates cash ISAs are paying and considers consumer behaviour and how this affects how the market works. Chapter 5 considers issues around the cash ISA transfer process and areas in which this can be improved. Chapter 6 considers the transparency of cash ISA interest rates and ways in which this may be improved. Chapter 7 explores the effect of cash ISA providers offering temporary bonuses to consumers. Chapter 8 sets out our conclusions and next steps. OFT1246 18

3 CASH ISA REGULATION 3.1 This chapter describes the development of cash ISAs and sets out the regulatory framework in which the providers of cash ISAs operate. Formation and development of cash ISAs 3.2 ISAs were introduced by the Government on 6 April 1999. Similar to TESSAs (Tax Exempt Special Savings Accounts) and PEPs (Personal Equity Plans) both of which ISAs replaced ISAs allow for taxadvantaged saving by not taxing the interest, dividends or capital gains deriving from assets within the account which would otherwise be liable to income or capital gains tax. 27 3.3 The Government s stated motivation for developing ISAs was to provide a more flexible savings product in order to extend the 'saving habit' to a wider section of the population than those who had already invested in either a TESSA or a PEP. 28 In its Pre-Budget Report of November 1997, the Government stated its concern that around half the population had little or no savings and expressed its hope that ISAs would encourage long-term saving amongst those on lower incomes. 29 3.4 In addition to being tax-advantaged, funds contained within an ISA were intended to be both easily accessible and transferable to other financial products. In its 2000 Budget Report, the Government stated that flexibility was an important strand to its savings strategy and described 27 While PEPs and TESSAs still existed after 1999, all subscriptions were stopped then. TESSAs were five year fixed accounts (and so all expired by 2004) and any remaining PEPs were converted into ISAs in 2009. 28 1997 Budget Report, paragraph 61. 29 1997 Pre-Budget Report, paragraph 5.09. OFT1246 19

how funds held in an ISA could be easily withdrawn to purchase other assets or transferred into a stakeholder pension. 30 3.5 ISAs were originally introduced in three main forms: the mini cash ISA, the mini stocks and shares ISA and the maxi ISA. In 2008 following an HMT consultation, the Government abolished the maxi / mini distinction for ISAs. The intended aim of this reform was to simplify the products, increase flexibility for investors and encourage more competition between ISA providers. 31 ISAs now come in just two forms: the stocks and shares ISA and the cash ISA. Initially, ISAs were only guaranteed to run for 10 years from 1999, but as part of a package of reforms in 2008, the Government announced its intention to make ISAs permanent beyond 2010. 3.6 In 1999 the annual subscription limit was set at 7,000, of which 3,000 could be invested in a cash ISA. Following changes in 2008, it became possible to transfer funds held in a cash ISA to a stocks and shares ISA, though it is not possible to transfer assets held in a stocks and shares ISA into a cash ISA. In April 2008, the subscription limit rose to 7,200, of which 3,600 could be deposited in a cash ISA. Annual subscription limits were increased again in October 2009 to 10,200, of which up to 5,100 can be invested in a cash ISA, for those aged 50 and over. In April 2010 this was extended to all other investors. In the June 2010 Budget, the Government confirmed that it will index link annual ISA subscription limits for both cash and stocks and shares ISAs from 2011-12. 3.7 Cash ISAs have been successful at attracting investors. The amount of money saved and the number of cash ISAs subscribed to in each year has grown steadily up to April 2008, as shown in Figure 3.1 below. 30 2000 Pre-Budget Report, paragraph 5.52. 31 Individual Savings Accounts: proposed reforms, HM Treasury, 2006, paragraphs 1.15 1.18. OFT1246 20

Figure 3.1: Number and value of cash ISAs subscribed to in each year, 1999-2009 Number of cash ISAs subscribed to (000s) in each year (bars) 14000 12000 10000 8000 6000 4000 2000 0 30000 25000 20000 15000 10000 5000 0 Value of Cash ISAs subscribed to (millions) in each year (line) Source: HMRC, table 9.4 3.8 In 2007-08, approximately 143 billion was held in cash ISAs by around 17.5 million consumers. 32 The average total funds held by each cash ISA holder in 2007-08 was approximately 8,000. Cash ISAs are used for a diverse range of saving aims, as had been anticipated when they were introduced. 33 Cash ISAs have also attracted savings by those on low incomes in 2007-8, approximately 30 per cent of cash ISA consumers 32 The market value of funds as of 5 April 2008 is available here www.hmrc.gov.uk/stats/isa/table9-6-onwards.pdf and the number of consumers with a cash ISA is available here www.hmrc.gov.uk/stats/isa/table9-10-07-08.pdf. Data for the number of consumers with a cash ISA in 2008-9 was not available at the time of writing. 33 From the OFT's website questionnaire for cash ISA investors we found a number of reasons for wanting to save in a cash ISA including the low degree of risk associated with cash ISAs, their tax free nature and attractive interest rates on offer. OFT1246 21

had an income of less than 10,000. 34 The regulatory framework 3.9 The rules governing the day-to-day management, transfer and promotion of cash ISAs have three main sources: the statutory instruments that established ISAs (and the subsequent amendments) guidance produced by HMRC in interpreting the relevant statutory instruments, and the Banking Conduct of Business Sourcebook (BCOBS). 3.10 The Payment Services Regulations 2009 (PSR) also apply to some ISA accounts. HMRC guidance 3.11 The first regulations governing the administration and transfer of ISAs were laid before Parliament in 1998. 35 The regulations specify the annual subscription limits and identify the qualifying investments that can be held as well as detailing the rules for operating ISA accounts. The key features for subscribing to, transferring, and withdrawing from a cash ISA, according to the ISA regulations, are that: 34 Table 9.10 available here www.hmrc.gov.uk/stats/isa/table9-10-07-08.pdf shows that 4,272,000 consumers out of a total of 14,069,000 cash ISA consumers who do not also have a stocks and shares ISA, had an income of less than 10,000 in 2008. The proportion of consumers with both a stocks and shares ISA as well as a cash ISA who had an income of less than 10,000 was 21 per cent. 35 The Individual Savings Account Regulations 1998 (SI 1998 No. 1870), The Individual Savings Account (Insurance Companies) Regulations 1998 (SI 1998 No. 1871), The Personal Equity Plan (Amendment) Regulations 1998 (SI 1998 No. 1869), and The Insurance Companies (Overseas Life Assurance Business) (Compliance) (Amendment) Regulations 1998 (SI 1998 No. 1872). OFT1246 22

investors may only subscribe to one cash ISA per tax year investors may withdraw money subject to any terms and conditions imposed by the ISA provider from the cash ISA without losing any tax benefits already accrued, and a transfer must take place directly between one cash ISA provider and another. 3.12 HMRC approves ISA providers, and the ISA regulations stipulate the information that needs to be reported by ISA managers in order that HMRC can monitor subscription limits. Systems operated by ISA managers should ensure that oversubscription is not possible. Banking Conduct of Business Sourcebook 3.13 BCOBS came into force in the UK on 1 November 2009 and is overseen by the FSA. It is a set of rules and guidance, which firms offering deposit-taking accounts must adhere to when dealing with banking customers (defined as consumers, micro-enterprises and charities). As cash ISAs are deposit-taking saving accounts, all providers offering a cash ISA will be subject to BCOBS. 3.14 Cash ISAs may also dependent on the individual product's specific characteristics fall within the definition of a 'payment account', as set out in the Payment Services Regulations (PSRs). 36 From our discussion with cash ISA providers, we have been informed that there are a small number of cash ISAs that fall into this category. If a cash ISA is a 36 The PSRs are a set of regulations that implement the Payment Services Directive (PSD). This is European Community legislation which aims to harmonize the rules relating to retail payment services across the European Economic Area. The PSRs came into force in the UK on 1 November 2009 and most aspects are overseen by the FSA. OFT1246 23

payment account, the PSRs also apply 37 and BCOBS does not apply to the extent that it would overlap with the requirements of the PSRs. 38 3.15 There are also some cash ISA providers who, regardless of the type of cash ISA product they offer, are not subject to the PSRs. These include credit unions, municipal banks and NS&I. 3.16 Two of the FSA s Principles for Businesses are also of particular relevance to this super-complaint: 39 Principle 6: 'A firm must pay due regard to the interests of its customers and treat them fairly.' Principle 7: 'A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.' 3.17 Reinforcing Principles 6 and 7, Chapter 2 of BCOBS seeks to set high standards for communication to banking customers by ensuring that the needs of consumers are taken into account and that any information provided to a consumer is transparent. Specifically, BCOBS 2.2.1R states that: 'a firm must take reasonable steps to ensure that a communication or a financial promotion is fair, clear and not misleading.' 3.18 Chapter 4 of BCOBS deals with information to be communicated to a banking customer. The 'appropriate information rule' at BCOBS 4.1.1R requires a firm to provide or make available appropriate information about a retail banking service and any deposit made in relation to that service: 37 The PSRs require, among other things, relevant information, including the interest rate, to be set out in a 'framework contract'. Any change to the framework contract must be notified to the customer two months in advance, unless the change is to the advantage of the customer. 38 See BCOBS 1.1.3R and 1.1.4R. 39 The principles are available here www.fsahandbook.info/fsa/html/handbook/prin/2/1. OFT1246 24

in good time in an appropriate medium, and in easily understandable language and in a clear and comprehensible form. 3.19 This should ensure that the banking customer can make decisions on an informed basis. 3.20 BCOBS 4.1.2G also provides guidance on the rule concerning appropriate information. It states that if a firm such as a cash ISA provider wishes to make a material adverse change to any interest rate (except where the interest rate changes because it tracks a publicly available rate), the cash ISA provider should provide 'reasonable notice' of this change on paper or in some other durable medium before this change occurs, whilst also taking into account any notice period required by the customer in order to terminate the contract. 3.21 Under BCOBS 4.2.1R, a firm such as a cash ISA provider must provide its customers with statements on paper or in another durable medium subject to certain exceptions. The two exceptions most relevant to cash ISAs are: where a passbook that records transactions is provided, and where the service is provided at a distance by electronic means and the customer has the ability to access the account balance, view transactions and give instructions via this distance medium. 3.22 There is no obligation under BCOBS for cash ISA providers to provide the rate of interest on statements. However, BCOBS 4.2.2G, in interpreting BCOBS 4.2.1R, states that a firm should 'consider 40 indicating the rate 40 Emphasis added. OFT1246 25

or rates of interest that apply to a retail banking service in each statement of account provided or made available to a banking customer.' OFT1246 26

