In a consultation paper published today on the consumer redress scheme for BSPS (March 31), the Financial Conduct Authority said it expects £71.2mn to be paid in compensation to consumers.
The regulator said the redress costs of the scheme will be paid by advice firms and their professional indemnity (PI) insurers. Redress will only be directly payable by firms whose past advice on BSPS transfers harmed consumers.
It is expected that the scheme will apply to 343 firms, the FCA said.
As a result of the scheme, some advice firms may be unable to cover their liabilities and may leave the market, the City watchdog explained.
“Any such market exit is a direct result of providing unsuitable advice to BSPS members and now putting consumers back in the financial position they would have been in if the advice they received had been suitable and compliant,” it said.
In cases where advice firms become insolvent, outstanding liabilities will be passed to the Financial Services Compensation Scheme which will in turn represent a cost to wider industry of an estimated £20.6mn.
In addition to redress payments that firms will need to pay to BSPS members who are found to have been given unsuitable advice, the FCA also estimates that advice firms will incur around £9.1mn in compliance costs to review their historical BSPS transfers, and to deal with possible complaints and challenges regarding their assessment.
Those firms that have given unsuitable advice will incur an estimated additional £1.4mn to calculate and administer the redress due.
The FCA said the proposal could make professional indemnity insurance harder to obtain for firms that have previously advised BSPS consumers.
However, the regulator said it considers it unlikely that the proposal would lead to wider deterioration in the PII market.
“We believe the risk that competition in the market for DB transfer advice will be materially affected by our proposal is very low. We will undertake further work during the consultation period to better understand these factors in advance of the policy statement.”
The proposal will also lead to administrative costs for the FCA, the Financial Ombudsman Service, and FSCS.
The FCA estimates that it will incur costs of around £3.2mn, while the Fos will incur costs of £0.4mn, without taking into account fees from firms, and FSCS will incur administrative costs of £0.6mn, which will be recovered from firms via the FSCS levy.
Last year, the FSCS forecasted a levy of £900m for 2022/23, as advisers will yet again contribute the maximum £240m.
Redress calculator
To help firms to carry out redress calculations, the FCA is also considering whether it is possible to develop a calculator.
A calculator could require users to input relevant information about the transfer which would be used to determine how much the consumer has lost between the date of transfer and the date of assessment.
The resulting figure would be the redress that the firm will be required to pay the consumer to put right the harm caused by the unsuitable advice.
The FCA said the steps that the proposed scheme will require firms to take can be grouped into three main phases: pre-scheme checks, suitability assessments and assessment outcomes.
The pre-scheme check will require a firm to identify and write to all consumers who transferred out after a personal recommendation.
Following this, a firm will move on to the suitability section which requires the firm to review the available evidence and information.
It also requires firms to consider a list of examples that are indicators that advice is likely to have been unsuitable.
The firm must conclude, taking into account all of the available evidence and the presence of any examples indicating unsuitable advice, whether it complied with the suitability requirements.
The firm will then move on to the assessment outcome to assess whether the advice was suitable and the redress to be paid if so.
To ensure consumers receive outcomes from the scheme in a reasonable timeframe, the FCA said it is proposing deadlines by which firms must complete the steps in that phase.
If firms have reason to believe they will be unable to complete a phase by the deadline, firms can consider applying for a waiver.
The BSPS case
During 2017, BSPS members were asked to make decisions about their pensions as part of a restructure of the scheme.
About 8,000 members transferred out of the scheme, with transfers collectively worth about £2.8bn.
But concerns about the suitability of the transfers were soon raised, leading to an intervention from the Financial Conduct Authority that resulted in a number of advice firms – key players in the debacle – stopping their transfer advice service, while others went out of business.
The debacle created a mountain of liabilities, which lawyers believe could end up costing the industry up to £300m.
In September, the FCA and FSCS travelled to Swansea to meet steelworkers who could be due compensation but were met with mixed feelings, with some showing no interest while others claimed they were unable to book a place.
The City watchdog also travelled to Swansea in November to meet steelworkers about bringing possible claims against their adviser.
Earlier this year, the FSCS said it had paid out more than £36.5m in compensation to BSPS members, as of January 25.
sonia.rach@ft.com
What do you think about the issues raised by this story? Email us on FTAletters@ft.com to let us know
