Financial advisory firms steel themselves as pension redress scheme to come into effect

Firms which advised members to transfer out of the British Steel Pension Scheme (‘BSPS’) will soon have to undertake a review of the advice provided and offer redress where appropriate when the FCA’s new redress scheme is implemented early next year.

At the end of November, the FCA issued Policy Statement PS22/144 ‘Consumer redress scheme for unsuitable advice to transfer out of the British Steel Pension Scheme’ setting out rules for its opt-out redress scheme for firms to compensate for pension transfer advice given to members of the BSPS between 26 May 2016 and 29 March 2018 (the ‘Scheme’). Temporary asset retention requirements were imposed in readiness by the FCA earlier in the year on target firms to address the risk of assets being disposed of ahead of the Scheme’s implementation. In conjunction with that announcement, on 28 November the FCA also issued a ‘Dear CEO’ letter to those firms’ professional indemnity insurers of, setting out its expectations of them in clarifying the cover afforded in respect of claims within the Scheme and in responding to those claims.

Operation of the Scheme

The Scheme’s key objective is to ensure that consumers who have suffered a loss as a result of unsuitable advice to transfer out of BSPS obtain appropriate redress. Whilst the FCA estimates that almost half of BSPS members will have received unsuitable transfer advice and suffered substantial loss as a result, it is believed that approximately only 10% of those who received transfer advice have pursued complaints. Time is ticking: given that the claims of members who transferred out prior to November 2016 (and prior to November 2017 where Scottish law applies) may already be time-barred, the Scheme is intended to preserve the rights of the large body of members still eligible for compensation who have not already sought redress to date by operating to ‘stop the clock’ on the applicable limitation periods upon implementation. By the FCA’s own estimate, the Scheme should provide prompt redress for over a thousand in-scope consumers totalling £49 million, of which it is envisaged that firms will pay some £33.6 million and the FSCS the rest (£15.4 million).

The Scheme comes into effect on 28 February 2023, after which firms which provided transfer advice during the relevant period have until 28 March 2023 to identify all relevant formers clients and to advise them – unless they elect to opt-out – that they intend to review the suitability of the advice provided. Firms must then proceed to assess those cases and communicate the outcome by 28 September 2023. In cases where the advice is assessed as having been unsuitable, redress is required to be offered (by 29 December 2023 if a lump sum payment has been requested, or by 28 February 2024 for consumers seeking a payment into their pension) and paid within 28 days of acceptance.

‘Dear CEO’ Letter to PI insurers

Given the ambitious timetable for redress, the FCA seeks to ensure the smooth operation of the Scheme by avoiding delays to which insurance coverage issues may give rise. By its ‘Dear CEO’ letter of 28 November the FCA has set out its expectations of PI insurers. These are aligned with the forthcoming new ‘Consumer Duty’ requiring firms to ‘act to deliver good outcomes for retail customers’, which includes ensuring that PI policies respond appropriately. In particular, insurers are expected upon request to be able to provide affected firms with a prompt ‘indication of cover’ in respect of potential in-scope claims so as to enable those firms to assess their financial resources to meet claims. To facilitate meeting these expectations, insurers are encouraged to develop approaches which expedite the reporting and consideration of claims which may arise through the Scheme. Where claims are not expected to be covered, a summary of the reasons for this is to be provided. Insurers are also reminded of the FCA’s expectations that they will consider notifications, handle claims and pay out any indemnities as appropriate promptly and fairly.

Impact of the Scheme

Firms which provided advice to transfer out of the BSPS during the relevant period will want to get a head start, engaging early with insurers to ascertain the scope of cover available to meet Scheme claims where unsuitable advice may have been provided and to keep insurers informed as file reviews are conducted in the period to September 2023. Insurers will likewise need to identify early and assess promptly any potential coverage issues, whether relating to the scope of cover afforded in applicable policy years or to issues of compliance with policy conditions.

Whilst the FCA is anxious to ensure that PII policies responding to Scheme claims result in prompt pay-outs, the extent to which redress will be met by insurance is far from clear. The FCA’s consultation with insurers active in the PII market for Defined Benefit transfer advice has led it to conclude that claims arising under the Scheme could be widely excluded from cover. Even where such claims are not expressly excluded, there may well be reduced limits of cover in respect of BSPS advice and large excesses. The FCA notes that policy excesses are typically £25,000 per claim: more than half of its predicted average claim value under the Scheme of £45.000, although for some firms excesses could be substantially higher. In such circumstances the FCA’s estimate as to the failure rate of advisory firms impacted by the Scheme (around 10% of close to 400 firms involved in providing transfer advice to BSPS members) may prove optimistic.

The extent to which consumers will be prepared to accept the conclusions of the very firms they are seeking to hold to account remains to be seen, and concerns were inevitably raised during the Scheme’s consultation process about firms ‘marking their own homework’. Where a firm has assessed transfer advice under the Scheme as having been suitable, affected consumers would be entitled to have the Financial Ombudsman Service assess the firm’s application of the Scheme’s rules and the FCA has intimated that it may facilitate referrals of ‘suitable’ cases to the Service. Given the rate at which the Financial Ombudsman Service has upheld BSPS transfer complaints to date, it may find that it is met with a high referral rate of cases in a year’s time.