4 COMPETITION IN THE CASH ISA MARKET 4.1 This chapter considers competition in the cash ISA market. 41 It looks at the market structure and assesses the relative decline in cash ISA interest rates compared to other savings products and other retail funding sources. It concludes by introducing some issues around consumer behaviour that have a bearing on how the market operates. Concerns raised by Consumer Focus 4.2 In its super-complaint, Consumer Focus raised a number of concerns regarding competition in the cash ISA market, quoting the Financial Services Consumer Panel which argued that 'competition in this market appears to have dried up.' 42 4.3 Consumer Focus described the recent decline in cash ISA interest rates as being greater than other comparable products and notes the widening spread between cash ISA interest rates and residential mortgage interest rates. 43 Consumer Focus also presented market share data on cash ISA providers, noting 'the dominance of the major high street banks in the cash ISA market.' 44 4.4 The evidence used by Consumer Focus to support its concerns includes: 41 It should be noted that the OFT has not carried out a full relevant market definition exercise in this reasoned response. The use of the term 'cash ISA market' should not be interpreted as meaning the OFT considers this the appropriate market definition for the purposes of competition law. 42 Consumer Focus super-complaint: Cash ISAs, page 23. 43 Consumer Focus super-complaint: Cash ISAs, page 22. 44 Consumer Focus super-complaint: Cash ISAs, page 9. OFT1246 27

the average spread in rates of return between cash ISAs and other savings accounts (instant access and notice) has significantly narrowed 45 between 2004 and 2007, the spread between the average rate of return on cash ISAs and existing home mortgages 46 was 0.8 per cent and between 2008 and 2009 it rose to 2.5 per cent 47, and analysis of all products on a comparison website 48 suggests that the best paying (non-isa) savings products offer slightly higher returns than the best paying cash ISA products. 49 4.5 Consumer Focus stated that '[s]ome commentators have drawn the conclusion that providers are failing to pass on the full tax relief to savers.' 50 Market structure 4.6 In this section we describe several structural indicators to give an assessment of whether there are any structural features of the cash ISA market that adversely affect competition, and thus cause harm to consumers. It considers whether existing providers or potential entrants provide a competitive constraint that creates an incentive to innovate and provide consumers with products they value. The threat of losing 45 Consumer Focus super-complaint: Cash ISAs, page 21. 46 This figure does not differentiate between fixed rate and variable rate mortgages. 47 Consumer Focus super-complaint: Cash ISAs, page 22. Comparable figures are provided for new home mortgages also. 48 Moneymadeclear website, accessed on 1 March 2010 (www.moneymadeclear.org.uk/products/savings/types/cash_isas.html). 49 Consumer Focus super-complaint: Cash ISAs, page 16. 50 Consumer Focus super-complaint: Cash ISAs, page 16. OFT1246 28

business should spur innovation and provide incentives to offer better rates of return and higher levels of service. 4.7 Further, where a market is highly concentrated, with high barriers to entry and expansion and a fragmented consumer base unable to exert buyer power, it might be expected to raise greater competition concerns than one that does not have these features. 4.8 As a first step, we have estimated market shares in the cash ISA market between March 2007 and April 2009 (measured in terms of the number of customers per provider). These market shares are provided in Table 4.1 below. OFT1246 29

Table 4.1: Market shares, by number of customers Market share Cash ISA provider Mar 2007 Apr 2008 Apr 2009 Halifax Bank of Scotland Lloyds Banking 19.4% 14.9% 21.3% 51 Lloyds TSB/ Cheltenham & Gloucester Group 5.8% 8.8% Abbey 7.9% 6.1% 14.8% 52 Alliance & Leicester Santander 4.3% 2.6% Bradford & Bingley 2.7% 2.6% Nationwide Building Society Nationwide 9.6% 13.2% 14.6% Portman Building Society Building Society 2.2% Royal Bank of Scotland Group 53 6.1% 8.8% 13.1% HSBC 54 10.6% 7.9% 8.5% Barclays/Woolwich 4.6% 7.0% 6.3% Britannia Building Society 3.0% 2.6% 4.2% Co-operative Bank 1.2% Na 55 National Savings and Investments 0.9% Na 2.8% Northern Rock Na Na 1.2% Yorkshire Building Society 1.2% Na 1.1% ING Direct Na Na 1.0% Yorkshire Bank/Clydesdale Bank 1.1% Na 0.5% Others 56 19.4% 25.5% 10.5% Source: OFT calculations based on Mintel ISAs, Finance Intelligence Reports (June 2007 August 2009) 51 Refers to Lloyds Banking Group, which includes Lloyds TSB, Halifax, Birmingham Midshires, Cheltenham & Gloucester, Intelligent Finance and Scottish Widows. 52 Refers to Santander UK which includes Abbey, Alliance & Leicester and Bradford & Bingley. 53 Includes Direct Line. 54 Includes First Direct. 55 Data not available for these rows from Mintel reports. 56 This category includes respondents who did not know who their cash ISA provider was. OFT1246 30

4.9 Table 4.1 shows that the cash ISA market has become more concentrated since 2007. The Herfindahl-Hirschman Index (HHI), a tool commonly used to asses the level of concentration in a market, showed that concentration rose from a figure of 880 in 2007 to 1,228 in 2009. 57 4.10 The recent increase in concentration is, in large part, due to the mergers that took place in the wake of the financial crisis. 58 It is not clear if this level of concentration will persist. Table 4.1 shows that market shares fluctuated from year to year for many providers. Indeed, the changes in market shares for some providers are quite pronounced from 2007 to 2009. For example, on the above calculations, RBS's market share as measured by customer numbers has doubled over this period, whereas Yorkshire Bank/Clydesdale's has halved. The fluctuating market shares suggest that providers can, and do, win business from one another. 4.11 Barriers to entry and expansion are an important determinant of how a market evolves. 59 If there exist high barriers to entry or expansion (such as the need to have a branch network or recognised brand), then potential new entrants will find it harder to enter the market and exert a competitive constraint on existing firms. If there exist barriers to expansion, there will be reduced incentives to providers to offer more competitive offerings to attract new customers to increase market share. 57 The HHI is the sum of the squares of each firm's market share. An HHI index of 1,228 can be regarded as indicative of moderate concentration. 58 It should be noted that over the period in question there were mergers between, among others, Lloyds TSB and Halifax Bank of Scotland, Abbey with Bradford & Bingley and Alliance & Leicester, Co-operative Bank and Britannia Building Society in addition to Nationwide and Portman Building Society. 59 The OFT is currently considering barriers to entry, expansion and exit in retail banking more generally and will be reporting back later this year. See www.oft.gov.uk/oftwork/financial-andprofessional/review-barriers/ for further details. OFT1246 31

4.12 A large branch network is useful for a cash ISA provider since it allows firms to sell cash ISAs to existing customers. However, firms can enter on a small scale without a significant branch network by using telephone and internet banking. For example, ING Direct entered the market in 2007 without a branch network, and as Table 4.1 shows, by 2009 was one of the top ten providers. 4.13 Our analysis of data provided by Defaqto shows that 23 per cent of available cash ISAs cannot be opened in branches, that is, they can only be opened via the internet, phone or post. This reflects research by Mintel 60 which suggests that the internet is likely to become an increasingly important access point for savings and investment products. Thus, while the branch network will still be important, other distribution channels will allow new and existing cash ISA providers to offer consumers alternative ways to access their products. 4.14 We have also been informed by cash ISA providers that it is possible to enter the market through a partnership arrangement, whereby a provider brands a cash ISA but contracts out the management and operation of the cash ISA to a third party. For example, Family Investments provides cash ISA products for the Post Office. 61 This further suggests that it is possible to enter the market without incurring significant sunk costs, meaning that barriers to entry are not insurmountable. 4.15 On the basis of the above analysis, while the cash ISA market has moderate levels of concentration, this is largely the result of recent mergers. We have not identified any significant concerns around the structure of competition in the cash ISA market and nor do there appear to be any major barriers to entry or expansion that are dampening competition. 60 Deposit and Savings Accounts UK, May 2009, page 29. 61 See www.familyinvestments.co.uk/partners.aspx. OFT1246 32

Cash ISA interest rates 4.16 As the Consumer Focus super-complaint noted, cash ISAs are a popular form of savings product, coming second only to savings accounts: 34 per cent of adults hold cash ISAs compared to 59 per cent having savings accounts. 62 Our consumer survey revealed that of those surveyed who hold cash ISAs, 35 per cent hold more than one cash ISA (which translates into 15 per cent of all consumers). 63 4.17 Cash ISAs have motivated saving by UK consumers. Our consumer survey suggested that 30 per cent of cash ISA investors regularly deposited funds into their cash ISAs, but the majority (over 60 per cent) deposited money only when they could afford to do so. Over 10 per cent of respondents stated that since opening their cash ISA they had never deposited further money. 4.18 Respondents to our consumer consultation noted that the main reasons for investing in cash ISAs related to their tax free status and low risk. Consumers use cash ISAs (and ISAs more generally) for a number of purposes. An HMRC report 64 found that most investors used cash ISAs for non-specific savings reasons: 22 per cent said that they were saving for a rainy day or an emergency, while 21 per cent were saving for no specific reason. Ten per cent of investors were saving for retirement pensions and six per cent cited saving for a house deposit or home improvements as their main motivation. A survey conducted for HMRC 65 62 Consumer Focus super-complaint: Cash ISAs, page 7. 63 Consumers may hold more than one cash ISA for a number of reasons. It may be that they have opened additional cash ISAs to take advantage of high interest rates that are only available to new money or they are prevented from depositing additional money into their existing cash ISA. Alternatively it may be the case that consumers simply do not close their old cash ISAs. 64 HMRC Research Report 38: Savings in ISAs. 65 HMRC Working Paper Individual Attitudes to Saving: Effects of ISAs on People's Saving Behaviour, Report 38. OFT1246 33

further found that around a third of respondents said that they would not have saved as much had cash ISAs (and ISAs more generally) not existed. 4.19 Despite regulatory limitations, cash ISA providers can, and do, compete across a range of dimensions. Our research suggests that key product features on which providers compete include: the interest rate offered on cash ISAs (including whether the interest rate is fixed, variable or tiered) how often interest is paid distribution channels through which cash ISAs are sold ways to withdraw money conditions around withdrawal, and quality of service. 4.20 However, as a survey for Money.co.uk notes, the key determinant in choosing a cash ISA provider remains the interest rate offered. 66 The tax advantage available on cash ISAs result in them being generally more attractive than other savings products with the same gross interest rate. However, if the gross interest rate on an alternative savings product was sufficiently higher than that of a cash ISA to outweigh the tax advantage, consumers may consider the alternative savings product as a more attractive option. Therefore, to an extent, alternative savings products might be considered a substitute for cash ISAs by consumers, and these substitutes may therefore exert a degree of competitive constraint on cash ISAs. 66 In a YouGov survey for Money.co.uk, the most commonly suggested factor by consumers in choosing a cash ISA was 'finding the best interest rate available at the time.' This survey is available at: www.today.yougov.co.uk/sites/today.yougov.co.uk/files/yg-archives-finmoney.co_.uk-isas-120410.pdf. OFT1246 34

Comparison with other products 4.21 In its super-complaint, Consumer Focus presented data from the Bank of England showing the decline in the average rate of interest on cash ISAs against other savings accounts before and after the financial crisis. A similar graph to the one presented in the super-complaint is provided below in Figure 4.2. Figure 4.2: Average rates of return for cash ISAs and savings accounts not including any bonus rates offered on those accounts, April 1999 March 2010 8 7 6 Interest rate 5 4 3 2 1 0 Ap r- 99 Se p- 99 Fe b- 00 J ul- 00 De c- 00 M ay- 01 Oc t- 01 M ar- 02 Au g- 02 Ja n- 03 Ju n- 03 No v- 03 Ap r- 04 Se p- 04 Fe b- 05 J ul- 05 De c- 05 M ay- 06 Oc t- 06 M ar- 07 Au g- 07 Ja n- 08 Ju n- 08 No v- 08 Ap r- 09 Se p- 09 Fe b- 10 Average interest rate for cash ISAs (instant access with no bonus rate) Average interest rate on instant access savings accounts (no bonus) Source: Bank of England 4.22 Figure 4.2 above shows that the spread between the average interest rate available on cash ISAs and instant access savings accounts significantly narrowed around October 2008. The spread between cash ISAs and instant access savings accounts fell from 2.59 per cent in April 2007 to 0.28 per cent in March 2010. However, the cash ISA interest rate remains above that of instant access savings. This does not indicate OFT1246 35

that firms are failing to pass on the tax advantage of cash ISAs to consumers. 4.23 Figure 4.2 only paints a partial picture. It does not take account of the bonus interest rate that some cash ISAs and savings accounts offer. 67 In a well functioning market, consumers drive competition by switching to those providers that offer the best rates: thus, it is important to also consider the interest rate available on cash ISAs, including the bonuses being offered. Figure 4.3 below presents the average interest rate on cash ISAs and savings accounts where the interest rate now reflects the core rate plus any bonus being offered. 68 67 'Bonus rates' refers to the practice of offering higher rates of interest for a limited period on cash ISAs before reverting to a standard rate, which may be lower. 68 Both the Bank of England and Moneyfacts data are aggregated. The Bank of England average is weighted according to the size of providers' balance sheets and does not include any bonus rates paid. In its super-complaint, Consumer Focus uses data from the Bank of England. The Moneyfacts data does include bonus rates paid but is not weighted. OFT1246 36

