City regulators have warned the government that the implementation of its much touted Lifetime ISA saving scheme could result in a major mis-selling scandal. Sources have revealed to the Daily Telegraph that the Financial Conduct Authority has issued private warnings in meetings with the Treasury about how the schemes high exit penalties will make it unsuitable for many savers, leading to the high potential of mis-selling. The FCA is also reported to be shocked at the 5% exit fee whilst at the same time they are lobbying for a ban on exit charges on private pensions.
These revelations follow a number of high profile criticisms of the Lifetime ISA, including the government's former pensions minister Baroness Ros Altmann:
"Lifetime ISAs are a danger to pensions and will just confuse people into perhaps giving up their employer contribution to pensions which is so valuable - and the penalties are just punitive. Providers are probably worried about people coming back and complaining further down the line - and rightly so."
House of Commons Work and Pensions committee have also criticised it, back in May commenting:
"Automatic enrolment (AE) has so far been a tremendous success. It has resulted in more than six million people being newly enrolled into a workplace pension scheme. Rates of opting-out have been lower than expected. AE is on schedule to have a transformative effect on private pension saving, but it is now at a crucial and risky stage of its development. It is imperative that it is not undermined by other government-sponsored forms of saving."
"Some young people may opt-out of AE in order to save in a lifetime ISA, leaving themselves worse off in retirement. Furthermore, the lifetime ISA is due to be introduced at a time when the majority of small businesses will still be to move on to auto-enrolment and statutory contribution rates will be yet to rise."
However, the government seem set to go full steam ahead with the Lifetime ISA, a Treasury spokesperson saying:
"This government is absolutely committed to supporting people to save for their future. The Lifetime ISA is a key part of this, which has been designed to complement, not replace pensions. It is designed as a long-term savings product which allows flexibility for savers. The Treasury is responsible for policy on the Lifetime ISA, along with all other ISAs. We continue to work closely together with HMRC on its implementation."
The FCA has not commented so far although there is a paper on the subject being published by them later this week.