Tuesday, 13 April 2010

The great ISA conspiracy

Now is the time of year we all (should) move our ISAs. You know, those Individual Savings Accounts which are tax-free both on the interest they earn and any capital gain you might be so lucky to achieve. On the 6th of April the new tax year started and everyone gets to put another £5100 into their cash ISA, and the same again into an equity ISA. The banks are advertising like mad for your business.

But, look behind the hype and all is not what it seems. Take Santander, they advertise 3.2% guaranteed! That's a healthy return in these low interest times. Unfortunately in the small print they reduce the rate to 2.75% for existing ISA savings; it's only "new" money that gets the 3.2%. Same at Barclays, they have a dancing cash-puppet on TV to lure in your savings, but again, new money gets a decent return but if you want to transfer in an existing ISA from another bank it's 0.1% - and 0.1% is a bank's way of saying f**k off!

What's the deal here, why won't they pay top rate on all your savings? This blog has made some enquiries and it appears that branch-level staff really don't know why there is a difference in rates depending on where the money comes from.

The real reason must be that they don't really want to compete with each other. It would seem that there's a bit of behind-the-scenes inter-bank colluding going on here. If the banks all offered their top rate to all comers then all the savings would naturally gravitate to the highest offering, which would force up the rates the banks have to pay. Also there is an administrative cost to banks when an ISA is moved. It doesn't profit the industry as a whole to have accounts being churned once a year. Presumably they have agreed between themselves that they won't compete with each other, but concentrate on attracting new money into the banking system as a whole. Hence all the TV advertising backed by such poor offerings.

It's debatable whether this is even legal.

However it will be a "Gentlemen's agreement" - nothing written down, just a tacit understanding not to rock the boat.

Santander, now a High Street presence in the UK, possibly because it's foreign, a Spanish bank, is slightly out of step with the others with its 3.2% offering. The British banks are loathe to go above 2.75%. (Hmm... we've been here before, haven't we? Foreign bank; offers unusually high interest rate - that didn't end well last time!)

And Santander are well and truly rocking the boat back home in Spain. They've started a price war for deposits by offering 4%. The little Spanish "thrifts" called cajas cannot compete and it looks like mass bankruptcy is on the cards.

Perhaps when Santander have finished having fun in the sun they should consider a price war over here in the UK. That would be nice! I mean, I wouldn't actually entrust my savings to them, but I'd like to see the deposit rates forced up generally.

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