In a July blog I reported on the House of Commons Public Accounts Committee report entitled "Investigation into the British Steele Pension Scheme". The blog set out a number of recommendations of the Committee in light of its investigations into the FCA's conduct and regulatory oversight of BSPS and, in particular, the 7,834 members that transferred out of BSPS into a personal pension scheme. We have now had a sneak preview of the FCA's response in the recent Committee minutes. Here's what the FCA had to say.
The FCA responded by way of a letter dated 22 September 2022 and the content is summarised at pages 14 to 22 of the Committee's minutes. First, the minutes note that the FCA accepts there are lessons to lean but "… is concerned the report does not fully acknowledge the ways the FCA has responded since 2017, acting against poorly performing firms and improving the wider defined benefit pension transfer market…" and this includes over £20million in redress having been paid out by firms said to be due to action by the FCA.
The letter then addressed the 6 conclusions from the Committee's earlier report:
1. The regulatory system left BSPS members open to being manipulated and taken advantage of by unscrupulous financial advisers who personally profited from giving bad advice
The FCA is said to share the significant concerns of steelworkers, MPs and other stakeholders about the levels of unsuitable advice and has met with 400 steelworkers to provide support and listen to concerns. Since the inception of a joint protocol between the FCA, Pensions Regulator and Pension Protection Fund in January 2019 there has been greater joint working and early intervention to address risk. Actions have included issuing joint proactive statements, setting out the concerns and action each organisation will take and noting such steps were taken in relation to the Rolls Royce pension scheme and P&O pension scheme.
2. The FCA has consistently been behind the curve in responding to the catastrophic impact on BSPS members
The Committee recommended that the FCA should examine what can be done to improve data and insight to take a more proactive approach to regulation. The FCA agreed with the recommendation and noted that since 2018 it has been collecting more defined benefit (DB) pension transfer data from advisory firms across the market. The FCA's rules since October 2020 have also required firms with permissions to advise on pension transfers to report a range of key data metrics to the FCA on a half-yearly basis. Risk indicators are triggered from this data, including volume of business conversion rate, resource levels, income levels and "DB business trends" with supervisory reviews and actions being undertaken on such triggers.
3. The FCA has not been sufficiently proactive or timely in using its enforcement powers
The FCA has said that enforcement activity related to BSPS is a "high priority". The FCA has c. 30 ongoing investigations into firms and individuals relating wholly or partly to BSPS advice. The investigations are said to be at an advanced stage with 5 having entered either Stage 1 settlement discussions or the Regulatory Decisions Committee. If a matter is resolved at Stage 1 the FCA can publish information about it, if following Stage 1, the subject contests the matter it moves into the Regulatory Decisions Committee or Upper Tribunal process. 48 firms have withdrawn from the DB pension transfer market. The FCA is also taking steps to enhance its approach to unregulated activities performed by authorised firms.
4. The way that compensation has been provided in the BSPS case has been slow and unfair and the FCA should also resolve differences in the levels of compensation received by BSPS members to date
The DB redress methodology is designed to put consumers back in the position they would have been in had they not transferred to a personal pension scheme and this is done by estimating the amount they will need at retirement to purchase an annuity that would replicate the DB pension benefits they would have received. That amount is then discounted to determine the amount needed in today's terms – the redress amount is then the difference between the amount needed in today's terms and the current value of an individual's transferred personal pension pot. Changes in economic circumstances between calculations explains why consumers in apparently similar positions receive different levels of compensation as the calculation is a point in time calculation. The FCA is also considering whether it might be appropriate to increase FSCS limits and is due to publish a feedback statement on that in late 2022.
5. Seven years after the Pension Schemes Act that introduced the pension freedoms, regulated bodies are still not clear on the FCA's expectations for consumer protection
The FCA has engaged extensively with BSPS members including direct mailings in 2018, 2019 and 2020 and local events in 2019 and 2021. Further, following face to face meetings in late 2021 there was an uplift in FOS complaints. That said the FCA accepts that it can do more to proactively engage with consumers.
6. The current compensation arrangements do not always protect consumers, can create wider costs to firms and may not have the capacity to cope with future risks in the advice market
The FCA, FOS and FSCS are to write to the Committee on 21 January 2023 to explain what they are doing to manage risks in the redress system for financial advice. The FCA rejects the Committee's recommendation that the FCA's handling of the wider DB pension market should reviewed. The FCA says that the "… harm associated with BSPS is unique and not replicated elsewhere…" with the FCA's evidence suggesting 46% of BSPS transfer cases were unsuitable compared to 17% in high risk firms in non-BSPS pension transfer cases. Stats that seem to be forgotten before FOS.
Although we wait to see the FCA's letter itself, notably the FCA rejected any suggestion that it should look at its own role in the supervision of the wider DB market outside of BSPS, saying BSPS is "unique" (which is perhaps not always seen in FOS decisions on final salary transfers).
The FCA's response, based on the Committee's minutes, also refers a lot to the proposed BSPS consumer redress scheme and a consumer redress scheme being the appropriate approach in cases such as BSPS to deliver redress to customers but also repeating a number of times the time it takes, given the statutory tests, to put such a scheme in place. The minutes also refer to the FCA's understanding that many consumers who transferred out of BSPS "… are not considering making a complaint about the advice they were given. Some of these consumers have vulnerable characteristics and need help to identify whether the advice they were given was unsuitable. The FCA took this into account when considering whether a section 404 scheme was desirable compared to alternative options to ensure consumers receive redress…" which may imply an unwillingness to drop any automatic opt-in as part of the redress scheme. We await the next chapter for BSPS with the response to the s.404 consultation due in the coming months.