FCA publishes final rules for the long anticipated British Steel redress scheme under s.404 of FSMA

Readers of this blog space will remember that we published an article on 22 December 2021 discussing the FCA's proposed consultation on a redress scheme under s.404 of the Financial Services and Markets Act (FSMA) covering transfers from the British Steel Pension Scheme (BSPS). The final rules have now been published in Policy Statement PS22/14, just in time for the festive period. It is, perhaps, not the Christmas present that the industry and its insurers wanted.

In general terms, the final rules (which can be found here) do not deviate much from the proposed rules published in March; the FCA still intends to run the redress scheme on an 'opt-out' basis and for the FOS to act as a final arbiter on files graded suitable. Despite PS22/14 showing evidence of heavy criticism, the defined benefit advice assessment tool ("DBAAT") is still to be used to assess suitability.

The paper opens by reminding readers that 46% of transfers from BSPS assessed by the FCA were graded unsuitable. There is then some good news: the FCA estimates that 1,100 transfers will be in scope (down slightly from the 1,400 estimated in the consultation paper). Furthermore, redress is expected to come to £49 million, with firms paying £33.6 of this, and the FSCS £15.4. This is down significantly from the total estimate of redress of £71.2 million from the March consultation paper. Interestingly, the percentage of cases expecting to show no loss has increased from 6% to 32% based on claims data from the FSCS. In turn, estimated per file redress as a percentage of CETV has dropped to 12% from 16%. The FCA is also at pains to note (again) that only 10% of BSPS members who transferred have actually complained (which the writer believes could simply indicate that they are happy with the outcome) and notes that "it is likely that a number of consumers would be time-barred from making a complaint if they wanted to do so in the future" thus apparently justifying a safety net for those overcome with inertia.

Sadly, there are few additional positives. Firstly, the FCA has decided that the review should cover transfers from 26 May 2016 to 29 March 2018, rather than using the possible later starting date of 1 March 2017. This raises concerns with limitation, which will be a key issue for transfers that took place in 2016 as the primary limitation period in which to bring a claim will have expired for most transfers. Furthermore, the high-profile issues with BSPS mean members are unlikely to be able to rely on the secondary three year limitation period at s.14A of the Limitation Act 1980. The FCA appears to be alive to this, noting that members who transferred before 24 November may already be out of time to complain and will only be covered by the scheme if "they became aware [they] may have had poor advice after 24 November 2019." S.404(8) itself provides that redress must be paid even if a limitation defence became available "after the rules are made…" and, whilst the Policy Statement was published on 28 November, the Rules themselves (at Appendix 1) were signed on 24 November. Interestingly, customers who are excluded from the review on the basis their transfer occurred before 24 November 2016 but believe they can rely on secondary limitation are told to complain to FOS. Readers may see the sense in implementing a scheme that includes advice from 26 May 2016, only to then state that any transfers completed in the subsequent six months can effectively not be included for time bar reasons, but the logic of this escapes us.

Excluded from the scheme are customers of firms who have gone out of business. Such consumers are told that they can make a claim to the FSCS, whereas customers of firms who fail during the course of the scheme will have their advice considered by the FSCS under the methodology set out. Also excluded are people already paid compensation, insistent clients, those who have complained to the FSCS and "people who were out of time to make a complaint before the scheme was implemented", as discussed above. Also excluded are files where the transfer was assessed by a skilled person using the DBAAT, provided the consumer was told they can complain to FOS if they disagreed with the findings. Files reviewed by other third parties are not excluded but, if a DBAAT was completed the firm can confirm that the same outcome would have been reached.

The FCA has provided little time for firms to now prepare for the review - the scheme will start on 28 February and all consumers (both those in and out of scope) will need to be contacted by 28 March 2023. Suitability reviews are then to be completed by 28 September and redress paid by 28 December (or 28 February 2024 if the consumer requests an augmentation offer, as discussed below).

