Take a closer look at Tessa rates

Savers with Tessa accounts should check the rates they are being paid. They may be entitled to compensation if they have been earning less than on a comparable account with the same bank or building society, or if their money has been locked in by penalties.

A ruling was issued by the Financial Ombudsman Ser vice last week on how banks and societies should treat Tessa savers after a flood of complaints about poor rates on the now obsolete ac-counts. Several organisations are likely to have been in breach of the guidance laid down by the Ombudsman, and some savers might have been short-changed by more than £150.

But some banks and building societies seemed in no mood last week to simply top up and backdate Tessa rates.

It looks likely that savers will have to do the leg-work themselves and lodge a formal complaint with their bank or society. If it does not offer a solution that suits them, he or she can appeal to the Ombudsman.

The nub of this row is that many banks and building societies have been paying less on Tessa accounts than on Isas, the Government-backed tax-free savings scheme that replaced the Tessa in April 1999. Savers have become unhappy, particularly since they were often unable to transfer their Tessas to another organisation because of penalties.

The Ombudsman said he would probably not order compensation if the provider passed at least one of two tests: •It paid a 'fair' rate of interest on the Tessa. 'Fair' means that it was at least as good as that paid on any other account with less onerous features in the bank or society's range. The account would not necessarily be an Isa, therefore.

• It told investors by 5 May 1999 that the Tessa could be moved freely. The Ombudsman ruled that savers should have been told within 30 days of the scrapping of Tessas, on 5 April 1999, that they were 'superseded' accounts. Savers should have been able to move without penalty after that time.

The Ombudsman says that in cases where compensation is appropriate he would order the bank or building society to pay the difference between the Tessa rate and the comparable account up to the date the investor was told the account could be transferred without penalty.

Britannia building society is paying 6.4 per cent on most of its Tessas against 6.85 per cent on its mini cash Isas. Until July it imposed penalties of 90 days' notice on savers who wanted to move their money. But Britannia believes it does not need to do more to comply with the Ombudsman's ruling. A spokeswoman said: 'We feel the Ombudsman is messing in an area where he shouldn't be.'

Abbey National pays 5.95 per cent on a variable rate Tessa, while its Isas pay between 5.95 and 6.65 per cent. Abbey told customers in February 1999 that the Tessa would soon be superseded but it did not remove the £30 administration fee for transfers until August.

Nevertheless, Janet Connor, director of savings, says the bank stands by its rate and believes Tessa custom-ers have been given a fair deal. The Tessa's rate has compared well with the base rate over the period.

Others look to have a clearer position to defend.

Bristol & West said it did not expect to have to fend off complaints. B&W's Tessa carried a penalty until April this year, but the bank had reviewed rates on the variable Tessa and, when its maturity bonuses were taken into account, these had been equivalent to those on the bank's Isa and others comparable accounts. The Ombdusman says that bonuses can be counted towards the overall rate on a Tessa, when comparing it with other accounts.

Halifax looks to be in the clear.

Its Isa Saver account, paying between 4.15 and 6.6 per cent, has a seven-day notice penalty for withdrawals; the Tessa account pays 6.05 per cent, but there are no penalties. So the terms on the Isa are more onerous than on the Tessa, rather than the reverse - one of the issues the Ombudsman has highlighted.

Customers of other organisations may have some difficulty working out whether they have received a fair deal. Several organisations have now equalised Isa and Tessa rates, but rates may have been out of line before this.

Another complication is that the Isa rate is not necessarily the one to compare with a Tessa, given that the Ombudsman says the Tessa rate must be as good as any other account with less onerous features. However, the Ombudsman's office says a comparison with Isa rates would be a reasonable starting point.

Savers must complain first to the bank or society; if no resolution is reached, they can contact the Ombudsman on 020 7931 0044 (societies) or 0845 766 0902 (banks).