Cash ISA returns: The shame of high-street banks

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Goodness, as if the last few years for savers in the UK haven’t been miserably disillusioning enough, how shocking it was to read the latest statistics regarding returns on cash ISAs unearthed in a recent investigation by Money Mail. The survey analysed over 70 accounts spread across the various household names among banks and building societies, and the numbers are, to say the least, appalling.

Despite the fact that base rates once again remained unchanged, many banks paid out less in interest in 2015 than in 2014 to cash ISA savers – in some cases a drop off approaching 50%! And the axe looks set to continue its fall in 2016, with some ISAs set to pay an annual rate as low as 0.5%. One of the banks in particular has a deft degree of sneakiness by automatically transferring funds from one type of ISA account to another after 12 months; the latter paying a ridiculous return of just 0.25%.

Such tomfoolery is a common theme among these high-street behemoths, who prey on the inertia of those waiting for a long-overdue increase in Bank of England rates – one that now seems as distant a dream as it ever has been. The FCA have recently looked to clamp down on such sleights of hand in order to keep customers fully informed, but these new regulations only come into effect at the end of the year.

Why did it all go south?

So what has happened to the cash ISA, a once popular product, formerly defined by its simplicity and reasonable rates of return? It’s been a scarcely believable 17 years since the ISA was introduced in the UK, with the Cash ISA – then offered in a ‘mini’ or ‘maxi’ variety - having a limit of £3,000 for the tax year. And in 1999, returns in excess of 6% were not unusual.

There were subtle ups and downs for much of the 2000s, but, shortly before the global economic recession, the average Cash ISA rate was a healthy 5.5%, and in the face of fanfare among consumers, Alistair Darling began to up the annual limit in 2008.

Of course, the recession sparked a rapid decline in Bank of England rates, and, given the obvious link between these and rates on ISAs, returns on the latter somewhat understandably began to plummet too. But there is a lingering question that surely should cause bankers to cover their eyes with shame. Why, if base rates have been unmoved since March 2009, have returns on cash ISAs continued to fall so drastically in recent years?

There are other variables involved beyond Bank of England rates, but none that sufficiently explain such a discrepancy. Instead, it is the tax-paying consumer who has been fleeced – the very same tax-paying consumer who effectively bailed the bankers out in the wake of the recession.

Peer-to-peer lending offers an alternative

Until now, there hasn’t been a whole lot the consumer could do, other than tinker with transfers to different ISA providers, or indeed shift funds towards stocks & shares ISAs. But peer-to-peer lending (P2P) is beginning to change the landscape, and the incoming Innovative Finance ISA (IFISA) in April underlines the legitimate and lucrative alternative it presents.

Of course, there are risks, and, unlike funds within cash ISAs, lender capital is not covered by the Financial Services Compensation Scheme. Yet the measures to counter this are now well-documented, and to date no one has lost a penny with any of the major platforms since protection funds were introduced in 2010. Instead, lenders have enjoyed steady annualised returns, often in excess of 5%, and with the advent of the tax-efficient IFISA, things are set to get better and better.

Declining cash ISA rates put into sharp focus both the arrogance of banks and building societies, and the lack of competition they have faced in terms of low-risk investments. But the rapid growth of peer-to-peer lending is beginning to change all that. Will it usurp the established high-street guard of the past millennium in the near future? Of course not. But if it causes bankers to sit up and take note, and realise the entire market is no longer theirs to dictate, then that’s a huge win for both P2P platforms, and, more importantly, the consumer.

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