There are few substantive changes from the original proposals, but we have highlighted some key points below:

• There was considerable pressure on the FCA to implement an opt-in process for the review, as this was absent from the proposed rules in the consultation paper. There has been some movement, as firms are now expected to write to members at the outset stating that they will review the file unless the member opts-out. Previously, the 'opt-out' process was to take place following the assessment of suitability. This no doubt comes as a result of the FCA's concerns over inaction and fixation on the low number of former members who have complained. A past business review would normally require a consumer to take the active step of opting in. Here, the review will commence in the absence of an active decision to opt out. The difference is subtle but important – to what extent can a 'claim' exist for policy purposes of PI cover if a member has had no active involvement with the process?
• The FCA has amended the scheme rules to allow steps to be carried out by insurers on a firm's behalf. This is allegedly to make the rules more compatible with PII cover, but this doesn’t address the lack of a claim having been made before an offer of compensation is to be communicated. The FCA seeks to address this via the template acceptance letter, which has been amended to make it more expressly a valid 'claim'.
• For files graded suitable, the FCA is to be provided with confirmation of the outcome and the consumer's details.  They may then contact consumers to ask if they would like to refer a complaint to FOS. It seems that FOS will simply be required to determine if the scheme rules were interpreted incorrectly. This at least goes some way to addressing concerns about the FOS actually providing a view on suitability when the measuring stick here is whether or not a legal liability exists (with the obvious concern being that FOS does not have to apply the law and has no legal expertise).
• As envisaged, the DBAAT is to be used to assess suitability, despite concerns being raised that it was biased towards unsuitable determinations and does not allow for full consideration of soft facts. The FCA highlights that the DBAAT itself does not determine whether advice was suitable or unsuitable, and that this is ultimately for the assessor.
• In terms of the comparator scheme for redress purposes, the FCA states that a firm must look at which alternative scheme the member would have ended up in, but for the advice, had the member progressed to the Time to Choose consultation and been given the option of the PPF or BSPS2. Any scheme selection made by the member is not to be treated as definitive, as this could have been changed once made (although this will still be a relevant consideration).The FCA has also not adopted the approach of using the highest paying scheme as a comparator, and instead states that the evidence on file will need to be used to determine which alternative should be the comparator.
• The FCA is building a redress calculator and this should be ready by mid-April. Firms will not be required to offer redress as an augmentation in every case and the FCA expects most redress to be payable as a lump sum. The FCA notes that neither BSPS2 nor the old scheme allow for the admission of new members and that their investigations show that a specific annuity product is not viable.

At the same time, the FCA has issued a 'Dear CEO' letter to insurers who provided PI cover for firms that advised on BSPS transfers, along with brokers. This sets out what the FCA expects of insurers and notes that advice firms will want certainty around the extent of cover. In brief, they expect insurers to be able to give an opinion on whether their PII policies are likely to respond and, if not, to provide reasons for this (along with an explanation of what further information / actions may be needed from the insured for them to comply with the policy's terms). They also expect insurers to consider any notifications promptly and fairly, and to communicate the outcome of this to their insured. insurers are also reminded of their obligation to handle claims promptly and fairly and to pay promptly once settlement terms are agreed.

The FCA closes the letter by sneaking in a reference to the new Consumer Duty stating that its expectations here are allied with new Principle 12, which requires firms to "act to deliver good outcomes for retail customers." The letter really just reinforces that insurers are to deliver on their existing obligations to their insureds, to ensure that the redress scheme works smoothly for all parties without impediment.

Things will develop quickly now and we will be keeping a close eye this. As always, the devil is in the detail and we will provide further updates once we've enjoyed a deep-dive into the rules. In the meantime, any optimism caused by the recent decrease in redress calculations may be offset somewhat by the FCA's insistence on pushing through with their opt-out scheme despite the legitimate concerns raised. Still, at least they didn’t wait until three days before Christmas this time!