OPINION: What happens when you buy a lemon? With any faulty product, if it's not fit for purpose, you return it and have it repaired or replaced. If it's a substantial failure you can have your money back.

What if a financial product isn't fit for purpose for certain customers?

We're not talking about the markets tanking. We mean the structure and bones of the financial item.

You'd think the financial regulator would step in. There's a lofty thought. In New Zealand we have a tendency to make out it didn't happen or isn't happening. Why the wall of silence? Because the mess isn't as easy to see as an exploding blender or a brown avocado.

New Zealanders with small balances in KiwiSaver accounts have been sitting on a brown avocado since the day they purchased it. Yet, nothing is done. The regulator writes annual reports. Focus areas are identified such as "value for money". Still, no action.

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What's the rub? It all comes down to the "membership fee" charged by managers. This amounts to an irrelevant sounding $20 to $50 a year, depending on who you invest with. It's minuscule if you've got a decent-sized savings pot. It's massive if you haven't.

A trap for non-savers

There's roughly 1.2 million people who don't contribute any money whatsoever to KiwiSaver. They opened an account, but are now dormant.

These are not people taking an official contribution holiday. They're either not working or are children. They have an average balance of almost $10,000. Yet averages are deceiving.

At $30 a year on the average balance, it's a charge of 0.3 per cent. But there will be hundreds of thousands of people who aren't average and are paying far more as a percentage. Those who took the $1000 starter-gift (taxpayer money) and never added any more are having their savings drip-fed to fund managers at a rate of 3 per cent a year if they're paying a $30 fee.

This qualifies as misselling in my view. Why? From day one we knew there was a $1000 starter-gift and it had no-strings attached. People didn't have to commit to saving. From day one, we knew which customers didn't have an employer and those who didn't set up a regular savings direct credit. They were easily identifiable.

So why didn't we tell them this sort of investment had a structure with a fixed membership fee that would eat away returns in a significant and disproportionate manner? That the fee was exceptionally high (3 per cent on a $1000 investment). An internationally unheard-of level for an admin-fee on a managed fund.

Nothing was said for two reasons:

First, it was the taxpayers' money, a gift of $1000. Just in case it got removed (and it did) it was in the customer's interest to grab it. If the fund manager then filters off $300 in the next ten years (which they did) then we shrug. The customer still has $700 free money – so surely that's not misselling? Their investment returns will fudge the issue that this investment structure is inappropriate for a non-saver.

Second, ownership of the customer is paramount. This was a lolly scramble from 2007 to 2015. Managers had one chance to sign up as many people as possible with the taxpayer-funded carrot. Once you've got them, there's a lifetime relationship, thanks to a lack of open-architecture (your account doesn't sit on a platform where you can divide money between managers). Yes, customers can switch managers, but all your money must move. Few can decipher any reason why they'd do this, apart from chasing past performance.

Could anything have been done sooner? Yes, right from day one the problem has been obvious. Managers could have insisted that anyone not signing up to a regular savings direct credit, kept their money in a cash fund with no admin fee.

Has the financial cost been material? For many non-savers, no it hasn't. With good returns in the sharemarket, even a 3 per cent membership fee and another 1 per cent annual management fee (based on their balance), they could have outperformed cash. But that doesn't happen all the time, or forever, and it doesn't render as an excuse for misselling an unsuitable product.

What should be done?

Repair: Managers should repay the last 12 years of admin fees to non-savers.

Replace: Managers should decide if they are prepared to wipe their membership fee going forward to place the customer in a new fair-fees environment. They have a future lifetime value when they start working.

Refund: The regulator could forcibly switch money to those managers with no membership fee. BNZ don't charge any customers this fee. Simplicity, Juno and Craigs don't charge children.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views.  They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product.  Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.