Figure 4.3: Average rates of return for cash ISAs and savings accounts where the interest rate includes any bonus applied to those accounts, April 2007 March 2010 6.00 5.00 4.00 Interest rate 3.00 2.00 1.00 0.00 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Source: OFT analysis of Moneyfacts data Average interest rate for cash ISAs (with bonus, instant access) Average interest rate for instant access savings accounts (with bonus) 4.24 Following the fall in the base rate in 2008 and 2009, the interest rate on savings products fell significantly. Figure 4.3 shows that in the case of cash ISAs and savings accounts, both with bonus rates, the spread has narrowed between April 2007 and March 2010 - falling from 1.48 per cent to 0.74 per cent over that time period. This is a smaller reduction than if the bonus rates are not included. As before, cash ISA interest rates remain above those available from instant access savings accounts. OFT1246 37

4.25 Again, focusing solely on spreads only presents a partial picture. It is important to consider interest rate trends more generally to place the decline in cash ISA interest rates in context. 4.26 Financial institutions have a range of sources of funds including retail deposits such as cash ISAs and borrowing from the wholesale market. It is instructive to compare the cost of funding through cash ISAs compared to other wholesale sources, to determine whether cash ISA providers are using the product as a source of cheap funding. Of course, it is important to note that not all cash ISA providers will have equal access to wholesale financial markets. Further, in doing such an analysis, one must be careful to differentiate between cyclical and structural trends. 4.27 Figure 4.4 below shows that the rates of return paid on cash ISAs have been very similar to both the base rate and LIBOR 69 over a ten year period. Both the cash ISA rate and the base rate were significantly lower than LIBOR during the financial crisis of 2008 and 2009 because the lack of supply of wholesale funds forced up its cost. This gap narrowed in the beginning of 2010. The current situation does not appear to be significantly different from the long term trend. 69 The London Interbank Offered Rate (LIBOR) is a reference rate based on the interest rates at which banks can borrow unsecured funds from other banks on the London wholesale money market. OFT1246 38

Figure 4.4: Average rates of return for cash ISAs (not including any bonus rate offered on these accounts) compared to 3 month LIBOR and Bank of England base rate, April 1999 March 2010 8 7 6 5 Interest rate 4 3 2 1 0 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Cash ISA Rate of Return (instant access and no bonus rate) End month BoE base rate 3 month mean LIBOR Source: Bank of England 4.28 Further, as can be seen from Figure 4.4, the interest rate on cash ISAs has closely followed the base rate and not fallen faster than it. 4.29 Referring back to the decline in spreads between cash ISAs and savings accounts (Figures 4.2 and 4.3), for these spreads to have remained constant in light of a declining Bank of England base rate, the interest rate earned on savings accounts would have had to become negative. Clearly, this is not possible for nominal interest rates. Thus, given the OFT1246 39

very low interest rate environment in 2009 and 2010, it would have been impossible to maintain the same magnitude of spreads between cash ISAs and savings (with and without bonus rates), hence the fall in cash ISA interest rates is greater than for other savings products. In short, cash ISA interest rates had further to fall. 70 4.30 Consumer Focus also noted that the difference between cash ISA interest rates and interest rates on mortgages has increased. 71 However, it is not the case that the difference between lending and borrowing rates should necessarily be stable. For example, the cost of providing mortgages has increased substantially since 2007. Firstly, mortgage providers must now hold a great deal more capital than in 2007 and secondly, the price of that capital has increased. Therefore, an increase in the difference between mortgage and cash ISA rates would be expected during the period 2007 to 2009. 4.31 One can also compare the returns earned on fixed rate maturity products with those of fixed rate cash ISAs. As Figure 4.5 below shows, the returns earned on cash ISA and other fixed rate products have been very similar for the past three years. 70 We have also examined the ratio of returns between cash ISAs and instant access savings accounts. Our analysis shows that at the beginning of 2010, the ratio was close to its long term average. This indicates that the relative attractiveness of savings accounts vis-à-vis cash ISAs has remained largely unchanged. 71 Consumer Focus super-complaint: Cash ISAs, pages 21 and 22. OFT1246 40

Figure 4.5: Average rates of return for fixed term cash ISAs and fixed rate maturities, April 2007 March 2010 7.00 6.00 5.00 Interest rate 4.00 3.00 2.00 1.00 0.00 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Cash ISA rate of return fixed rate more than 1 year Average interest rates fixed rates savings accounts (all maturities) Source: OFT analysis of Moneyfacts data 4.32 Taken together with the evidence on the structure of the market, our analysis does not suggest that there is a lack of competition in the cash ISA market. How the cash ISA market works 4.33 Even if there is not a lack of competition amongst cash ISA providers, there may still be issues around the functioning of the market. An effective market outcome is characterised by active consumers who understand the cash ISA product and are confident in transferring their OFT1246 41

cash ISA between providers. In such a market, cash ISA providers would need to offer more competitive products and innovative services to attract customers. This would lead to the virtuous circle described in Figure 4.6 below, ultimately leading to better outcomes for consumers. In a market displaying these characteristics, more efficient firms gain market share at the expense of less efficient ones, which is good for consumer welfare and, by providing pressure to reduce costs, is good for UK productivity. Figure 4.6: The pro-competitive virtuous circle in the cash ISA market Cash ISA rates of return and any conditions associated with them are clearly specified and communicated Consumers have the confidence to transfer their cash ISA between providers Consumers have the information they need to make effective comparisons between providers 4.34 If consumers are unable to, or do not, fully understand cash ISAs and therefore cannot make effective comparisons between providers, or face difficulties in transferring their cash ISA between providers, then they will not be able to exercise an effective competitive constraint on providers. This, in turn, will mean consumers will miss out on the best deals and not be in a position to provide incentives for providers to innovate and offer better products. OFT1246 42

4.35 Our research has found that while there is a significant number of consumers who actively seek out the best deals and transfer their funds to take advantage of them, many consumers do not. Whilst the annual rate of switching cash ISAs is 12 per cent, 83 per cent of consumers questioned in our survey had never transferred their cash ISA. 72 This suggests that some consumers are regularly transferring whilst others are never transferring their cash ISA. 73 4.36 A similar picture emerges regarding knowledge of interest rates. Our survey found that 62 per cent of consumers who responded did not know their interest rates. 74 At the same time, over a quarter of consumers responding to a survey on the MoneySavingExpert.com website said they checked their interest rate every month or so. 75 4.37 Consumer behaviour can change the way that firms compete. For example, consumers weighing the short-term greater than the long-term may lead cash ISA providers to change their own behaviour to take advantage of this bias, such as through emphasising short-term benefits of cash ISAs to attract new savers. 72 OFT omnibus survey - see Annexe B for more details. 73 It seems unlikely that this is due to the lack of gains from transferring a cash ISA. The difference between the average rate of return in 2009 without a bonus (from Bank of England data) and the best rate of return that allowed transfers in (based on OFT analysis of Defaqto data) was 2.83 per cent. In 2008 (the most recent year for which there is data), 61 per cent of consumers with a cash ISA (but who did not have a stocks and shares ISA), had a cash ISA account worth more than 3,000 and 36 per cent had more than 6,000 (see www.hmrc.gov.uk/stats/isa/table9-10-07-08.pdf) meaning they could potentially gain between more than 80 and 160 respectively each year if they transferred from an average cash ISA to one paying the highest level of interest. 74 OFT omnibus survey - see Annexe B for more details. 75 Internet based survey of MoneySavingExpert.com users conducted by Consumer Focus. It should be noted that whilst the OFT survey was based on a random sample of respondents, the MoneySavingExpert.com survey was based on visitors to its website and is therefore likely to be biased in favour of more active consumers. OFT1246 43

Conclusion 4.38 The OFT's analysis suggests that while the cash ISA market may have become more concentrated in recent years, this has largely been the result of retail bank mergers and that there do not appear to be any major barriers to entry or expansion that are dampening competition. 4.39 The nature of competition in the market is largely focused on interest rates offered. Our analysis shows that while the interest rates offered on cash ISAs have declined since 2008, they are no lower than comparable products that do not have the tax advantage. Cash ISA interest rates have not fallen by more than the base rate. Interest rates on other savings products have fallen by less than cash ISAs, but this is because they cannot fall below zero. 4.40 On the basis of the above analysis, it does not appear that the structure of the market is substantially harming consumers. However, for competition to be truly effective, it requires properly informed consumers to search for the most appropriate product and transfer their cash ISA when necessary. OFT1246 44

5 TRANSFERRING A CASH ISA 5.1 This chapter assesses issues raised in the super-complaint by Consumer Focus around the cash ISA transfer process. It describes the transfer process, the length of the process when the transfer goes well, and the problems that may arise in the transfer process. It concludes by setting out measures agreed with the industry and other recommendations to address these issues. Issues raised in the super-complaint 5.2 Consumer Focus raised a number of concerns about the process of transferring funds from one cash ISA account to another 76 (the 'cash ISA transfer process'). In its super-complaint Consumer Focus said that: the time taken for consumers to transfer their cash ISA from one provider to another is too long a survey for Consumer Focus found that cash ISA transfers took longer than five weeks for nearly one in three consumers surveyed 77 the regulatory framework of cash ISAs makes opening and transferring into cash ISAs restrictive and bureaucratic, 78 and cash ISA providers impose arbitrary rules prohibiting transfers to the most attractive cash ISAs. 79 5.3 On the basis of these concerns, Consumer Focus asked the OFT, in collaboration with the FSA and HMRC, to address: 76 This transfer can be between cash ISA providers or between cash ISA products offered by the same provider. 77 Consumer Focus super-complaint: Cash ISAs, Figure 3, page 18. 78 Consumer Focus super-complaint: Cash ISAs, page 12. 79 Consumer Focus super-complaint: Cash ISAs, page 4. OFT1246 45

the '[u]nnecessarily bureaucratic and lengthy processes for transferring savings between cash ISA accounts used to prevent switching', 80 and the '[a]britrary rules imposed by cash ISA providers forbidding transfers into some of the most attractive accounts'. 81 5.4 Consumer Focus noted that it is not 'unreasonable, for example, to expect providers to commit to managing transfers within five working days'. 82 The transfer process 5.5 As outlined in Chapter 3, in order to ensure tax privileges are granted and maintained, a cash ISA consumer cannot simply withdraw funds from their existing cash ISA, close the account and open a new cash ISA. The transfer must be directly between the old and new provider. These extra requirements, particular to cash ISAs due to their taxadvantaged status, mean that transfers of funds from one provider to another must also involve a transfer of extra information in order to sustain the 'tax wrapper' that keeps returns exempt from tax. This differentiates cash ISA transfers from transfers of most other financial products. 5.6 Through its guidance notes to ISA managers in 2008 and regular 'ISA bulletins' since that time, HMRC has provided clarification over the rules relating to the transfer of cash ISAs. Statements by HMRC of particular relevance to this super-complaint include: 83 80 Consumer Focus super-complaint: Cash ISAs, page 27, fourth bullet point. 81 Consumer Focus super-complaint: Cash ISAs, page 27, fifth bullet point. 82 Consumer Focus super-complaint: Cash ISAs, page 27. 83 HMRC ISA Bulletins 2 and 3, 2008. OFT1246 46

cash ISA transfer requests do not need to be made by the investor in writing and may be done over the telephone or online cash ISA transfers can be made electronically by managers and following the removal of the requirement for old managers to provide a declaration to the new manager when transferring funds, Bacs 84 can be used to effect the transfer of cash ISA funds, and the existing provider has 30 calendar days in which to complete the transfer and fund the consumer s new cash ISA. 5.7 Figure 5.1 below summarises the cash ISA transfer process. 85 84 Bacs Payment Schemes Limited is the payment processor responsible for processing payments such as Direct Debits and Standing Orders. 85 This process assumes that the new provider does not use a processing centre and that both cash ISA funds and information is transferred by post. OFT1246 47

