The Financial Services Compensation Scheme estimates that 18 per cent (£3.2mn) of compensation awarded to British Steel Pension Scheme members has been paid in fees to third party firms.
In a letter to the chair of the public accounts committee, Financial Conduct Authority boss Nikhil Rathi said many BSPS members have used third parties such as claims management companies and litigation firms to seek redress on their behalf.
“The NAO report observed that CMCs and their legal representatives charge a fee for their services, which prevents consumers from accessing the full amount of compensation,” he said.
As set out in the report, based on anecdotal evidence from representative firms across the market, FSCS estimates that 18 per cent of compensation awarded to BSPS members through third-party representatives has been paid in fees to these companies.
“As I said at the committee, this is of significant concern to us as it impacts on the long-term financial wellbeing of affected BSPS members,” he said.
“The introduction of a redress scheme as we propose in our consultation negates the need for CMC involvement or of a third party litigation/ law firm as BSPS members will not need to do anything to be included in the scheme.”
The FCA launched a consultation on a redress scheme for former members of the BSPS in March.
The regulator set out plans to deliver £71.2mn in compensation to former members of the BSPS who received unsuitable advice to transfer out of their pension.
This was to ensure that firms can meet the costs of carrying out a review and compensating customers for any unsuitable advice they may have given if the scheme is implemented.
The letter, which is dated to May 18, is in regards to the evidence hearing which was held on April 27.
During the hearing in April, the public accounts committee grilled the FCA and other regulatory bodies on their handling of the BSPS scandal and their plans to introduce a consumer redress scheme.
This formed part of the committee’s inquiry into the BSPS saga which saw 7,700 members, many of whom received financial advice, transfer out of the scheme, representing about £2.8bn in funds.
The committee questioned the FCA on whether legislation was needed to make sure a scandal of this scale did not occur again.
Rathi was asked by MP Nick Smith about the dialogue and discussions between the FCA and HM Treasury in 2015, in particular about its concerns with defined benefit (DB) pension transfers.
In the letter, he listed the timeline from March 2014 when the government announced proposals in the Budget for what would become known as the pension freedoms, publishing an accompanying consultation that ran from March 2014 to July 2014.
The consultation considered how the freedoms could be extended to members of private sector DB schemes.
He said: “This laid the foundations for the system that was put in place in so far as it affected the FCA’s regulation, including the introduction of an advice requirement for transfers of more than £30,000, which was designed as a safeguard to protect individuals.”
"Introduced too quickly"
Meanwhile, Rathi also referenced former FCA chief executive Andrew Bailey’s views on pension freedoms where Bailey said they were “introduced too quickly” and that “we have been on a catch-up process as a regulator”.
Rathi said: “My view also, as expressed in my appointment hearing with the Treasury Committee in July 2020, is that the changes were implemented too quickly.”
“As noted above, predecessors in my role have also highlighted the significance and complexity created by pension freedoms, the regulatory challenge it entailed and some of the difficulties in the timetable for implementation.”
Rathi said HMT and the FCA have worked together on the development of the Budget proposals.
He explained that the regulator has closely engaged closely with HMT to publish its own consultation on retirement reforms and the guidance guarantee and a thematic review of enhanced transfer value pension transfers in July 2014.
“We also changed the scope of our market study of the wider retirement income market study to examine how the market might develop following the introduction of pension freedoms, with an interim report published in December 2014, and a final report in March 2015,” he said.
He explained that following the announcement of pension freedoms, the Financial Services Consumer Panel responded to HMT’s consultation and provided written evidence to the Work and Pensions Committee.
The panel also responded to the FCA’s consultation on pension reforms and provided “extensive input and challenge” at each stage of the retirement outcomes review, which examined how the retirement income market had evolved since pension freedoms were introduced in 2015.
He said it subsequently identified a range of regulatory remedies to protect consumers from poor outcomes, improve consumer engagement and promote competition
On DB pension transfer advice, the panel provided responses to various FCA consultations and supported a ban on the practice of contingent charging.
Rathi said: “In November 2021, the chair of the panel met MP Nick Smith and British Steel campaigners to discuss their concerns. The panel has also had discussions more recently with the FCA about the proposed redress scheme and to understand and comment on more fully the nature of the issues with BSPS.
“It has also responded in writing to the Public Accounts Committee inquiry on the subject and will respond to the FCA consultation on the nature of the redress scheme.”
Data sharing across regulators has improved since BSPS
Rathi also said data and intelligence sharing between regulatory bodies has improved since BSPS, stating that the FCA, the Pensions Regulator (TPR) and the Money and Pensions Service meet on a fortnightly basis and on a quarterly basis to “share emerging intelligence on issues and pressures”.
“We recognise that reporting is one of the most demanding parts of regulation. Our data needs have also evolved as technology and business models have changed," he said.
“We are working with the Bank of England and industry to transform how we collect data from the UK financial sector. As Sheldon Mills (executive director, consumers and competition) referred to at the committee, as part of the transformation programme at the FCA, we are also seeking to improve how we are using data.”
In the committee hearing, he also outlined that through co-operation with TPR and others, it has enabled the regulator to be proactive and see risks appearing, providing the examples of warnings it has issued about the Rolls-Royce and P&O Ferries pension schemes.
Rathi was also asked by the committee what representations it is making to the government on changes to primary legislation around data.
“I can confirm that we have a general rule making power which enables us to make rules to require firms to report data to us, so we do not require primary legislation to make rules to collect data from firms in real time,” he said.
“However, collecting data from firms in real time would likely introduce additional costs for firms and is less valuable to us than the collection of aggregate data on a periodic basis, which gives a clearer impression of the market as a whole.”
Firms with full permissions to advise on pension transfers are currently required to provide the FCA with data about their activities and those of their appointed representatives.
This data includes numbers of customers advised to transfer, transfer values and revenue generated from pension transfer advice.
It is collected every six months on a backwards-looking basis and Rathi said it can be used to inform its supervision of the market.
sonia.rach@ft.com
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