Is the FCA to blame for BSPS? MPs seem to think so

The House of Commons Public Accounts Committee (PAC) yesterday published a report entitled "Investigation into the British Steel Pension Scheme". The report makes a number of recommendations in light of its investigations in to the FCA's conduct and regulatory oversight at the time of the issues arising from the British Steel Pension Scheme (BSPS) and in particular the decision by 7,834 members to transfer to a personal pension arrangement. The report is heavily critical of the FCA's handling of BSPS and its regulatory oversight of the defined benefit transfer market generally. Given the request in the report for an update from the FCA on its progress on the various recommendations and conclusions in 6 months' time, we wait to see how the FCA reacts to yet further criticism of its handling of BSPS at a time when it is reviewing responses to the consumer redress scheme consultation.

The report from the PAC comes off the back of a Report by the Comptroller and Auditor General on 27 April 2022 following which the committee heard evidence from the FCA, FOS and FSCS on the BSPS. The report is against a backdrop where the FCA has found that 47% of transfer advice provided to British Steel Pension Scheme members was unsuitable (with an average loss of £82,600 to a member) and this compares across the wider defined benefit transfer market to a 17% unsuitable rate over the period 2015 to 2021.  Further, recommendations to BSPS members to transfer were made in 79% of cases.  

Against that backdrop report sets out six recommendations and conclusions:

1. The FCA should provide the PAC with an update on the extent and impact of unsuitable advice to British Steel Pension Scheme members and what it has done to stop similar cases from occurring again, in particular changes to its approach to regulating small advice firms.  The FCA was unable to identify which firms were giving advice and its focus on larger advice firms created a regulatory gap.
2. The FCA should examine what can be done to improve data and insight to inform a more proactive approach to regulation and what lessons in particular can be learnt from the Covid 19 pandemic. The report refers to the quick response of the FCA to Covid 19 to protect firms and consumers in contrast to what it perceives to be the slow response of the FCA at all stages of the British Steel Pension Scheme case.  The report cites numerous failures, including to take effective preventative actions after identifying problems with the defined benefit advice market in 2015 and a lack of access to timely data and insight into the defined benefit pension transfer market indicating that the regulator was slower to understand the risks to pension members and how to effectively monitor these.  The report notes a number of failures by the FCA broader than BSPS – (1) failure to take swift and effective action including being aware of unsuitable transfer advice in 2015 but failing to take sufficient action to prevent consumers from being harmed, (2) failure to have adequate insights into the behaviour of smaller advice firms given its work was limited to high-level market research to identify high-risk firms rather than specific targeted interventions and (3) failure to have data to tell which firms had provided advice to members and difficulties accessing this information when it was needed.  Further examples cited of the FCA's delays include taking 32 months to ban contingent charging and five years to implement emergency asset retention powers.  
3. The FCA should report to the PAC on the progress being made on its 30 active enforcement cases and how it is updating its approach to make a clearer distinction about how it enforces against poor conduct and rogue advisors and how it signals the outcome of its actions to the wider market.  Further, the FCA should review whether it has sufficient enforcement powers to deal with bad actors in the financial industry and the Treasury should consider how to address concerns about activity relevant to but not within the FCA's remit, for example the actions of unregulated introducers. The report also finds that the FCA implemented ineffective regulatory interventions in its initial response to the BSPS case including letters to advice firms reminding them of their obligations to provide advice in the consumer's best interests and permitting 44 firms to withdraw from the market voluntarily rather than taking enforcement action.  The report also notes that the FCA does not publish lists of firms or advisors under investigation and the FCA must look into whether it would be an option to publish lists of those under investigation where there are significant grounds to believe they are committing serious harm to consumers.  
4. The committee recommends that the FCA considers as part of its consumer redress scheme for British Steel members how further redress mechanisms can be implemented more quickly and provide fair compensation.  The FCA should also consider how to resolve differences in levels of compensation received by British Steel members and how this compares to the amount that other members will receive from the proposed consumer redress scheme.  In particular the report notes that members who sought compensation early have received significantly less than those who claimed compensation after 2021 (given changes to the FCA's redress formula) and states that there are significant variations in the amount of compensation awarded to British Steel members based on when redress is calculated. The report notes that there is a delay in providing redress to consumers with the FOS yet to resolve 480 complaints and due to their complexity complaints take an average 8 months to be completed with some taking as long as 31 months.  The FOS is said to have added 25 specialists to address the complex backlog of BSPS cases.
5. The FCA should be more proactive and consumer focused on its engagement with stakeholders, it should have a better mechanism for responding to consumer harm and collect more evidence on a regular basis to pick up on issues that are being raised especially from emerging risks in financial markets.  The report notes that the FCA consulted on removing its presumption that advice to transfer from a final salary pension scheme was unsuitable in 2017 despite the fact that it had itself found a 17% unsuitability rate for defined benefit transfer advice across the market (compared to 4% across the wider advice market).  The report also refers to written evidence from multiple advice firms highlighting that in November 2017 the FCA visited advice firms and outlined their "neutral" stance to defined benefit transfers and that FCA file reviews deemed advice suitable that have subsequently resulted in upheld complaints at FOS.  The report notes that such contradictions and misalignment between the legislation and regulation of defined benefit transfer advice contributed to the failings of advisors with BSPS.  The report also refers to uncertainties around the provision of professional indemnity insurance and is critical of the FCA's failure to define its expectations for the professional indemnity market or fully consider its actions on the stability of the pension transfer advice market.  The report also states that the FCA has failed to clarify its regulatory approach in other areas of emerging risk such as crypto asset investments.
6. The FCA, FOS and FSCS should write to the committee within six months to explain what they are doing to manage risks in the redress system for financial services.  The FCA's handling of the wider defined benefit pension market should be reviewed as there could be "thousands" more cases of mis-selling which may be eligible for financial redress given a significant amount of unsuitable advice provided across the sector and the review should include consideration of a solution in circumstances in which an industrywide levy is insufficient to pay out compensation to those who are eligible.  The report notes that only 25% of British Steel members who received unsuitable advice have to date raised claims with redress organisations.  It also notes that despite the redress process being free 72% of complaints to the FOS and 40% of claims to the FSCS are made through third party representatives such as claims management companies and solicitors.  

A lot of what is in the report is not new.  That said, the report will no doubt make for difficult reading for the FCA.  It is heavily critical of the FCA's work in the defined benefit transfer market since the introduction of pension freedoms in April 2015 and BSPS in particular.  How the FCA reacts to the criticisms is perhaps the key issue.  The report makes two notable recommendations – first, the FCA should look at compensation for BSPS members with the implication being that something should be done for those who received redress early and have, the report concludes, received less than other BSPS members – the FCA is currently considering responses to the proposed section 404 redress scheme for BSPS and so we wait to see if this recommendation is taken in to account.  Second, the report calls for the FCA to consider action in the wider defined benefit market.  Whether the FCA react to that suggestion will be interesting to see.