Money: Mutuals' ISA dilemma

With just four weeks to go before cash-based mini-ISAs are due to go on sale, the remaining mutual building societies are under pressure. They are caught between the desire to offer Government-approved, CAT- marked mini-ISAS, which could bring in a new generation of small savers, and their need to keep out the carpetbaggers.

To obtain the Government's seal of approval the mini-ISAs must be easy- access and open to savers with as little as pounds 10 to invest. But with a deposit of just pounds 100, investors will qualify as members and will be entitled to share windfalls if the society converts or is taken over. Investors can only have one mini-ISA a year but a mini-ISA with pounds 100 could offer carpetbaggers a cheap way into membership of one more society and allow them to dodge the high opening balances for new accounts that many societies have imposed to discourage them.

Last week the Leeds & Holbeck followed the Nationwide, the Britannia, the Yorkshire and the Coventry in requiring new investors to sign a pledge to give any possible windfalls to charity. They will all now be able to offer CAT-marked, cash-only mini-ISAs without the risk of attracting a late rush of carpetbaggers. But some societies are still reluctant to create a two-tier structure with different rights for new and old members. Others have decided not to offer a CAT-marked ISA at all.

The Chelsea building society, which took a decision two years ago to impose a minimum investment of pounds 2,500 for new account holders, has decided not to offer any kind of cash-only ISA because it would open the way for carpetbaggers to get a cheap foothold in the society. The Skipton building society, which last year imposed a minimum investment of pounds 2,000 for all new account holders who were not already members, is expected to offer an ISA but it is also expected to require a minimum investment of at least pounds 2,000. That will put it well out of reach of small investors as well as most carpetbaggers, and means it certainly will not qualify for the CAT mark.

Other societies are still working on a strategy to meet the challenge of the carpetbaggers. The second biggest mutual, the Bradford & Bingley, which could conceivably survive as an independent bank, has taken the drastic step of rejecting all new accounts - at least until it has seen off the challenge by Stephen Major. He successfully tabled a motion for the AGM next month demanding that the society converts and distributes free shares to members. After that a new strategy will have to be developed.

The Portman building society, now the fifth biggest committed mutual, took a similar step last year when it was inundated by new investors after strong rumours that it was facing a potential bid from the Allied Irish Bank. The excitement has subsided and ISAs will be offered to existing members. (It is not yet certain, however, whether they will qualify for CAT marking.) But new accounts remain limited only to people living within the society's catchment area around its head office in Bournemouth. So far, it has rejected the idea of requiring all new investors to assign their potential windfalls to charity because it does not wish to create a two-tier membership.

The Derbyshire building society has also imposed limits on investments, requiring investors living outside its Midlands catchment area to put up pounds 5,000 to open a new account; some branches within the catchment have individual limits of pounds 1,000. The Derbyshire has decided in principle to offer a cash ISA after 5 April, but it will not qualify for the Government's CAT standard and the minimum investment rules for new investors will continue to apply.

Outside the top 10, the Cheshire plans to offer a cash-only ISA but the minimum investment will remain pounds 250 within the branch area and pounds 1,000 for outsiders. The Market Harborough will offer a CAT-marked ISA but it will only be available to people living in Leicestershire and Northants, and the minimum for outsiders to open an account remains at pounds 2,000. The Norwich & Peterborough, one of the most vocal champions of mutuality, still allows investors in the Anglia region to open accounts with pounds 100 and is due to announce its ISA policy shortly.