Matthew Connell explains the impact of the FCA’s British Steel pension compensation scheme
In May this year, the Financial Conduct Authority (FCA) completed its consultation on a consumer redress scheme for people who were wrongly advised to transfer out of the British Steel Pension Scheme (BSPS).
It is one of the most emotive issues faced by financial services in the last 20 years. In 2018, a Department for Work and Pensions (DWP) Select Committee report concluded that the steel workers were “woefully under-supported” by both the pension scheme and The Pensions Regulator in making their choices. It went on to say “reputable local IFAs were overwhelmed by demand for advice” and that some “dubious advisers… shamelessly bamboozled” pension scheme members into making poor decisions about both transferring out and ongoing investment of their pension savings.
The DWP Select Committee also observed, in a rare moment of understatement, that “ultimately, some bills may end up being footed by reputable advice firms through a compensation levy”.
Given this kind of criticism, it is not surprising that the FCA has taken radical action. The redress scheme it is proposing is set up under Section 404 of the Financial Services and Markets Act. This kind of review was first used for pensions mis-selling in the 1990s, but was not used for other large mis-selling problems such as mortgage endowments and payment protection insurance. The key elements are:
- Unlike an approach based on encouraging complaints to the firm and the Financial Ombudsman Service (FOS), a Section 404 review requires firms to review the advice they gave to clients regardless of whether the client has complained. To avoid the impression of firms ‘marking their own homework’, clients will also have the opportunity to complain to the FOS if they are not happy with the outcome of a review.
- Unlike an approach taken through the FCA’s supervisory work, a Section 404 review applies collectively – given that more than 330 firms will be covered by the review, the FCA believes this approach will be costly and time-consuming.
One question about the review will be the extent to which it will be the beginning of a wider review of defined benefit (DB) pension transfer advice. The FCA’s consultation itself notes: “Trade bodies were concerned about redress schemes being used more widely for DB transfer cases.”
In the past, mis-selling issues such as the pensions review have tended to expand over time from a relatively small number of very serious breaches to much larger-scale compensation relating to lines of business that are increasingly perceived to be against consumers’ interests.
Reputable local IFAs were overwhelmed by demand for advice and some ‘dubious advisers shamelessly bamboozled’ pension scheme members into making poor decisions
The FCA has sought to address this perception head on, saying: “BSPS is a highly exceptional case. Our evidence… suggests that 46% of transfers were unsuitable. This suggests much higher levels of poor advice compared with that we have seen in higher-risk firms in non-BSPS pension transfer cases (17%).”
The reasons the FCA gives for BSPS advice being less reliable than other pension transfer advice are:
- Unlike most people who are considering a pension scheme transfer, BSPS members were not given the choice of retaining their existing arrangements. Instead, they were given a complex set of choices, which included membership of two different DB arrangements and transferring out.
- Many BSPS members distrusted their employer.
- They only had limited information on the alternative options.
- They had to contend with tight timescales to make a decision.
- They had limited support to help them make a decision.
As a result, the FCA argues, it does not follow that all transfer advice should be treated in the same way as BSPS transfer advice, because the circumstances in other cases did not create the kind of atmosphere of confusion and distrust thatcould allow poor decisions to be made so easily.
Although the FCA’s intention is to restrict the review to the BSPS scheme, the financial impact of the scheme will be considerable. The PFS has repeatedly supported the need to pay full compensation for clients who have been poorly advised.
Nevertheless, it is important to recognise that not all BSPS recommendations to transfer were poor advice – the FCA estimates that 41% of recommendations were compliant. In addition, the FCA’s analysis was a scan of a sample designed to identify the broad scale of the problem, and the analysis did not always take into account every piece of information on the client’s files.
Also, we must consider issues such as whether the compensation, which will be paid as a lump sum, is adequately putting clients back in the situation they would have been if they had not transferred out.
It is also important to ensure that firms that have not given unsuitable advice do not have to foot the compensation bill significantly more than they have already. The FCA has adopted emergency powers to prevent firms with five or more cases from getting rid of assets that could be used to pay a potential redress bill, a move supported by the PFS.
Matthew Connell is director of policy and public affairs at the PFS