Figure 5.1: The cash ISA transfer process Responsibility lies with: Consumer Consumer completes and hands in transfer form to new provider New Provider Existing Provider New provider checks and processes form and sends transfer form to existing provider Existing provider receives documentation by post and processes transfer out Existing provider prints cheque and paper work and sends by post to new provider. Customer's existing cash ISA is closed New provider receives cheque and relevant paper work New provider opens new cash ISA account and credits funds Consumer has their new cash ISA Source: OFT based on information from cash ISA providers OFT1246 48

5.8 Once the existing provider closes a cash ISA account, the consumer no longer earns interest until the new cash ISA provider opens the new account. As a result, the consumer can receive no interest for up to five days. Some providers backdate interest from the date of closure of the existing account, ensuring the consumer receives interest for every day. However this is not consistent across the industry. Length of the transfer process 5.9 This section analyses the length of the transfer process when each of the transfer steps are completed as required. In response to significant problems in the cash ISA transfer process the BBA, BSA and TISA published new guidelines in August 2008 aimed at speeding up the transfer of cash ISAs between providers and improving the efficiency of the process. 86 HMRC supported the work of the cross-industry group and used it as a basis for HMRC guidance. 5.10 A number of recommendations were set out in the guidelines for cash ISA providers to adopt. The key recommendation was that cash ISA providers aim to complete transfers within 23 working days. 87 The ISA Regulations state that cash ISA transfers must be completed within 30 calendar days of the old manager becoming aware of the transfer request. 88 5.11 The OFT asked cash ISA providers to explain how long the transfer process should take. Based on the OFT's analysis of these responses, 89 86 Cash ISA Transfers: Guidelines August 2008. 87 Cash ISA Transfers: Guidelines August 2008 - General background and frequently asked questions. 88 Cash ISA Transfers: Guidelines August 2008. 89 In April 2010, in response to questions posted on the OFT website, 26 responses were received from cash ISA providers. OFT1246 49

cash ISA transfers should take no more than 15 working days. 90 Some cash ISA providers are able to action transfers in less time than this. We heard from a few providers who said that they can do it within 10 working days, or 14 working days during the busiest times. Given this, the existing guidance is not very demanding of cash ISA providers. 5.12 From data provided by cash ISA providers, we estimate that the average industry timescale for transfers is currently just over 26 calendar days with approximately 25 per cent of transfers taking longer than 30 calendar days. 91 For some cash ISA providers the average time was nearer 40 calendar days. 5.13 A number of cash ISA providers have told us that many of the delays encountered during the transfer process are a result of the existing cash ISA provider delaying processing the transfer. One cash ISA provider said that the average time to process a transfer out by other providers was around 19 working days. 92 5.14 Cash ISA providers have told us that there can be seasonal increases in the number of cash ISA transfers providers have to process, particularly between February and May, the 'ISA season'. During these periods some cash ISA providers receive larger than normal volumes of transfer requests which often leads to delays in processing. Sometimes the introduction of a highly competitive cash ISA by a provider can create extra demand for other providers to transfer cash ISAs out. This can lead 90 This is based on data received from providers where the process takes on average seven working days for the new provider; five working days for the existing provider and three days to take into account postal times. This also assumes that the whole process is error free and the volumes of ISA transfers providers receive are manageable. 91 Based on data received from cash ISA providers covering the period 6 April 2008 to 6 April 2010. 92 Based on data provided in response to a question on how long it took for providers to transfer out. OFT1246 50

to delays given that it is difficult for providers to predict this increase in demand. 5.15 Some providers store up transfers for batch processing rather than handling transfers on a day-to-day basis and the use of second class postage is common. These can both lengthen the transfer time considerably. Problems in the transfer process 5.16 In addition to dissatisfaction with the length of time taken for some cash ISA transfers, the OFT also found evidence to indicate that some consumers experience other problems in transferring their cash ISA. The problems some consumers experience and the perception that there are problems may be a contributing factor to low transfer activity amongst cash ISA consumers. 5.17 We have been told that the volume of cases involving problems is a significant cause of delay to transfers. 93 These cases require some form of intervention or some additional action from the consumer. 5.18 The OFT's omnibus survey showed that 14 per cent of those who had transferred their cash ISA had encountered problems doing so. 94 In addition, a survey of Which? subscribers 95 conducted in 2009 found that 20 per cent of members who transferred a cash ISA experienced problems. 5.19 From the responses we received from cash ISA providers, we are aware that some providers receive substantial amounts of complaints in relation to cash ISAs. For some providers, over 25 per cent of the complaints they received between April 2008 and March 2010 about cash ISAs 93 Based on information received from cash ISA providers. 94 See Annexe B - Cash ISA Omnibus Survey Q7. 95 Which? survey, Transferring ISAs January 2009. OFT1246 51

were in relation to transfers. It is also clear from providers' responses that there are seasonal increases in the number of complaints that they receive, usually peaking during the 'ISA season'. 5.20 One of the major reasons for problems is transfer forms that are poorly completed. One provider told us that 15 per cent of transfer forms require further investigation or some further action by the consumer. For example, some cash ISA providers have told us that they have received transfer forms which are out of date and incomplete with incorrect or missing ISA account numbers. In other cases there have been pages missing from the transfer form or the consumer's details on the transfer form do not match the details held on the provider's system. Overall, these issues often result in an inability to locate the consumer based on the information provided resulting in delays in the processing time. 5.21 Poor communication between the new and existing provider can also cause or exacerbate problems with a transfer. In instances where the new cash ISA provider has not heard from the existing cash ISA provider, it is the new cash ISA provider s responsibility to follow this up. The 2008 BBA/BSA/TISA guidelines states that this should be done within 14 working days. Often this is done with a follow up letter. TISA hold a database of cash ISA providers' contact details. However not all cash ISA providers have their specific cash ISA handling teams' contact details on this database, as this is not mandatory. 5.22 Some cash ISA providers have told us that they have improved their cash ISA transfer out processes over the last few years and that this has led to a substantial reduction in the number and effect of problems with transfers. New developments include changes to IT systems to make the application process streamlined, the use of pre-populated transfer forms and the use of specialist teams for handling transfers and associated problems. 5.23 Based on evidence received from consumers, consumer groups and cash ISA providers, the OFT has found that transfers of cash ISAs are taking longer than necessary and too often involve problems. This can leave OFT1246 52

consumers feeling frustrated at what should be a relatively easy and quick process. 5.24 In addition, as a result of transferring their cash ISA, consumers may not receive interest for a period of up to five days. This is due to the fact that the existing ISA provider may pay interest up to the day the account is closed and the cheque sent to the new provider and then the new provider may only start paying interest on the third working day after receipt of the cheque from the existing provider. 5.25 Those consumers who do not receive interest or whose cash ISA transfer does not occur quickly and easily are directly harmed by those problems. Consumer harm may also arise indirectly as a result of these problems reducing consumers' willingness to transfer their cash ISA thereby reducing competitive pressure on cash ISA providers. Our omnibus survey showed that only 17 per cent of those consumers surveyed had ever transferred their cash ISA. A Mintel report 96 indicated that only 12 per cent of consumers transferred their cash ISA in 2009, either to a new product with a new provider or a new product with the same provider, despite the potential for some to benefit significantly from transferring. 5.26 A low willingness to transfer on the part of consumers could dampen competition as there is little to spur cash ISA providers to attract custom. In the long run this can have a detrimental effect on productivity and innovation. Other issues on cash ISA transfers 5.27 Consumer Focus argued that the regulatory framework for cash ISAs makes opening and transferring into cash ISAs restrictive and bureaucratic. 97 For example, the HMRC regulations prevent consumers 96 ISAs, Finance Intelligence, August 2009. 97 Consumer Focus super-complaint: Cash ISAs, page 12. OFT1246 53

from transferring in the same way they would a normal savings account and therefore may lead to a more lengthy transfer process. 5.28 In our view cash ISA transfers do take longer than necessary, but this is due to factors associated with the process cash ISA providers follow, rather than regulatory bureaucracy. The regulations are needed to maintain the integrity of the cash ISA tax advantage. 5.29 In their super-complaint Consumer Focus argued that cash ISA providers impose arbitrary rules to prevent transfers to the most attractive cash ISAs. 98 5.30 Data obtained by the OFT indicates that only 14 per cent of cash ISA accounts available to consumers in 2009 did not accept transfers of funds from other cash ISAs. 99 Although these tend to be the most attractive, the best interest rates for accounts that allow transfers in have offered 4.15 per cent interest rate on average over the last three years, whilst the equivalent rate for those that do not allow transfers in has been only slightly higher at 4.62 per cent. 100 5.31 Consumer Focus claimed that 'the fact that many cash ISA providers do not accept transfers into their most attractive products makes it impossible for customers to consolidate their holdings into a single account.' 101 Despite some accounts restricting transfers of funds, in April 2010 consumers could choose from over 50 cash ISAs accepting transfers in that offered an interest rate of at least two per cent above the base rate. 102 Therefore, consumers are able to consolidate their cash 98 Consumer Focus super-complaint: Cash ISAs, page 27, fifth bullet point. 99 OFT analysis of Defacto data. 100 OFT analysis of Defacto data. Rates calculated by taking an average of the highest cash ISA rates offered in April 2008, 2009 and 2010. 101 Consumer Focus super-complaint: Cash ISAs, page 27. 102 OFT analysis of Defacto data. OFT1246 54

ISAs into one product offering an interest rate substantially above the base rate. 5.32 Cash ISA providers have some legitimate reasons for having constraints on their products, such as restricting the amount of money consumers can put into their products. 5.33 Given the small proportion of the market that is currently affected, the relatively small interest rate difference between accounts allowing, and not allowing, transfers in and the availability of cash ISAs offering interest rates substantially higher than the base rate that allow transfers in, we do not consider that restrictions on transfers in cause substantial harm at this point in time. Initiatives agreed 5.34 During the course of our work we engaged with cash ISA providers to discuss the transfer of cash ISAs. As a result of this process the BBA, BSA and TISA have agreed to amend their guidelines to reduce the maximum period for completion of the end-to-end process for cash ISA transfers from 23 to 15 working days. The revised guidelines will come into effect on 31 December 2010. The BBA, BSA and TISA have also agreed to explore how best practice can be more widely implemented to reduce the problems that consumers face in transferring their cash ISAs by 31 December 2010. 5.35 To support these new timescales, all cheques and accompanying paper work will be required to be sent by first class post, 103 and all cash ISA providers have committed to handling transfers on a daily basis rather than batch processing. The industry has also committed to increasing staff resources to handle cash ISA new openings and transfers, particularly during the peak 'ISA season' so as to maintain the agreed new timescales. 103 Currently the guidelines do not specify a postal class and many providers currently use second class post. OFT1246 55

