As part of the British Steel Pension Scheme (BSPS) 2017 restructuring, members with defined benefit (DB) pensions were asked to make complex decisions about transferring their pensions within a short timeframe. One of the options involved a transfer to a defined contribution (DC) scheme. This ‘time to choose’ exercise is the most high-profile example of the dynamics at play in the DB transfer market (see more on this in our earlier blog posts here, here and here). Recently, the House of Commons Public Accounts Committee (PAC) published its ‘Investigation into the British Steel Pension Scheme’, detailing how, in its view, the FCA failed to protect BSPS members from ‘unscrupulous’ financial advisers.

The PAC’s report considers that the FCA mishandled the BSPS scandal, arguing more widely that it has ‘consistently been behind the curve in responding to unsuitable pension transfer advice’. Alongside this, the report criticises the FCA’s proposed redress scheme, identifies wider issues in regulating financial advice and analyses the FCA’s preparedness for future risks. The table below summarises some of the key failings noted by the PAC alongside some of the PAC’s recommendations.

 

Failing

Recommendation

During the BSPS transfer

In at least 47% of BSPS member cases, the financial advice provided was unsuitable. This was because:

  • the FCA took 32 months to ban independent financial advisers (IFAs) from using contingent charging models which incentivised recommending members transfer out; and
  • the FCA lacked data setting out which firms had provided inappropriate advice to members because its market research was conducted only on larger scale firms, delaying its warning to BSPS members.

The FCA should update the PAC on action it has taken to prevent similar problems from occurring in the future, particularly regarding changes to its approach in regulating small advice firms.

Responding to the BSPS transfer

The FCA issued reminders to firms of their obligation to provide advice in the pension scheme members’ best interests, demonstrating naivety in failing to understand the behaviour and motivations of unscrupulous advisers.

To date, only one fine has been issued in response to the BSPS case and a further 30 enforcement cases have been ongoing for years without significant progress being made.

The FCA does not publish a list of firms or advisers under investigation, so this is not flagged to consumers who are searching the FCA register.

The FCA should examine how to improve the data and insight necessary to inform a proactive approach to regulation.

The FCA should report to the PAC on the progress made on its 30 active enforcement cases.

The FCA should review whether it has sufficient enforcement powers to regulate bad actors.

Compensating BSPS members

BSPS members face significant delays in receiving compensation, with complaints taking an average of eight months to be completed.

There is significant variation in the compensation BSPS members receive because the calculations which determine compensation levels use complex financial assumptions updated in accordance with market performance.

Compensation awarded by the Financial Services Compensation Scheme (FSCS) is capped by the FCA at £85,000 for firms who failed after April 2019 and £50,000 for firms who failed before, which unfairly penalises those who followed FCA guidance and sought compensation early.

The wider redress system, which relies on consumers to seek compensation themselves, is complex and inaccessible. As such, it has proved ineffective in the case of many BSPS members.

The FCA should consider how further redress mechanisms can be more quickly implemented and provide fair compensation.

The FCA should explore resolving differences in the levels of compensation received by BSPS members to date, and how this compares to the amount other members will receive from the proposed FCA redress scheme.

Note that the FCA has recently published a consultation paper proposing some changes to calculating redress for consumers who have suffered loss because of poor DB transfer advice, so watch this space for future changes.

Issues beyond BSPS

Responding to the Pensions Schemes Act 2015, the FCA announced that advisers’ starting positions should be to assume that in most cases a DB transfer would be unsuitable. In 2017, the FCA consulted on removing this starting position, creating confusion within the advice market.

The availability of professional indemnity insurance (PII) has become severely limited because insurers are struggling to accurately predict the risk of DB transfer advice, reducing the number of providers willing to offer cover. The FCA is also yet to define its expectations for the PII industry, creating market uncertainty.

The FCA should develop better mechanisms for identifying and responding to consumer harms and collect more evidence on a regular basis to identify issues.

The FCA, Financial Ombudsman Service and FSCS should write to the PAC in six months explaining actions being taken to manage risks in the redress system.

As trailed in earlier blog posts, while the PAC’s report is primarily focused on the regulated financial advice market, the wider issues in the DB transfer market may also impact employers and pension scheme trustees who engage financial advisers to support member decision-making during these types of exercises. As the FCA comes under increasing pressure from the UK Government to intensify its scrutiny in this area, IFAs, employers and trustees should ensure that they are on top of the issues.

It remains to be seen whether the PAC’s recommendations will have the desired effect, but it is clear that the regulators are walking a fine line between taking action and giving IFAs the means to provide, and employers and trustees the ability to source, high quality financial advice. The BSPS scandal might be the most high-profile example of poor financial advice in the DB transfer market to date, but this remains an area fraught with risk. It remains an open question as to whether there will be class action lawsuits brought by members who later regret the to give up their valuable DB rights.