On Friday the National Audit Office (NAO) published a report on the British Steel Pension Scheme (BSPS), looking at the regulation of pension transfer advice and extent to which compensation has been delivered. The NAO's report does not look at the merits of individual decisions made by the FCA and other organisations but includes some insightful information on the BSPS scheme and the status of complaints at FOS and the FSCS and the NAO's findings. With the report coming just before the FCA is due to publish its consultation on a consumer redress scheme for impacted BSPS members and makes for useful reading for those involved with BSPS complaints.
The National Audit Office (NAO) report sets out the regulatory background to British Steel Pension Scheme (BSPS), the regulatory apportionment arrangement that led to the splitting of British Steel from BSPS and subsequent creation of BSPS2, the level of transfers from BSPS and notably what the FCA did at the time with respect to BSPS. Many will be well aware of the contemporaneous interventions made by the FCA and the report recaps on those:
The FCA assigned a number of staff to BSPS in late 2017.
- In November 2017 the FCA held seminars attended by 151 advisers in Swansea and Doncaster reminding firms of their expectations.
- In December 2017 the FCA worked with its regulatory partners to enable the BSPS trustees to issue a joint letter to around 12,000 BSPS members who had requested a transfer quotation to urge them to be careful if considering this option. The FCA followed up with a further joint letter, sent by BSPS trustees, to members who had already transferred out of BSPS and helped to organise a dedicated helpline for members seeking further guidance.
- In January 2018 the FCA wrote to all defined benefit advice firms to advise them of its expectations.
- The FCA assessed 26 firms that had advised BSPS members and by March 2018 10 had been identified as "high risk" with all 10 ceasing to provide final salary pension transfer advice.
The NAO report goes through the detail of the transfers out of BSPS, the status of complaints and claims and regulatory interventions:
- In 2015/2016 the BSPS had 130,000 members of which 14,000 were current employees. BSPS had £13.3bn in assets and £14bn in liabilities.
- 7,834 members decided to transfer out of BSPS to a personal pension plan (representing £2.8bn in assets). 95% of those that transferred received advice (with anyone transferring benefits of over £30,000 required to obtain advice). In the 10 years to 2017 166 members had transferred out of BSPS by comparison.
- The FCA estimates that 79% of all BSPS members who received advice decided to transfer out of BSPS to a personal pension scheme. The average transfer value was £365,000.
- 369 firms provided advice on transfers out of the BSPS scheme. 235 advised fewer than 10 members (i.e. 134 advised more than 10 members). Only 5 of the firms that provided advice met the FCA's size threshold for regulator engagement with the FCA. 30% of BSPS transfers involved situations where members were introduced to their adviser by an independent third party.
- 25% of those that transferred, 1,878, have raised a complaint. The FOS has upheld 71% of complaints (albeit the report notes that 98% of complaints have been upheld specifically for unsuitable advice). The report references an ongoing "related" judicial review of a FOS decision on a final salary transfer case.
- 22% of complaints referred to FOS have been passed to the FSCS. The FSCS has paid £37.3m in compensation to date compared to £55.3m if you remove the FSCS cap (being £50,000 for firms that failed before April 2019 and £85,000 for firms that failed after April 2019).
- The average redress calculation is £82,600 with respect to unsuitable final salary pension transfer advice from the BSPS, with redress calculations ranging from £nil to £489,000.
- 72% of cases before FOS and 40% of cases before the FSCS have been made via a claims management company or law firm.
- By May 2020 45 firms had been instructed or agreed to conduct a past business review with respect to final salary pension transfer advice from the BSPS (45 having agreed to conduct a past business review and 10 conducting a review by way of a skilled person review). 2 firms have completed their review paying compensation of c.£12m. 17 of the 45 firms were unable to afford the redress under the review scheme and entered insolvency proceedings.
- The FCA has levied fines of £1.3m to date with respect to enforcement action taken against firms and individuals involved with BSPS transfers. There are 30 ongoing enforcement investigations involving both individuals and firms. One individual has been banned from providing advice. It is estimated 44 firms have voluntarily withdrawn from the defined benefit advice market.
The NAO report assesses the advice provided to BSPS members and refers to the FCA's 3 "key reasons" for unsuitable advice on BSPS transfers:
- The advice market was not prepared for the impact of BSPS – there was limited time to understand the BSPS' situation and move advisers were financially incentivised to recommend a transfer;
- Financial advisers responded poorly to the increased demand for services – they lacked resources to scale up, to save time advisers used formulaic and standardised approaches to advice (rather than catering advice to the client) and adopted a standard process and did not apply an appropriate level of quality assurance;
- Advice firms implemented bad practices – insufficient information was requested, collected and documented from BSPS members and the advice did not provide the necessary detail to be suitable and advisers placed too much wright on members' desire to transfer out of the BSPS rather than on their retirement income needs.
The report also includes information about the wider defined benefit market to put some of the FCA's findings with respect to BSPS in context:
- In June 2018 the FCA started to review the defined benefit advice market, reviewing 377 files.
- Of the 377 files, 192 were from BSPS across 28 firms.
- The unsuitability rate for BSPS transfers was 47%, compared to 17% for other defined benefit transfers. The unclear rate (i.e. where the file included insufficient information to determine suitability) for BSPS was 32% compared to 28% for the wider market and the suitable rate was 21% for BSPS compared to 55% for the wider market.
The NAO having considered the regulatory landscape, reaches the following conclusions:
- The financial advice market was not prepared for the impact of BSPS, in particular, the demand for advice.
- In the Summer of 2017 the FCA had limited insight into the defined benefit market and what was happening with BSPS respectively. The FCA had no data on the number of defined benefit transfer requests and no data on the state of the local market. The FCA subsequently changed its approach in 2018 to the collation of data, agreed a joint protocol to enable early intervention, banned contingent charging (where fees are dependent on the transfer taking place) and updated qualifications.
The NAO report also sets out a series of considerations for the industry to strengthen measures to prevent the issues with BSPS recurring again:
- Raising the question as to whether measures for protecting individuals with respect to pension freedoms work together to identify and mitigate risk
- Should further changes be made to minimise the risks arising on the transfer out of a final salary pension scheme including (1) strengthening safeguards, (2) what regulatory data is needed for proactive intervention and (3) a mechanism and approach to communicate key messages to less accessible firms and consumers
- The FCA, FOS and the FSCS should reflect on how it can reach out to impacted customers
Since BSPS there has been a reduction in the number of final salary transfers with the NAO report commenting that the levels of final salary pension transfers are closer to levels at the time pension freedoms were first introduced i.e. April 2015. Since 2018 60% of firms have removed their permissions to provide final transfer pension advice; in 2015 2,789 had requisite permissions to provide defined benefit transfer advice, by 2018 this had increased to 3,068 and now, 2022, this sits at 1,160.
The NAO report does not contain anything ground-breaking on the BSPS but it does give a useful insight in to the status of complaints involving BSPS and a reminder of what the FCA did at the time to intervene in the evolving situation. The NAO report does have some comments that the FCA in particular will want to reflect on in particular comments around its slowness to react. A useful read for anyone involved in BSPS complaints and just before the scheduled publication of the FCA consultation on a consumer redress scheme for BSPS.