5.36 The industry has recognised that it is essential that communications between cash ISA providers need to be directed to the correct recipient in the first instance. Therefore, the BBA/BSA/TISA guidelines will be amended to require cash ISA providers to keep their contact details up to date at all times on the TISA database to support faster communication between providers. In addition, all communication, both written and verbal, should be directed to a designated cash ISA team rather than a generic central service team. 5.37 In addition, the industry has agreed to produce and publish a consumerfriendly summary of its cash ISA transfer guidelines. This summary will be made available to all consumers from 29 June 2010 through the BBA, BSA and TISA websites. We expect cash ISA providers to use the consumer friendly guide to explain the transfer process to consumers. 5.38 Cash ISA providers have agreed to submit to their relevant industry body monthly information on how long cash ISA transfers take. This information will be summarised and reviewed against the new 15 working day limit. Summary information will be sent to the FSA. Further recommendations 5.39 In the past the industry has not always followed the transfer times in its guidelines. It is therefore important that the new guidelines are followed. To ensure this happens, we recommend that: HMRC change its guidance to reflect the new industry guidelines and considers whether the tax rules should similarly be amended the FSA refers to the new guidelines in BCOBS 104 and reviews the information on cash ISA transfer times provided to it by the BBA and 104 BCOBS 5.1.8G currently reads 'A firm may find it helpful to take account of the European Banking Industry Committee Common Principles for Bank Account Switching and the British Bankers' Association/ Building Societies Association/ Tax Incentivised Savings Association Cash ISA Transfers: Guidelines.' OFT1246 56

the BSA, in addition to any information the FSA receives about relevant complaints, and if the new industry guidelines are not being followed, the FSA considers taking action itself under its Banking Conduct Regime paying consideration to BCOBS 5.1.5. 105 5.40 In order to ensure that consumers are not adversely affected if delays occur, we consider that consumers should receive the interest rate on the cash ISA to which they are transferring no later than 15 working days after requesting the transfer, whether or not the transfer has been completed. Therefore, we recommend that: consumers complain to their provider if their transfer takes longer than 15 working days, and in resolving these complaints cash ISA providers ensure that consumers are no worse off than would have been the case if the guidance had been followed, whilst not requiring consumers to work out which provider is at fault. 5.41 The new guidance is one of the factors that the FOS will be able to take into account in settling complaints between consumers and cash ISA providers. 5.42 There may be some additional benefit from bringing the transfer time down below 15 working days. We therefore recommend that the industry consider adopting an electronic system for transfers. The BBA, BSA and TISA have committed to undertake a feasibility study to take this recommendation forward. We understand from some providers that despite the substantial upfront cost of implementing an industry wide electronic transfer system, the annual running cost of cash ISAs would 105 BCOBS 5.1.5 states 'A firm must provide a prompt and efficient service to enable a banking customer to move to a retail banking service (including a payment service) provided by another firm.' OFT1246 57

fall in the long run, and that this would lead to significant benefits for providers. Clearly for some smaller cash ISA providers, the implementation cost would prove to be more challenging. For these reasons our view is that further consideration of an electronic system is required. 5.43 The BBA and BSA have agreed to ensure that consumers start to accrue interest no later than two days after the funds are received from the old provider. We do not believe that this is sufficient. We consider that consumers should receive interest for every day during the transfer process since the OFT understands that one of the providers has the consumers' money at all times during the transfer process. We note that a number of providers already backdate interest from the date of closure of the existing cash ISA account. This ensures that consumers receive interest on every day. 5.44 We recommend that cash ISA providers ensure that consumers receive interest on every day during a cash ISA transfer and that the FSA consider the case for taking action under BCOBS or for amending the BCOBS rules or guidance if providers do not follow this approach. 5.45 Some stakeholders argue that self transfers using certificates and cheques would speed cash ISA transfers since it would allow consumers to manage transfers themselves, removing the need for funds and paper work to be sent directly between providers. Some consumers would benefit from self-transfers, in particular those with the time to visit the branches of cash ISA providers and handle the transfer themselves. 5.46 However some industry bodies and cash ISA providers oppose a certificate based system. They argued that: The system would have relatively high cost and administrative burdens. Initial certificates would either involve IT changes or would need manual calculation and production. Less centralisation of the process would result in greater costs borne by individual branches. Significant practical concerns exist. For example how long the certificate would be valid for and what would happen if the OFT1246 58

certificate had expired, were lost or stolen. Some providers voiced concern about the potential for fraudulent duplicate certificates to be in circulation. Where a consumer wants to split their funds between two or more different providers, updated certificates would be required to show any remaining balance. If current year subscriptions were involved, the process would become more complex as it would need to show exactly how much of the allowance had been transferred and how much still remained. Extra compliance checks would be required to ensure certificates were genuine, that the investor had an authentic certificate and that replacements were only issued when necessary. 5.47 Given these arguments and the substantial improvements that the industry has agreed to under the proposed new guidelines, we do not recommend moving to a self transfer system at this time. 5.48 Finally, we recommend that consumers review the interest rates being paid on their cash ISAs regularly, comparing them with the rates available from competitors, and consider transferring when better deals can be found. The OFT also recommends that consumers consider the full range of cash ISA providers and cash ISAs available, including providers that do not offer bonus rates and cash ISAs that offer fixed rates. Conclusion 5.49 The OFT s research indicates that cash ISA transfers are taking too long and that many problems occur that could be easily avoided. This causes direct harm to those consumers whose transfers are affected and may also decrease consumers willingness to transfer their cash ISAs. As discussed in the previous chapter, it is important that consumers are willing to transfer if competition is to work effectively. 5.50 The OFT believes that the improvements to the cash ISA transfer process outlined above, and in particular reducing the time taken to process transfers, will give consumers greater confidence in the transfer OFT1246 59

process. In turn, this should spur cash ISA providers to offer increasingly more competitive and innovative products to attract custom. OFT1246 60

6 TRANSPARENCY OF INTEREST RATES ON CASH ISAS 6.1 This chapter considers concerns raised by Consumer Focus regarding the lack of transparency around interest rates for cash ISAs, particularly for older cash ISAs. 106 It considers the ease with which consumers can find information about cash ISAs and ways in which this may be improved. It concludes by discussing measures agreed with industry and other recommendations to address these issues. Concerns raised by Consumer Focus 6.2 In its super-complaint, Consumer Focus reported a number of concerns regarding the provision of information on cash ISAs. These concerns can be summarised as: '[d]ifficulty in accessing the prevailing interest rate being earned on savings accounts, including cash ISA account[s], especially of older accounts.' 107 'customers mistakenly assume that their provider will automatically transfer them to a new (higher) interest rate when they launch a new cash ISA product.' 108 '[c]onfusion about which account a saver has, owing to the proliferation of similar (and similarly-named) products.' 109 6.3 On the basis of these concerns, Consumer Focus asked the OFT, in collaboration with FSA and HMRC, to: 106 Consumer Focus super-complaint: Cash ISAs page 4. 107 Consumer Focus super-complaint: Cash ISAs page 27, sixth bullet point. 108 Consumer Focus super-complaint: Cash ISAs page 20. 109 Consumer Focus super-complaint: Cash ISAs page 27, third bullet point. OFT1246 61

address confusion about which account a saver has, and address difficulties in accessing the prevailing interest rate being earned on savings accounts, including cash ISA accounts, especially of older accounts. 110 6.4 Consumer Focus noted that after 1 May 2010, most consumers would receive notification when any bonus rate period ends and when there is a material adverse change in their interest rate. However, it noted that there remained no requirement for cash ISA providers to place individual interest rates on cash ISA statements. 6.5 Consumer Focus said that it is not 'unreasonable for all statements to contain information on the correct name of the account (including issue number) and up-to-date information on the prevailing rate of interest and the date at which any bonus period comes to an end.' 111 6.6 Our assessment examines each of the above concerns in turn, focusing most attention on the difficulty consumers have in finding their interest rate. Difficulty in finding interest rates 6.7 Our consumer survey found that awareness of individual interest rates was low: 62 per cent of consumers surveyed did not know their interest rate, meaning that there may be some consumers who are not able to effectively assess their cash ISA's value and as a result cannot assess the benefits of transferring cash ISAs. 110 In this reasoned response we have focused solely on cash ISAs, not savings products more widely. This follows the statement in the super-complaint that Consumer Focus is 'not calling for a wider review of the savings market at this stage', Consumer Focus super-complaint: Cash ISAs, page 28. 111 Consumer Focus super-complaint: Cash ISAs, page 27. OFT1246 62

6.8 Our consumer survey asked those who said they knew their current interest rate how they knew that information. There was a range of responses: the most commonly reported sources of information were branch enquiry (23 per cent of respondents), annual statements (16 per cent) and material sent by providers (13 per cent). Online banking services and providers' websites were reported by 12 and 10 per cent of respondents respectively. 112 6.9 The OFT considers that consumers have a variety of means available to ascertain the interest rate paid on their cash ISAs. For example, cash ISA consumers can obtain personalised interest rate information through a branch or telephone enquiry, by quoting their account number. In addition, many of the major providers' statements include the name of the cash ISA product, which enables savers to check their interest rates on leaflets or websites. Information on other products can also be found on rival providers' websites and independent websites, as well as promotional material. 6.10 We consider that, in most cases, such information is relatively easy to gather. When we tried to find interest rate information, we found it relatively easily and quickly. For example, we found that online information is usually straightforward to find on cash ISA providers' websites, at least for current cash ISAs: on average, it takes two or three clicks on prominently signposted links to lead the user from the homepage to the relevant webpage, where information for individual accounts is clearly set out. 6.11 However, our review of online information suggested it is harder to find interest rate information for older cash ISAs, particularly those offered by smaller providers. We tried to retrieve interest rate information online for a sample of 47 cash ISAs offered in 2003 that are held by existing customers but are no longer open to new customers. We found that some websites of smaller providers did not provide this information and 112 Full results of the omnibus survey can be found in Annexe B. OFT1246 63

some websites only showed this information if the user typed in this request in the search function. 6.12 On the basis of the above evidence it appears that it is not particularly difficult to locate interest rate information about many cash ISAs. However, for certain older cash ISAs it is harder to ascertain interest rate information quickly. Notification of interest rate changes 6.13 The FSA's BCOBS has recently been amended to add guidance relating to information about interest rate changes and this has a bearing on some of the issues raised above. From 1 May 2010, firms should provide advance personal notification of material interest rate changes that are to the detriment of the customer (except where the change occurs automatically because the account tracks a publicly available reference rate). Firms should also, where appropriate, provide notice of the expiry of the bonus rate period. 6.14 On 26 May 2010, the FSA confirmed BBA/BSA/UK Payments industry guidance on one way that firms may choose to comply with the 'appropriate information rule' in relation to the pre-notification of material adverse changes in interest rates. In short, the guidance states that firms may consider a fall in interest rates to be material when the account has a balance of 500 or more, and the interest rate falls by more than 25 basis points (bps) 113 (or where a fall of less than 25bps will result in there being a cumulative fall over the preceding 12 months of 50 bps or more). Notification should be provided at least 14 days before the interest rate change. At least 14 days' notice should also be given of the end of a bonus rate period where the account has a balance of 500 or more and the bonus rate has applied for six months or longer. 113 25bps is equivalent to 0.25 per cent. OFT1246 64

6.15 Informing consumers when their interest rate falls and when their bonus rate ends should prompt some consumers to search and transfer their cash ISAs in order to avoid an interest rate reduction. 6.16 However, the materiality threshold means that consumers with low levels of savings are likely to miss out on advance notice of an adverse rate change. It is also worth noting that consumers will not be told if the Bank of England base rate has increased and their own rate has not increased at the same rate. This could happen in the next few years if the base rate rises from its current very low level. Interest rates on statements 6.17 Whilst the changes to the BCOBS will increase transparency, we note that there is no obligation in the BCOBS for cash ISA providers to detail interest rates on cash ISA statements, 114 though the BCOBS does stipulate that firms should provide appropriate information to consumers to enable them to make an informed decision, and it contains guidance that firms should consider indicating the interest rate on statements. 115 We consider that the provision of interest rates on cash ISA statements is likely to lead to substantial further benefits. Automatic transfer to new rate of interest 6.18 Consumer Focus argued that some consumers assume that they will be automatically transferred to a new (higher) interest rate, when it becomes available. 116 We have not received any evidence to substantiate this claim less than one per cent of respondents to our consumer consultation raised this as an issue. Further, we did not find any 114 BCOBS 4.2.2. 115 Emphasis added. 116 Consumer Focus super-complaint: Cash ISAs page 20. OFT1246 65

evidence that cash ISA providers are purposely misleading consumers into making such an assumption. 6.19 In the absence of compelling evidence, we conclude that there is no, or very limited, consumer harm arising from consumers' perceptions that they will be automatically transferred to the best cash ISAs with their existing provider. Proliferation of accounts with similar names 6.20 Consumer Focus claimed that the proliferation of similar (and similarly named) accounts cause confusion. 117 Our analysis of cash ISA provider product portfolios suggests that since the product's introduction in 1999, the number of cash ISAs offered by each provider has grown. As a result, many cash ISA providers offer multiple cash ISAs with different features. Table 6.1 below shows an increase in the number of cash ISAs available from major providers between 2002 and 2010. The number of cash ISAs offered changes over time and will depend on a range of factors. 117 Consumer Focus super-complaint: Cash ISAs page 27, third bullet point. OFT1246 66

