In a report published by the NAO today (March 18), it said the average loss for BSPS claims resolved by Financial Services Compensation Scheme is £82,600, with individual cases ranging from £0 up to £489,000.
Compensation awarded by the FSCS to BSPS members is limited to £50,000 for claims against firms that failed before April 2019 and £85,000 for firms that failed after that date.
However, the FSCS has estimated that the total loss for its upheld BSPS claims is £55.3mn, and the total compensation awarded by FSCS is £37.3mn, resulting in a shortfall of £18mn.
Back in February, FTAdviser reported the lifeboat scheme had paid out a total of £36.5mn at the end of January.
The report by NAO found that 263 pension scheme members have lost £18mn of redress to date because financial advisers have gone into liquidation and there are limits to the compensation that can be provided.
Around 22 per cent of complaints made to the Financial Ombudsman Service have been passed to the FSCS due to firms being unable to pay compensation.
Additionally, 72 per cent of the Fos’s cases and 40 per cent of FSCS's claims have been made through claims management companies or legal representatives, who charge a fee for their service, meaning some BSPS members have not received the full amount of redress owed to them.
Gareth Davies, head of the NAO, said: "Although measures have been put in place aimed at improving how the pensions advice market is regulated and to attempt to remedy the financial losses suffered by British Steel Pension Scheme members, it is clear that many people have not been compensated fully under current arrangements.
“The BSPS case demonstrates the costs and difficulties of remedying failures in financial services and the importance of preventing problems from occurring in the first place."
Advice market unprepared
NAO said the financial advice market was not prepared for the impact of the BSPS restructure.
Advisers in the local steel-working areas saw very rapid growth in requests for DB transfer advice and the FCA said many of the advice firms had limited experience of processing large numbers of transfers and did not respond appropriately to the increased demand for their services.
Most advisers were financially incentivised at the time to recommend to members that they transfer out of the BSPS, even when it was clearly not in members' interest.
In 47 per cent of BSPS cases, financial advice was unsuitable, and in a further 32 per cent of transfers, it was unclear. The FCA said this was much higher than for the DB transfer market in general (17 per cent).
The regulator estimated that 79 per cent of BSPS members who received advice transferred out of the scheme.
The FCA has since put in place measures aimed at improving the regulation of the pensions advice market, such as a ban on charges where advisers are paid only if a transfer proceeds, and along with the Fos and FSCS it is attempting to remedy the financial detriment suffered by BSPS members.
However, the redress arrangements have not compensated all individuals fully, the costs of redress have impacted on the wider financial services industry and the number of firms providing DB pensions transfer advice has more than halved.
NAO has therefore set out matters for consideration by the FCA and HM Treasury.
It has said the FCA and HM Treasury should consider whether there are lessons to be learned about the way they work together to identify and mitigate any risks to consumers as policy is being developed.
NAO warned that while the exact circumstances of the BSPS may not be replicated, the risk of large numbers of pension members looking to transfer out of a DB pension remains.
It said: “The regulators and oversight bodies with responsibilities for protecting pension scheme members should consider what further changes can be made to minimise the risks associated with transferring out of a scheme.
“This should include consideration of key regulatory factors, such as the strength of existing safeguards to protect consumers in the DB pension transfer process; the regulatory data needed to support proactive intervention and the powers to collect this; and the mechanisms and approaches that can be used to communicate key messages effectively with less accessible firms and consumers.”
The FCA's role
There have been wider market impacts from the costs of compensation such as the FCA requirement for firms to have enough resources to cover liabilities for unsuitable advice through their own capital and professional indemnity insurance (PII).
The price of the relevant insurance cover for advisers has increased significantly since the BSPS case, with some insurers refusing to cover this type of risk altogether.
In addition, the investigation by the NAO found that only five out of the estimated 369 firms that provided advice to BSPS members met the FCA’s threshold for having regular engagement with the regulator, that it would have with larger financial institutions.
“Instead, its approach to monitoring most of the small, local advice firms involved was limited to undertaking thematic work on key issues and specific case work identified through intelligence,” NAO said.
The FCA also estimated that 95 per cent of the BSPS members who transferred out of the scheme received financial advice from an authorised firm.
It identified approximately 369 different firms that provided advice to BSPS members, with 235 of these advising on fewer than 10 transfers each.
The FCA said it had limited insight into the DB transfer advice market and what was happening in the BSPS at the time of its restructure as data on the number of transfer requests were held by the scheme trustees and administrators, who are not FCA authorised.
The City watchdog outlined it did not have any data on the number of DB transfer requests that were taking place, or on the adviser market in the local areas.
A spokesperson for the FCA said: “We welcome the report, which highlights the complex issues for government and regulators which arose from the exceptional circumstances around BSPS and the framework for pension freedoms. We recognise the harm these circumstances caused to steelworkers and communities, and that’s why we continue to work to ensure that former British Steel Pension Scheme members who lost out financially due to poor advice receive compensation.
“We’ve taken significant action, including since the Rookes Review in 2019 to support them already and are preparing to consult on a consumer redress scheme for BSPS members by the end of March.”
The FCA added: “We’ve already acted to raise the standard of pension transfer advice more generally – by introducing new rules, as well as working with our partners to ensure that consumers are supported to make decisions about their pension.”
So far, the FCA said only 25 per cent (1,878) of members who transferred out of the BSPS have sought redress through complaints and the regulator is yet to decide whether to implement a consumer redress scheme for BSPS members, in which all firms involved would have to review their advice and potentially offer compensation.
The FCA must gather evidence to meet certain legal tests before it can implement this scheme. The regulator started assessing the suitability of a consumer redress scheme in April 2021 and expects to launch a consultation on this by the end of March 2022.
In November, NAO contacted advisers and other stakeholders to better understand what happened as part of the BSPS debacle to inform its probe into the regulator’s involvement.
The body announced its investigation into the FCA’s work on BSPS in October.
sonia.rach@ft.com
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