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British Steel redress scheme: the potential insurance impact for advisers

British Steel redress scheme: the potential insurance impact for advisers
(Karan Bhatia/Unsplash)

The Financial Conduct Authority recently published proposals to deliver compensation to former members of the British Steel Pension Scheme who were misled about the advantages of transferring their pension benefits.

The regulator is currently consulting with the industry on the merits of launching a compensation scheme for former members of the BSPS.   

In total, around 8,000 steelworkers collectively transferred out £2.8bn when the scheme was restructured in 2017. The review seeks to determine whether they received unsuitable advice to transfer their benefits away from the BSPS.

Many of the employees who moved their benefits took advice from financial advisers in the process while the regulator states that almost half of all the advice files it has reviewed appear to be unsuitable.

If the FCA’s compensation scheme – which was announced in March – goes ahead as initially proposed, advisers will be forced to pay compensation to those who received unsuitable advice to switch away.

It is extremely difficult to determine whether the FCA’s proposed consumer redress scheme (under section 404 of the Financial Services and Markets Act 2000) is the natural conclusion to a four-year investigation, or simply the last available option.

However, what we can say, is that despite the numerous announcements, letters and meetings, the actual number of BSPS members that have come forward alleging that they have been mis-advised to transfer their benefits is lower than the FCA had anticipated.  

The primary reason for reaching such a conclusion is that the facts being used to justify the s404 review, namely the poor results of the 365 files reviewed to date, have been known for many years and during this time the FCA has seemingly made every effort to bring forward complaints from consumers thereby avoiding the requirement for the review.  

However, as it now seems inevitable that the review will take place, it is worth considering some of the more practical aspects and potential implications for advisers when it comes to the redress scheme – particularly in relation to their professional indemnity insurance policies.

The implications of the opt-out basis

The review is proposed on an opt-out basis, and whether the clients should opt in or out is a very important point from an insurance perspective. The majority of PII policies are worded in such a way as to respond to a claim – the so-called 'claims made' policy.

The significance of the opt-out basis is that there will be no requirement for a client to actually complain or make any allegation about the advice they received. Therefore, in most instances, it is probable that there will not be an actual claim made for the policy to respond to.  

While this is a point the FCA raises within the consultation paper, it does not make clear whether it expects insurers to provide redress where no allegation of negligence or malpractice exists.