Table 6.1: Number of cash ISA products on market for selected providers, April 2002 to April 2010 Provider 2002 2003 2004 2005 2006 2007 2008 2009 2010 Halifax Bank of Scotland Lloyds TSB / Cheltenham and Gloucester 7 10 6 6 6 6 6 7 7 4 4 4 4 6 5 6 5 6 Abbey 1 7 7 6 3 1 3 4 5 Alliance & Leicester 1 1 8 3 3 4 5 5 6 Bradford & Bingley 4 4 4 8 6 7 6 2 0 Nationwide Building Society Royal Bank of Scotland Group 3 3 4 4 4 8 6 14 10 3 4 4 2 2 2 3 7 5 HSBC 2 2 2 2 2 2 3 4 5 Barclays / Woolwich 2 2 3 4 4 5 2 2 2 Britannia Building Society 3 4 4 6 5 6 2 3 4 Source: Defaqto cash ISA database, 1999-2010 6.21 It should be noted that the above table refers to those cash ISAs still on the market. Providers will also have many other legacy cash ISAs in their portfolio that are not open to new investors. 6.22 We consider that the growth in cash ISAs offered is a result of product innovation (for example, multi-year fixed rate deals, online cash ISAs and cash ISAs linked to other products), rather than a deliberate strategy aimed at generating confusion. 6.23 We also consider that names are often functional descriptions of key characteristics of the product, with little or no creative elements in them, OFT1246 67

and are not overly long. Furthermore, cash ISA providers have told us that the choice of names is often limited by trademarks held by other firms. 6.24 Some providers have adopted a progressive numbering system for each cash ISA issue round, that is, cash ISA issue 1, cash ISA issue 2 and so on. Whilst consumers may be unsure as to which particular issue number they are on, such names can generate familiarity with the product with consumers readily able to refer to their product material in order to find out their issue number. Based on a review of the available evidence, including responses to our consumer consultation, we consider that the vast majority of consumers are not confused by these names. 118 Whilst interest rates vary between products, there is adequate information to find the rate applicable to consumers' individual cash ISAs. 6.25 On the basis of the above analysis, we do not consider there to be significant consumer harm arising from similar sounding cash ISA product names. Initiatives agreed 6.26 The notification of the end of bonus rates does not apply to those cash ISAs designated as 'payment accounts'. Through our discussions, the BBA 119 has agreed that its members will voluntarily send the same bonus rate notifications to holders of payment accounts as to holders of nonpayment accounts. This will take effect from 1 July 2010. We welcome this development. 118 In its super-complaint (page 20), Consumer Focus cited cash ISAs offered by Alliance & Leicester and Royal Bank of Scotland as examples of when it is particularly difficult to locate information on interest rates. A review of these websites during May 2010 suggested that the situation has improved, with Alliance & Leicester providing an interactive tool to find individualised information. We note that the information provided on the Royal Bank of Scotland website has also improved since Consumer Focus submitted their super-complaint. 119 Building societies do not treat any of their cash ISA accounts as payment accounts and therefore this issue does not apply to them. OFT1246 68

6.27 At the time of writing, only a limited number of the major cash ISA providers place interest rate information on cash ISA statements. Our analysis suggests that those providers that put interest rates on statements cover around 15 per cent of the market. As was found in the OFT's market study on personal current accounts, 120 when consumers do not have key information about their product they are poorly placed to assess whether they are getting value for money and the potential gains from switching. 6.28 A statement is likely to be an effective tool in catching consumers' attention. While many providers send interest rate information in the form of product information booklets, this is often sent out separately or is not individualised. We would expect that consumers are more likely to read information that is personalised to them than standard information regarding interest rates of many products, in particular because personalisation makes it quicker for consumers to find the information relevant to them. Therefore, we consider it more likely that consumers will find out what their interest rate is if the information is personalised and put on their statements rather than being provided in a standard booklet or available from other sources. 6.29 Annual statements reach all cash ISA holders (except for a minority of passbook-based cash ISAs) and hence have a wider base of recipients than the recent BCOBS changes mentioned above which are only sent to those who are materially affected. 6.30 The major benefit of placing interest rates on statements would be that those consumers who are not inclined to look for their interest rate are more likely to see it on their statement. This could make consumers aware of how their interest rate compares with interest rates they observe from adverts and other sources, and may trigger searching and switching. Our discussions with consumer groups have also revealed strong support from them for personalised interest rates on statements. 120 Personal Current Accounts in the UK: An OFT Market Study, July 2008. OFT1246 69

6.31 Placing interest rates on statements could also reduce consumers' search time. Our consumer survey found that of those who knew their interest rate, 27 per cent found out from either calling their bank or visiting a branch. Clearly both those methods can take some time so if all consumers could find their interest rates on their statements, some of that time may be saved. This is particularly the case for the older cash ISAs for which the interest rate is more difficult to find. 6.32 We estimate, based on information supplied by cash ISA providers, the one-off cost for a major cash ISA provider to put personalised interest rates on statements to be between 2-4 million. 121 Currently, there are six major providers who do not put interest rates on statements. Therefore, the one-off cost to the major providers who currently do not provide this information would be approximately 12-24 million, or between 8p and 20p per cash ISA account each year over the next 10 years. 122 We expect that it may be the case that the cost to smaller cash ISA providers would be somewhat lower if they have less complex IT systems. 6.33 The OFT has worked closely with the industry to extend the provision of interest rates on cash ISA statements. The BBA and BSA have agreed that their members will, on a voluntary basis, provide interest rates on cash ISA statements delivered in paper and/or electronic format. NS&I have also agreed to put interest rates on their statements. These changes will be implemented in time for the 2012 ISA 'season' at the latest, though we expect some providers may do so earlier. 6.34 Many of the arguments for interest rates being on cash ISA statements are likely to apply to other savings accounts as well. The FSA may 121 This cost refers to IT expenditure. 122 This calculation was based on the number of accounts that cash ISA providers who do not currently put interest rates on statements informed us that they had. A discount rate of 3.5 per cent was used. OFT1246 70

Conclusion therefore wish to consider amending its guidance that firms 'consider' putting interest rates on statements to state that firms 'should' do so. 123 6.35 On the basis of available evidence, we consider that there has not been a strategic proliferation of cash ISAs for the purpose of confusing consumers and that the misleading potential of cash ISA names is fairly limited. 6.36 Information on interest rates is available relatively easily online, by visiting a branch or by phoning cash ISA providers. However, we found that it was more difficult to find the interest rates of old cash ISAs online, that interest rates are rarely on statements and that putting interest rates on statement would usefully complement (rather than duplicate) changes to the BCOBS. 6.37 The OFT welcomes the initiatives, developed in discussion with industry, to introduce personalised interest rate information on cash ISA statements and apply the recent BCOBS guidance on bonus rate notification to cash ISAs designated as payment accounts. 123 See BCOBS 4.2.1R. OFT1246 71

7 BONUS RATES ON CASH ISAS 7.1 This chapter considers concerns raised by Consumer Focus around the use of bonus rates on cash ISAs. It considers the prevalence of this practice and the harm that may be caused by it. Concerns raised by Consumer Focus 7.2 In its super-complaint, Consumer Focus expressed concern about the use of what it termed 'bait pricing', that is high rates of interest that are only available for a limited time and then revert to a lower rate thereafter. 124 Consumer Focus argued that '[m]any providers, including many high street banks and building societies, appear to use 'bait' prices to attract savings into cash ISA accounts. Headline rates of three per cent and above are not uncommon; after a year the rates drop substantially.' 125 7.3 Consumer Focus noted that, given only 12 per cent of consumers switch cash ISAs, the majority of cash ISA savers are not enjoying bonus rates. 126 Further, Consumer Focus claimed that the practice of bait pricing was 'misleading consumers.' 127 7.4 On the basis of these concerns, Consumer Focus has asked the OFT, in collaboration with the FSA and HMRC, to: address the use of bait pricing, and 124 Consumer Focus super-complaint: Cash ISAs page 23. 125 Consumer Focus super-complaint: Cash ISAs page 4. 126 Consumer Focus super-complaint: Cash ISAs page 23. 127 Consumer Focus super-complaint: Cash ISAs page 27. OFT1246 72

address 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. 128 7.5 Consumer Focus asked 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 except for a higher interest rate. 7.6 The OFT is carrying out a market study on The Advertising of Prices 129 which is examining the issue of 'bait pricing', among others. The definition of 'bait pricing' being used in this study refers to a situation where only some products are available at the discounted price and consumers may ultimately purchase a full priced product. The OFT's discussion below will therefore not use the term 'bait pricing'. Instead, we will use the term 'bonus rates' to refer to the practice of offering higher rates of interest for a limited period on cash ISAs before reverting to a standard rate, which may be lower. Bonus rates 7.7 Table 7.1 below sets out the number of cash ISA products offering introductory bonus rates. 128 Consumer Focus super-complaint: Cash ISAs page 27, first and second bullets. 129 See www.oft.gov.uk/oftwork/markets-work/current/advertising-prices. OFT1246 73

Table 7.1: Cash ISAs open to new customers that offer an introductory bonus Total number of cash ISA products available to new business Products with introductory bonus Average introductory bonus April 2007 276 13 (5%) 0.71 April 2008 241 17 (7%) 0.68 April 2009 256 26 (10%) 1.21 April 2010 316 35 (11%) 1.05 Source: OFT analysis of DeFaqto data. 7.8 As Table 7.1 illustrates, the number of cash ISAs offering an introductory bonus has been steadily rising over the last four years, but remains a small proportion of the total. It is important to note that the above data is unweighted. That is to say, while only 11 per cent of cash ISAs offered an introductory bonus rate in April 2010, the actual number of consumers who take up such offers (either through transfers or new purchases) may be significantly higher. Nonetheless, it appears that the number of cash ISA accounts earning bonus rates is only a small proportion of the total stock of cash ISA accounts. 7.9 A number of cash ISA providers in their responses to our call for evidence noted that they have deliberately chosen not to offer bonus rates as part of their market positioning, preferring instead to focus on their existing customer base. We are also aware that it is possible to take out a cash ISA product that offers an average of rival interest rates. Finally, consumers can also take out fixed rate cash ISA products. This gives consumers a wide choice of cash ISAs. 7.10 Other cash ISA providers noted that bonuses are common for other financial products and are part of a strategy to attract new business in a time of low interest rates. 7.11 The practice of offering bonus rates is not unusual or necessarily harmful to consumers. Whether or not the practice of offering bonus rates will be harmful to consumers will depend on a range of factors including: OFT1246 74

whether consumers are aware that they are signing up to a product that has an introductory bonus rate which will revert to a standard (and potentially lower) rate at a specified time whether consumers are informed when this bonus period comes to an end, and whether consumers are 'locked in' to a particular cash ISA and are unable to switch products without adverse consequences. 7.12 If consumers are unaware of whether their cash ISA offers a bonus rate, then they might invest in a particular cash ISA that offers a bonus rate on the mistaken assumption that the bonus rate is permanent. If they are not informed when the bonus period expires, they could continue to believe the rate prevails, especially if they do not receive any current information on interest rates. There would therefore be consumer harm in the form of lost interest earnings due to not switching to get a better rate. Even if this information is readily available, consumer harm (again in the form of lost interest earnings compared to other products) could also occur if a consumer becomes locked-in to a cash ISA, either through a loss of interest or other penalties. 7.13 From a review of promotional material provided by cash ISA providers, when a bonus rate is offered, the level of the bonus rate, its duration and any conditions around it are explained. This information is typically in the main part of the material, not the 'small print'. 7.14 From the responses to our call for evidence, it would also appear that the number of cash ISA products that offer a bonus rate on the condition that the consumer takes out other products (such as a personal current account or stocks and shares ISA) with the same provider is small. The bundling of products in this way is not of itself necessarily inefficient, for example consumers may value the choice of a combined offering. 7.15 A consumer may become 'locked-in' if there are conditions attached to transferring that go beyond typical product withdrawal conditions, for example if transferring money out of a cash ISA during a bonus period meant that all interest paid to date must be repaid to the cash ISA OFT1246 75

