savings accounts

savings accounts

tax exempt special savings accounts (TESSAs)

From August 2000 we started receiving thousands of enquiries from customers who were dissatisfied with TESSA interest rates where these compared unfavourably with the rates available on other savings accounts, such as ISAs (Individual Savings Accounts).

In September 2000 we published a briefing note with the aim of helping firms and their customers resolve such complaints between them – by indicating the approach we were likely to take on those complaints that reached us. The briefing note included the following extract:

In relation to a complaint about the interest rate on a variable rate TESSA, we will consider two questions:

Did the bank or building society pay a “fair” rate of interest on the TESSA?
For this purpose, we will treat the effective interest rate on the TESSA as “fair” if it is at least as good as the interest rates available on any other accounts with less onerous features in that bank or building society’s current range.

We regard TESSAs as five-year accounts. So we will include any bonus payable at the end of the five years when we calculate the effective rate of interest on the TESSA, before comparing it to the other rates.
If the bank or building society did not pay a “fair” rate of interest on the TESSA, did it tell the investor by 5 May 1999 that that the TESSA could be moved freely?
Because of government tax changes, TESSAs could not be opened after 5 April 1999. From that date they became “superseded” accounts. We consider that, within 30 days (by 5 May 1999), the bank or building society should have told the investor that the account was superseded – but could be transferred to another bank or building society without any notice period or additional charge.

We are unlikely to award compensation if the answer to either of these questions is “yes”.

If we award compensation, it is likely to be assessed on the basis of the “lost” interest – plus any amount appropriate for inconvenience.

It is likely that we would calculate the “lost” interest as follows:

It would be based on the difference in interest rates between the TESSA and the other account with less onerous features in the bank or building society’s range.
It would run to the date the investor was told that he/she was free to transfer the money without notice or charge.
If any bonus is lost because the TESSA is transferred, we would exclude the bonus in calculating the rate of interest paid on the TESSA.

This approach is based (amongst other things) on our interpretation of the law, the principles of the Banking Code and good industry practice.

It takes into account the following special features of TESSAs:
They have special tax advantages, which depend on leaving the money in for five years. So TESSAs are effectively five-year accounts.
But, unlike most ordinary five-year accounts, TESSAs can usually be transferred from one bank or building society to another – without losing the favourable tax treatment.
Some banks and building societies do not emphasise this transfer option to their existing TESSA account holders.

The Banking Code has special provisions about superseded accounts.

(“Superseded” accounts are ones closed to new customers or which the firm no longer promotes).

The Code requires a bank or building society to either:

keep the interest rate on a superseded account at the same level as another account with similar features (if the bank or building society has one in its current range); or
switch the superseded account to another account with similar features (if the bank or building society has one in its current range).

This means the interest rate on a superseded account will be at least as good as the interest rate on an account with similar features in the bank or building society’s current range, if there is one. But there is unlikely to be an account with similar features to a TESSA. Overall the features of a mini cash ISA are different.

If a superseded account should pay interest which is at least as good as an account with similar features (where the bank or building society has one), we consider it follows that a superseded account such as a TESSA should not pay worse interest than any accounts in the bank or building society’s current range with less onerous features.

Features to be taken into account include any term or notice period. But the other accounts need not be term or notice accounts. Comparisons can be made with an instant access account if it pays a higher rate of interest. A mini cash ISA may or may not have less onerous features than the TESSA – it all depends on the account conditions.

Where a bank or building society has no account with similar features to an account which becomes superseded, the Code requires it to:

contact the investor within 30 days
tell the investor the account is superseded
tell the investor about its other accounts; and
help the investor switch accounts (without any notice period and without any additional charge).

We consider it follows that the bank or building society should, at the same time, remind the investor that the TESSA can be transferred to another bank or building society – and indicate that this can be done without any notice period or additional charge. It is then up to the investor, not the bank or building society, to review what alternative competitive rates of interest are available in the market.

what has happened since
We have received TESSA complaints about twelve banks. After we spoke to them, seven agreed to settle with their customers. We are still talking to two banks and we are investigating test cases in respect of the remaining three.

We have received TESSA complaints about 17 building societies, but almost all of these complaints related to just five societies. None of the five has settled with its customers, so they are all the subject of test cases. Four have reached the preliminary conclusion stage and each of these has thus far gone against the society concerned, but a final ombudsman decision has not yet been issued.

