British Steel redress scheme: the potential insurance impact for advisers

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.

If a claim arises and the client file is lost, there is probably very little likelihood of defending the claim successfully.

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. 

The only other s404 review to have taken place was conducted on an opt-in basis where consumers were informed that there were potential issues around the advice that they had received and invited to opt in to the review if they believed that they might have received poor advice.

The opt-out method is also problematic because redress will be paid based upon the result of a file review, which poses a challenge for advice businesses who have not kept full and comprehensive records.

There will be concerns across the advice industry about the Fos’ tendency to rule in favour of the consumer.

If a claim arises and the client file is lost, there is probably very little likelihood of defending the claim successfully, but that is not the same as saying the advice was deficient. The absence of a file does not prove that the advice was negligent; it proves that the client file is missing.

From conversations with insurers we do not see any attempt on their part to avoid making payments to those clients that have concerns about the advice they have received, but making payments to clients based only on the outcome of a file review may be seen as a step too far.

Insurance policies are, after all, legal contracts and the FCA could resolve any uncertainty for businesses by structuring the review to work on an opt-in basis. However, businesses with BSPS exposure will need to review their individual policy wording to understand if and how their policies will respond to the proposed structure of the review.

Indeed, unfortunately, some businesses will also hold policies that specifically seek to exclude any redress arising from s404 reviews.  

The Fos and their role as independent arbitrator

The FCA has stated that businesses cannot be left to “mark their own homework” and to a degree this is understandable. However, the proposed appointment of the Financial Ombudsman Service as the “independent arbiter” will, I am sure, be seen by some as frustrating, given that the Fos' current uphold rate of complaints relating to British Steel transfers is running at 98 per cent in favour of the client.  

While there is no guarantee that a similar uphold rate will apply for the formal redress scheme, there will be concerns across the advice industry about the Fos’ tendency to rule in favour of the consumer, particularly given that the client may have never raised a concern or made an allegation of negligence.

The risks of a capital lump sum payment

While the specific redress methodology has yet to be confirmed, we do know that the principle is that redress will be provided by way of a capital lump sum for the client to do with as they wish. This area could prove particularly problematic from the client’s perspective.  

We know from the FCA’s findings that in 66 per cent of unsuitable cases, the client relied heavily on their income from the British Steel scheme, and in 40 per cent of unsuitable cases, the client did not appear to have the knowledge and experience to understand the risks of the transfer.

With two in five clients falling under the redress scheme lacking the appropriate financial knowledge and experience to manage their personal pension portfolio, it could be argued there are better ways to reinstate pension benefits to ensure that those lost on transfer are restored.

The review introduces the inequity of a two-tier compensation scheme.

Simply adding more capital and prolonged investment risk, the exact factors that made the original advice unsuitable in the first place, could result in further detriment to the consumer and undermine the long-term value of any compensation.

This payout structure leads to a concern that further poor financial/investment decisions may be made up to and even beyond retirement.

Even if appropriate investment decisions are made, it still leaves the client to deal with the stress and worry of market volatility when they do not have the necessary capacity for loss to help assuage any anxiety caused by the fluctuation in value of asset-backed investments.

To resolve the situation, it would make sense for clients to have their pension funds repatriated into guaranteed income benefits such as deferred annuities that are topped up to match the scheme benefits they have lost. Unfortunately, it seems that the FCA has put this potential solution into the 'too difficult' box, but it should be considered in more detail.

Moreover, the review introduces the inequity of a two-tier compensation scheme, with consumers that have been advised by businesses that have since collapsed having their advice assessed by the Financial Services Compensation Scheme. 

In these instances their redress will be calculated in line with FSCS rules, thereby capping compensation at the limit of £85,000 per person (or just £50,000 where businesses failed before April 1 2019).

Not all bad news

While there are problematic aspects to the s404 review as currently set out, if conducted correctly, many consumers that rightly require redress will have their cases reviewed and receive compensation. This is clearly a good thing.

Likewise, many businesses that have been living under the sword of Damocles will have it lifted by the clear message from the FCA that the BSPS issue is unique and that there is not likely to be any expansion of the review to other schemes or any scope-creep into the wider defined benefit pension transfers market.

Chris Davies is executive director and co-lead of the financial and risk advisers division at insurance broker Howden