provider. The OFT has not received any evidence to suggest that lock-in is a concern. 7.16 As discussed in Chapter 6, there has been a recent change to the BCOBS that means cash ISA consumers should, where appropriate, receive notification before a bonus period comes to an end. 130 The BBA has also agreed that its members will apply this provision to cash ISA accounts designated as 'payment accounts'. This should give consumers enough notice to transfer their cash ISA if they wish to. 7.17 If consumers are informed of bonus rates (and conditions around them), know when they end and are able to switch providers without adverse consequences, then any consumer harm arising is likely to be minimal. Given the improvements to transfers and transparency of interest rates (discussed in Chapters 5 and 6 respectively), we consider it unlikely that bonus rates are causing significant harm in the cash ISA market. 7.18 Finally, it is important that consumers search around for the best deal for themselves based on the knowledge that bonuses can be temporary. Proposals suggested to address perceived concerns around bonus pricing 7.19 During our consultations with consumer groups, individual consumers and cash ISA providers, a number of proposals have been put forward to address concerns around bonus pricing. These include: banning the use of bonus rates for cash ISAs obliging cash ISA providers to automatically move existing cash ISA customers to new products that are identical except that they pay a higher rate of interest 130 See BCOBS 4.1.2G. OFT1246 76

sending cash ISA customers information on alternative products when their bonus rate expires, and addressing issues around the transfer of cash ISAs and transparency. 7.20 We consider each of these in turn. Banning bonus rates for cash ISAs 7.21 The argument for banning bonus rates for cash ISAs is based on the premise that few consumers are aware of their own interest rate and many wrongly believe they are still earning the bonus level. While, awareness of individual interest rates is low (see Chapter 6), the OFT does not believe that banning bonus rates for cash ISAs is appropriate. 7.22 As noted above, if consumers are informed of bonus rates (and conditions around them), are told when they end and are able to switch providers without adverse consequences, then any consumer harm arising is likely to be minimal. Further, banning bonuses removes an important incentive for consumers to seek out the best deals and switch between cash ISA providers. A comprehensive ban on bonuses may also require the banning of other temporary increases in interest rates which risks reducing the ability of providers to offer higher interest rates. Automatically transferring consumers to identical cash ISAs with higher interest rates 7.23 The argument for cash ISA providers to automatically move consumers to higher earning cash ISA products is similar to that of banning bonus pricing in that it prevents consumers from being on low rates without realising this. 7.24 We consider that the automatic transfer of customers is likely to weaken competition between cash ISA providers. It is likely to dampen incentives for consumers to compare providers to seek the highest interest rate. It may also reduce the incentive for cash ISA providers to offer higher interest rates to attract new consumers. OFT1246 77

Sending information on alternative products 7.25 Guidance in the BCOBS already specifies that when a firm informs customers of a material adverse rate change, the consumer should be told if the provider offers a comparable product, that the consumer can transfer to a product of another firm, and that the provider will help the consumer to transfer. 131 Cash ISA providers do not have to tell consumers about alternative products when their bonus rate ends, but many do already as the end of a bonus rate may be a moment when consumers consider changing providers. 7.26 Cash ISA providers already conduct large scale advertising campaigns and send promotional material to consumers. There are also a number of websites and newspapers that compare the best value cash ISAs. Providing consumers with information on other products available from their existing provider will only provide a partial picture of the products available on the market. Addressing issues around the transfer of cash ISAs and transparency 7.27 The first two above options involve a high degree of intervention in the way cash ISA providers offer their products. In light of the lack of evidence of significant harm to consumers from bonus rates and that the options for change having the risk of unintended detrimental consequences, we consider that the most appropriate approach at this stage is to improve the transparency of cash ISA interest rates and to speed up the transfer process. 7.28 The OFT believes that a well-functioning market is driven by active and informed consumers who are able to shop around for the best cash ISA. In doing so, these consumers drive competition by creating an incentive for cash ISA providers to improve their products and offer better rates. 131 See BCOBS 4.1.2G (4). OFT1246 78

7.29 As issues around the transfer process and transparency are addressed, it is important for consumers to assess their options and choose the most suitable cash ISA. Often there may be significant financial benefits in transferring to another cash ISA product with the same provider or moving to another provider altogether. Consumers need to keep their decisions under review. Active consumers in turn help drive the procompetitive virtuous circle discussed in Chapter 4. Conclusion 7.30 In the particular case of the cash ISA market at present, the OFT does not consider there to be substantial consumer harm arising from the practice of offering bonus rates. As noted above, the existence of a bonus rate is clearly communicated to consumers and they will now receive notice of when the bonus period ends. 7.31 The OFT believes, at this time, that the initiatives discussed around the transfer process and transparency, coupled with the move to inform customers of when their bonus rate ends, are more appropriate than interventionist measures to prevent bonus pricing. OFT1246 79

8 CONCLUSION 8.1 This chapter outlines our main findings and describes the initiatives already agreed and the OFT's recommendations to address the issues identified. It takes each of the three main issues raised by Consumer Focus in turn, considers the issue of a market investigation reference, and sets out next steps. Transferring a cash ISA 8.2 We have found that the transfer process for cash ISAs is currently too lengthy and too often involves problems for consumers. Consumers who are affected by delays and problems with transfers suffer detriment as a result. In addition, when consumers transfer their cash ISA, there can be a gap of up to five days during which interest is not accrued. These issues can result in consumers being put off transferring their cash ISA, preventing them from driving competition between providers as effectively as they could. 8.3 During the course of our work we engaged with cash ISA providers to discuss the transfer of cash ISAs. As a result of this process the BBA, BSA and TISA have agreed to amend their guidelines to reduce the maximum period for completion of the end-to-end process for cash ISA transfers from 23 to 15 working days. The revised guidelines will come into effect on 31 December 2010. The BBA, BSA and TISA have also agreed to explore how best practice can be more widely implemented to reduce the problems that consumers face in transferring their cash ISAs by 31 December 2010. 8.4 In addition, the industry has agreed to produce and publish a consumerfriendly summary of its cash ISA transfer guidelines. This summary will be made available to all consumers from 29 June 2010 through the BBA, BSA and TISA websites, and updated when the new guidelines come into effect. We expect cash ISA providers to use the consumer friendly guide to explain the transfer process to consumers. OFT1246 80

8.5 Cash ISA providers have agreed to submit to their relevant industry body monthly information on how long cash ISA transfers take. This information will be summarised and reviewed against the new 15 working day limit. Summary information will be sent to the FSA. 8.6 In the past the industry has not always met the transfer times in its guidelines. It is therefore important that the new guidelines are followed. To ensure this happens, we recommend that: HMRC change its guidance to reflect the new industry guidelines and considers whether the tax rules should similarly be amended the FSA refers to the new guidelines in BCOBS 132 and reviews the information on cash ISA transfer times provided to it by the BBA and the BSA, in addition to any information that the FSA receives about relevant complaints, and if the new industry guidelines are not being followed, the FSA considers taking action itself under its Banking Conduct Regime paying consideration to BCOBS 5.1.5. 133 8.7 In order to ensure that consumers are not adversely affected if delays occur, we consider that consumers should receive the interest rate on the cash ISA to which they are transferring no later than 15 working days after requesting the transfer, whether or not the transfer has been completed. Therefore, we recommend that: 132 BCOBS 5.1.8G currently reads 'A firm may find it helpful to take account of the European Banking Industry Committee Common Principles for Bank Account Switching and the British Bankers' Association/ Building Societies Association/ Tax Incentivised Savings Association Cash ISA Transfers: Guidelines'. 133 BCOBS 5.1.5 states 'A firm must provide a prompt and efficient service to enable a banking customer to move to a retail banking service (including a payment service) provided by another firm'. OFT1246 81

consumers complain to their provider if their transfer takes longer than 15 working days, and in resolving these complaints cash ISA providers ensure that consumers are no worse off than would have been the case if the guidance had been followed, whilst not requiring consumers to work out which provider is at fault. 8.8 The new guidance is one of the factors that the FOS will be able to take into account in settling complaints between consumers and cash ISA providers. 8.9 There may be some additional benefit from bringing the transfer time down below 15 working days. We therefore recommend that the industry consider adopting an electronic system for transfers. The BBA, BSA and TISA have committed to undertake a feasibility study to take this recommendation forward. 8.10 The BBA and BSA have agreed to ensure that consumers start to accrue interest no later than two days after the funds are received from the old provider. We do not believe that this is sufficient. We consider that consumers should receive interest for every day during the transfer process since the OFT understands that one of the providers has the consumers' money at all times during the transfer process. We note that a number of providers already backdate interest from the date of closure of the existing cash ISA account. This ensures that consumers receive interest on every day. 8.11 We recommend that cash ISA providers ensure that consumers receive interest on every day during a cash ISA transfer and that the FSA consider the case for taking action under BCOBS or for amending the BCOBS rules or guidance if providers do not follow this approach. 8.12 Finally, we recommend that consumers review the interest rates being paid on their cash ISAs regularly, comparing them with the rates available from competitors, and consider transferring when better deals can be found. The OFT also recommends that consumers consider the full range of cash ISA providers and cash ISAs available, including OFT1246 82

providers that do not offer bonus rates and cash ISAs that offer fixed rates. Transparency of interest rates on cash ISAs 8.13 Whilst consumers can find information on their interest rate from a number of sources, we consider that there are significant benefits from cash ISA providers putting personalised information about their customers interest rates on their statements. 8.14 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'. Through our discussions, the BBA has agreed that its members will voluntarily send the same bonus rate notifications to holders of payment accounts as to holders of non-payment accounts. This will take effect from 1 July 2010. We welcome this development. 8.15 From 1 May 2010, cash ISA providers should also provide advance personal notification of material interest rate changes that are to the detriment of the customer. This information will be helpful to consumers but we consider there to be significant additional benefit of consumers' personal interest rate being on their statements. 8.16 At the time of writing, only a limited number of the major cash ISA providers place interest rate information on cash ISA statements. Our analysis suggests that those providers that put interest rates on statements cover around 15 per cent of the market. We consider that providing interest rates on statements makes it significantly more likely that consumers are aware of their rate. 8.17 The OFT has worked closely with the industry to extend the provision of interest rates on cash ISA statements. The BBA and BSA have agreed that their members will, on a voluntary basis, provide interest rates on cash ISA statements delivered in paper and/or electronic format. NS&I have also agreed to put interest rates on their statements. These OFT1246 83

changes will be implemented in time for the 2012 ISA 'season' at the latest, though we expect some providers may do so earlier. 8.18 Many of the arguments for interest rates being on cash ISA statements are likely to apply to other savings accounts as well. The FSA may therefore wish to consider amending its guidance that firms 'consider' putting interest rates on statements to state that firms 'should' do so. 134 Bonus rates on cash ISAs 8.19 Consumers can choose cash ISA accounts offering temporary bonus rates. These bonuses are relatively clear and consumers are informed when they will end due to a recent change in the BCOBS. 135 We did not find evidence that there is substantial harm caused by firms offering temporary bonus rates of interest. We do not consider it appropriate to require cash ISA providers to transfer consumers to identical accounts with higher interest rates automatically. 8.20 Greater transparency of interest rates and better transfer processes should help to reduce the number of consumers either on a low rate without realising it, or on a low rate but unwilling to transfer due to a perception that problems will occur. 8.21 During our consultations with consumer groups and individual consumers, a number of proposals have been put forward to address their concerns around bonus rates. Given that some of these have the risk of unintended consequences, and the lack of evidence of significant harm to consumers from bonus rates, we consider that the most appropriate approach at this time is to improve the transparency of cash ISA interest rates and the transfer process through the initiatives and recommendations outlined above. 134 See BCOBS 4.2.1R. 135 See BCOBS 4.1.2G. OFT1246 84