Meanwhile, dozens of new cases continue to come in each week – principally in relation to building societies.

where interest on a savings account is cut
Dissatisfaction with interest rates on savings accounts is not confined to TESSAs. We receive a significant number of complaints about downgraded savings accounts – where the customers were attracted into the account by a good interest rate, but find after some years that they are now receiving what they consider to be a poor interest rate.

whose job is it to keep an eye on the account?
If a firm actually gives advice, it is liable if the advice is wrong. But (outside the realm of regulated investment business) the firm is under no obligation to offer or give advice. In particular, a firm is not usually required to tell customers when it would be in their interests to switch to another savings account.

So customers need to be vigilant. They should keep a careful eye on the rate of interest they are getting and on what they could get elsewhere. And they should carefully check any paperwork the firm sends them, not assume it is all simply marketing information.

we don’t control interest rates
General interest rates are affected by:

the Bank of England rate;
competitive market forces; and
the need for firms to generate whatever margin is required to maintain their business.

As explained in the 1994-95 annual report of the Building Societies Ombudsman Scheme, the Building Societies Ombudsman Scheme may consider it to be unfair treatment if a building society pays a lower rate of interest on term or notice accounts than on another account, with the same society, which has similar or less onerous terms.

Banking Ombudsman Scheme rules do not allow us to consider a complaint that concerns a bank’s general interest rate policy. We can’t act just on the basis that a particular bank interest rate appears unfair. But we can consider the following points in respect of both banks and building societies.

terms of the account
We can consider whether the terms of the account allow the firm to reduce the interest rate. It is reasonably certain that they will do. If the account was opened after 1 July 1995, we can consider whether the term used to vary the interest rate complies with the Unfair Terms in Consumer Contracts Regulations.

These only allow us to assess the fairness of the term against the circumstances when the account was opened, without the benefit of hindsight about what happened later.

The interest rate variation term may well be unfair unless:

it links the interest rate on the savings account to another rate that the firm does not control; or
it says the firm can only alter the interest rate for a valid reason which is specified in the contract; or
the term:

• only allows the firm to alter the interest rate for a valid reason (even if not specified in the contract); and
• requires the firm to tell the customer of the alteration at the earliest opportunity; and
• allows the customer to close the account without notice or penalty when the interest rate changes.

If the customer shows us promises in the marketing literature they received, we can consider whether those promises became part of the account terms or induced the customer to open the account on a false basis.

example
Mr G put £150,000 into a savings account. He later complained that base rate had gone up, but the interest rate on his savings account had gone down.

We decided that the firm had misled him into believing that he did not need to monitor the interest rate himself. The account literature said “if you … are worried about interest rates” the account “offers you peace of mind” and “you benefit whatever happens to interest rates.”

We awarded Mr G compensation of £1,500.

was the customer told about the interest rate cut?
If it was a postal account which could not be operated at a branch, the firm should have sent the customer individual notice of the interest rate reduction. If not, the customer may have a valid claim.

If it was an ordinary account, which could be operated at a branch, the firm did not have to send the customer individual notice of the rate change. The Banking Code says it is enough if the firm put notices in branches and in newspapers. We would prefer it if the Code required individual notices about rate cuts to be sent to customers for all kinds of accounts, but we don’t write the rules.

If the firm only put notices in branches and in newspapers, normally it should have sent the customer a list of its interest rates once a year. However, this didn’t apply:

before 31 March 1999, if the account had a passbook;
before 31 December 2000, if the account had a passbook and less than £100 in it;
from 1 January 2001, if the account had less than £100 in it.

was it a “superseded” account?
As we have already mentioned in the section about TESSAs, from 31 March 1999 the Banking Code introduced new rules about accounts that were “superseded” (before or after 31 March 1999). “Superseded” accounts are ones closed to new customers or which the firm no longer promoted. We apply these rules as follows:

The interest rate on a superseded account has to be kept up to the rate on an account in the firm’s current range which has similar or less stringent features – relating to, for example, notice periods, types of withdrawals, number of free withdrawals and how the account is accessed.

The comparison has to be based on the terms which applied to the superseded account at the time the customer took it out – not on any terms which were subsequently relaxed.
If there was no account with similar features, the firm should have written to the customer within 30 days to say that the account was superseded and to offer to help the customer switch accounts.

If the firm failed to follow these rules, the customer may have a valid claim for the consequent loss of interest, but only for the relevant period after 31 March 1999.