Banks are failing first-time buyers by not offering Lifetime ISA
The Lifetime ISA launches on April 6th, yet it’s unlikely that anyone will realise this, given how so few banks have actually stepped forward to offer the new ISA. As of writing, only Skipton Building Society have announced that they’ll be making it available to their customers, while every major bank on the high street has confirmed either that they won’t be selling it or that they’re waiting for further information from the Government regarding terms and conditions.
This is something of a heavy blow for the Government, who in the Spring Budget of 2016 proudly announced the Lifetime Individual Savings Account (LISA), which they claimed “you can use to save for retirement or to buy your first home.” Yet while it suggests that they’ve badly miscalculated in combining what is essentially a revamped help-to-buy ISA with an alternative pension fund, the lack of interest from banks isn’t merely an indictment of their policy alone, but also of the banks themselves.
For sure, the government have perhaps made the LISA too complex, insofar as the £4,000 it allows holders to save each year until they turn 50 can be used for more than just buying a first home. In fact, it isn’t merely complicated, but its £4,000 and 50-years-old limits also mean that it will distinctly underperform compared to occupational and private pensions.
And it’s this underperformance that has deterred banks from offering it, since they’re worried that it will create the risk of mis-selling, as has been highlighted by former Pensions Minister Ros Altmann, among others. In the wake of the PPI and other scandals, the banks are understandably keen to avoid such a risk, which is partly why Lipton stand alone among them.
However, while this would put the blame mostly on the Government’s shoulders for a misconceived ISA, it also reflects badly on the banks, since it suggests that they don’t trust themselves to sell customers the best possible financial products and services. It suggests that, rather than guiding their customers carefully through all the available options and fully informing people of the risks of each, they’ll rush through sales in an industrialised, one-size-fits-all kind of way, thereby creating liability in the event that customers end up being unhappy with what they’re sold.
Indeed, they’d have plenty of reason to distrust themselves like this, given their recent history on misselling. Not only have they abused payment protection insurance, but in 2013, for example, the FCA judged that the Big Four banks had mis-sold over 40,000 needless fixed-rate loans meant to protect SMEs against interest rate increases that never came.
They’d been doing so since 2001, racking up enough sales for them to set aside at least £3 billion in compensation for affected business. As revealed by anonymous sources within the industry, these sales were motivated by “aggressive targets”, with banks receiving big commissions for selling the loans on to derivative traders.
And unfortunately, the existence of such targets and such an ethos would make it likelier that they’d sell LISAs aggressively as well. This is indicated by how, in response to the PPI scandal, rather than seeking to reform the fundamental practices and culture of the banking industry, the Competition Commission (now the CMA) simply banned the sale of PPI in conjunction with other financial products.
What this shows is that, even after one of the biggest banking scandals in history, the underlying readiness of many banks to mis-sell products hasn’t been reformed. And it’s because they haven’t been reformed in any far-reaching way that most of them are refusing or are reluctant to commit to offering LISAs to their customers.
And at a time when houses cost 7.6 times more than the average salary, this is a massive shame, since their refusal will probably mean that thousands of hopeful first-time buyers will be denied a chance to buy a home, or at least to buy one more affordably. With the ability to save a maximum of £160,000 (including a £32,000 bonus from the Government), the Lifetime ISA is a good deal as far as its house-buying portion is concerned, which is why it’s such a missed opportunity for these buyers.
Yet more than that, it ultimately represents an unfortunate miscalculation on the government’s part, and more revealingly a confession on the part of the banks that they still can’t be trusted to act in the best interests of their customers. And if Skipton do remain the only bank or building society to offer a LISA, it’s in terms of this confession that the latter ought to be remembered.
By Lyndsey Burton, founder of Choose.co.uk, a consumer comparison site.