Market investigation reference 8.22 One of the actions that can result from a super-complaint is a market investigation reference (MIR) to the Competition Commission (CC). 136 The OFT will make a reference to the CC only when the reference test set out in section 131 of the Enterprise Act 2002 is met, 137 and when, in its view, each of the following criteria has been met: it would not be more appropriate to deal with the competition issues identified by applying the Competition Act 1998 or using other powers available to the OFT or, where appropriate, to sectoral regulators it would not be more appropriate to address the problem identified by means of undertakings in lieu of a reference the scale of the suspected problem, in terms of its adverse effect on competition, is such that a reference would be an appropriate response to it, and there is a reasonable chance that appropriate remedies would be available. 8.23 We have not addressed the statutory test in section 131 in detail here because, based on our analysis of the evidence, engagement with stakeholders and taking into account the initiatives outlined above, we do not consider that the scale of any problems is such that a reference would be an appropriate response. Therefore, the OFT does not believe that a reference to the CC would be an appropriate course of action in 136 See Super-complaints: guidance for designated consumer bodies, page 9. 137 Under section 131(1) of the Enterprise Act 2002, the OFT may make a reference to the CC if it 'has reasonable grounds for suspecting that any feature, or combination of features, of a market in the United Kingdom for goods and services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom.' OFT1246 85

this case. In the particular circumstances of this case, a consultation will take place on the OFT's decision not to make an MIR. For further information, please see the OFT website. 138 Next steps 8.24 Two competing alternatives have been considered to improve the way the market for cash ISAs works. The first is to introduce greater regulation over how cash ISAs are provided by firms. There are a number of risks involved in this approach. It may restrict innovation, lead to a reduction in the best interest rates and consumers could become less active, resulting in a market less driven by what consumers need and more by regulation. The second approach is to give consumers the tools and information necessary to drive effective competition in the market, leading to an outcome that consumers want. We see strong arguments for taking the latter approach in this market and consider that we have secured real improvements to the way in which the cash ISA market works. 8.25 The initiatives and recommendations outlined above should increase consumers confidence in the transfer process and make them more aware of their interest rate. We therefore consider that this will address the concerns regarding transparency of interest rates and transfers of cash ISAs raised by Consumer Focus in its super-complaint. We do not consider that the other concerns such as bonus rates are significantly harming consumers and we believe they will in any event be alleviated by the measures set out above. We therefore do not propose to take any further specific action regarding cash ISAs. 8.26 This work has focused on cash ISAs. However, there may be some read across from our findings here to other markets and we would encourage financial service providers to consider this. Many of the issues raised by the super-complaint are similar to those covered in our work on personal current accounts, as is the broad approach used to deal with them. 138 www.oft.gov.uk/oftwork/consultations. OFT1246 86

While many financial products will not have the same restrictions around transfers as cash ISAs, the issues raised and solutions identified may be of relevance to products such as pensions and mortgages. We continue to consider that important information should be transparent to consumers across all financial services and that transfer processes should be efficient. 8.27 We also believe that providers should think more broadly about whether there is asymmetry in their relationships with consumers if they levy fees when consumers miss a payment date for example, but are not prepared to offer redress voluntarily, without being asked, when their own processes are delayed or go wrong. OFT1246 87

A PARTIES CONSULTED Age UK Barclays Bank plc British Bankers' Association Britannia Building Society Building Societies Association Citizens Advice Clydesdale Bank plc Consumer Council for Northern Ireland Consumer Focus The Co-operative Bank Coventry Building Society Darlington Building Society Earl Shilton Building Society Family Investments Financial Ombudsman Service Financial Services Authority Financial Services Consumer Panel Her Majesty's Revenue and Customs Her Majesty's Treasury OFT1246 88

HSBC Bank plc Ipswich Building Society Leeds Building Society Lloyds Banking Group plc Mansfield Building Society MoneySavingExpert.com National Counties Building Society Nationwide Building Society Newbury Building Society Northern Bank Ltd Norwich & Peterborough Building Society Nottingham Building Society National Savings and Investments Principality Building Society Royal Bank of Scotland Group (Natwest and RBS brands) Santander UK plc Group Tax Incentivised Savings Association Teachers Building Society Virgin Money Personal Finance Service Ltd West Bromwich Building Society OFT1246 89

Which? Yorkshire Bank Yorkshire Building Society OFT1246 90

B CASH ISA OMNIBUS SURVEY Introduction B.1 In April and May 2010 the OFT placed a number of questions on a consumer omnibus survey to assess consumer reactions to certain propositions in relation to cash ISAs. The objective was to understand consumer behaviour and levels of understanding around cash ISAs. The OFT was particularly interested in consumers' decisions about, and experience of, transferring cash ISAs and the levels of understanding that consumers have on the interest rate payable on their own cash ISA. Methodology B.2 Fourteen questions were placed on the GfK NOP telephone omnibus survey - Telebus. This telephone survey interviewed 2,000 adults aged 16 and over. The fieldwork was conducted over the weekends of 23-25 April and 30 April - 2 May 2010. B.3 Respondents were selected by random digit dialling. The sampling frame was all telephone directories in the UK. Given that the sample is controlled by quotas, the final demographic profile should be fairly close to that of the target population. However, the achieved sample was examined post-survey to ensure the profile was as it should be. If necessary, the sample was then weighted to ensure that it is representative in terms of known population data on age, sex, social class, number of adults in household, working status and region. B.4 The survey covered respondents throughout the UK. OFT1246 91

Questions and results Q.1 A cash Individual Savings Account (ISA) is a type of savings account. How many cash ISAs do you hold? Responses Per cent (i) One 567 28.4% (ii) Two 198 9.9% (iii) More than two 101 5.0% (iv) None 1039 51.9% (v) Don't know 96 4.8% Total 2000 100.0% Unweighted total number of respondents was 2000. Based on all respondents answering the question Q.2 Is this the only cash ISA you have ever held? [asked to those answering Q.1 (i)] Responses Per cent (i) Yes 453 79.8% (ii) No 113 20.0% (iii) Not sure/don't know 1 0.2% Total 567 100.0% Unweighted total number of respondents was 549. Based on all respondents answering the question OFT1246 92

Q.3 And thinking about your cash ISA, what was the source of the money that you initially put into it? (multiple response) [asked to those answering Q.2 (ii)] Frequencies Responses Percent Percent of Cases (i) Money from an existing cash ISA that was then closed 49 37.0% 43.5% (ii) Money from another source: 83 62.6% 73.5% (iii) Don't know 1 0.4% 0.4% Total 133 100.0% 117.4% OFT1246 93

Q.4 Have you ever transferred money from an existing cash ISA to another cash ISA with a different provider or to another cash ISA product offered by your existing provider? [asked to those answering Q.1 (ii) or (iii)] Responses Per cent (i) Yes 100 33.7% (ii) No 198 66.3% (iii) Didn't know it was possible to transfer money 0 0% Total 298 100.0% Unweighted total number of respondents was 300. Based on all respondents answering the question Q.5 Have you ever considered moving your cash ISA money from your existing provider to another cash ISA provider or to another cash ISA product offered by your existing provider? [asked to those answering Q2. (i) or Q3 (ii only) or Q.4 (ii)] Responses Per cent (i) Yes 175 24.4% (ii) No 532 74.3% (iii) Didn't know it was possible to transfer money 9 1.3% Total 716 100.0% Unweighted total number of respondents was 701. Based on all respondents answering the question OFT1246 94

Q.6 What would you say was the main reason for you not considering moving your cash ISA money from your existing provider to another cash ISA provider or to another cash ISA product offered by your existing provider? [asked to those answering Q5 (ii)] Is it because: Responses Per cent (i) You didn't know enough about how to do it 37 6.9% (ii) You were concerned about whether the transfer process would 6 1.1% (iii) You didn't want, or have the time, to consider alternatives 98 18.5% (iv) You looked at other providers but there was no difference in interest rates or the difference was too small to be worthwhile 146 27.4% (v) You have only had an ISA for a short time 31 5.8% (vi) You don t feel you have sufficient money in your ISA to make it worthwhile 105 19.7% (vii) Other reason 102 19.2% (viii) Don't know 8 1.4% Total 532 100.0% Unweighted total number of respondents was 525. Based on all respondents answering the question OFT1246 95

Q.7 Did you encounter any problems in moving/trying to move money between cash ISAs? [asked to those answering Q3 (i) or Q.4 (i)] Responses Per cent (i) Yes 21 14.2% (ii) No 128 85.8% (iii) Not sure/don't know 0 0% Total 150 100.0% Unweighted total number of respondents was 148. Based on all respondents answering the question Q.8 When did you last encounter a problem? [asked to those answering Q7. (i)] Was it: Responses Per cent (i) In the last six months 8 36.5% (ii) Between six and twelve months ago 6 26.0% (iii) Between twelve months and two years ago 3 12.4% (iv) Longer than two years ago 5 25.1% (v) Don't know 0 0% Total 21 100.0% Unweighted total number of respondents was 23. Based on all respondents answering the question OFT1246 96

Q.9 What were the main problems you encountered? [asked to those answering Q7. (i)] (multiple response) Frequencies Responses Percent Percent of Cases (i) The process took longer than 30 days 16 23.2% 72.8% (ii) Further information was requested 7 10.3% 32.4% (iii) You needed to contact the old provider to find out what was happening 10 14.5% 45.4% (iv) You needed to contact the new provider to find out what was happening 9 13.6% 42.8% (v) You had to fill out another application form because there was a problem with the first 5 7.2% 22.6% (vi) The wrong amount of money was transferred 3 3.9% 12.3% (vii) You did not earn interest during the transfer process 6 9.4% 29.4% (viii) You did not earn as much money as you should have done for part of the transfer process 7 10.3% 32.4% (ix) Other problem: 5 7.5% 23.7% Total 67 100.0% 313.8% OFT1246 97

Q.10 Would you consider moving money between cash ISAs again? [asked to those answering Q7.] Responses Per cent (i) Yes 112 74.7% (ii) No 37 24.8% (iii) Don't know 1 0.5% Total 150 100.0% Unweighted total number of respondents was 148. Based on all respondents answering the question OFT1246 98

Q.11 When did you open your cash ISA (or the most recent cash ISA if you have more than one)? [asked to those answering Q1. (i), (ii) or (iii)] Was it: Responses Per cent (i) In the last six months 159 18.3% (ii) Between six and twelve months ago 119 13.7% (iii) Between twelve months and two years ago 167 19.3% (iv) Longer than two years ago 416 48.1% (v) Don't know 4 0.5% Total 866 100.0% Unweighted total number of respondents was 849. Based on all respondents answering the question Q.12 How do you save using your cash ISA(s)? [asked to those answering Q11.] (multiple response) Frequencies Responses Percent Percent of Cases (i) By regular deposits every month 260 21.4% 30.1% (ii) By deposits when you have money to save 554 45.5% 64.0% OFT1246 99

(iii) By deposits once a year 278 22.8% 32.1% (iv) You have not deposited any money since opening the ISA 112 9.2% 13.0% (v) Don't know 13 1.1% 1.5% Total 1217 100.0% 140.6% Q.13 Do you know what rate of interest your cash ISA (or the most recent cash ISA if you have more than one) currently earns? [asked to those answering Q12.] Responses per cent (i) Yes 331 38.3% (ii) No 534 61.7% (iii) Not sure/don't know 0 0% Total 866 100.0% Unweighted total number of respondents was 849. Based on all respondents answering the question Q.14 How do you know what the current interest rate is? [asked to those answering Q13 (i).] Responses Percent (i) Cash ISA statement 52 15.7% (ii) Looking at your account online 39 11.8% OFT1246 100

(iii) Looking at your provider's website 33 10.1% (iv) Online forums 21 6.4% (v) Branch inquiry 76 23.1% (vi) Telephone inquiry 12 3.7% (vii) Material sent by provider 43 13.1% (viii) Advertisement 22 6.6% (ix) You have only just opened the ISA 8 2.6% (x) Newspaper 11 3.2% (xi) Others 9 2.8% (xii) Don't know 3 0.8% Total 329 100.0% Unweighted total number of respondents was 326. Based on all respondents answering the question OFT1246 101