Money Covered: The Week that Was - 25 August

Welcome to The Week That Was, a round-up of key events in the financial services sector over the last seven days.

Season 2, Episode 6 of our podcast, Money Covered - The Month That Was, where the team discusses key developments and topical issues in the financial services area, is now available. This episode features Rob Morris and Ash Daniells discussing the Third Party (Rights Against Insurers) Act 2010.

To listen to this and all previous episodes, please click here.

Headline Developments 

Bank of England warns higher rates could lead to corporate defaults 

The Bank of England has warned that British companies are facing added pressure on repaying debts and are at an increased risk of corporate defaults as a result of rising interest rates. 

The Bank's latest blog post analyses companies with low interest coverage ratios (ICRs) as a measure of a company's debt servicing ability. The data suggests that firms with low ICRs are projected to increase from 45% in 2022 to 50% by the end of the year. The forecast was conducted using market expectations for the Bank Rate at the end of June, peaking at 6.1%. 

Whilst the analysis does not take into account the potential actions corporates could take to combat rising rates, it does compare the position to previous crashes, including the global financial crisis and dotcom crash. The data show that current vulnerabilities are below the peaks recorded in those respective crashes. 

The Bank of England further confirmed that, whilst UK banks are significantly better capitalised than before the global financial crisis, the increased pressure on companies is likely to continue in the near future. 

To read the Bank of England's blog in full, please click here. 

FOS Developments 

"The next PPI"?  FOS reports rise in motor finance commission complaints

The Financial Ombudsman Service (FOS) has reported a rise in motor finance complaints since Q4 of 2021. It is now the third most complained about product, with 2,987 new complaints received in Q3 of 2023. 

FOS director Viv Kelly has confirmed that these complaints are mostly about charges, fees and commission and that 41% of the complaints resolved in Q3 were upheld. The complaints are usually brought against credit brokers or intermediaries who arrange the finance (usually the car dealership) on the basis they did not tell the borrower about the commission they would earn for arranging the finance. 

Many complaints focus on alleged unfairness of commission arrangements when taking out a car finance agreement. This type of complaint could be well received by the FOS with the onset of the Consumer Duty, which requires firms to ensure products provide fair value and that consumers have a full understanding of a product, in order to make informed decisions. However, the FOS has confirmed that "there will be a range of outcomes". 

The FOS has not upheld a number of complaints on the basis there was no issue with the commission model. For example, a complaint against a broker who received no commission or a small amount under a fixed payment arrangement is unlikely to be upheld. In contrast, the FOS noted it has upheld complaints where there was a Difference in Charges (DiC) model in place and where this led to consumer detriment. So, the likelihood of the FOS upholding these complaints seems likely to depend on the level of commission involved and the extent of the alleged unfairness of the commission model. 

Kelly confirmed that most of the complaints were received from claims management companies and was asked whether this could become "the next PPI", to which she noted "the size of the potential pool of complaints on this topic is significantly smaller than that for PPI". 

To read the FOS' blog on the issue, please click here. 

Developments for Pensions Professionals

Pension funds back Crypto broker 

Pensions funds are among the large number of traditional investors providing financing to a specialist broker to invest in cryptocurrency assets in order to seek higher returns in a mature market. 

Retirement plans such as that of US defence contractor, Lockheed Martin, have backed Hidden Road, a "prime broker" which provides leverage to traditional investors and investment opportunities in the digital space. Prime brokers typically sit within banks and use the lenders' balance sheet to provide leverage to hedge funds, family offices and other traders. However, the structure is risky due not only to the volatility of crypto assets but, in the event of large losses, either the prime broker or the pension funds will be left footing the bill. 

There are further concerns around the relatively small size of Hidden Road's balance sheet and questions as to whether it could withstand a significant market event. 

To read more, please click here. 

SIPP provider loses appeal over in-specie contributions

Killik & Co, a SIPP provider, brought an appeal to the First Tier Tribunal (FTT) against HMRC's decision to refuse tax relief on in-specie contributions made by individuals into their SIPP (as opposed to monetary contributions). At the time, HMRC's guidance stated that in-specie contributions were not allowed and, in order to contribute assets to a scheme, there had to be "a prior debt obligation to pay a cash amount to the scheme".

Killick & Co appealed to the FTT on the grounds that members' contributions via payments in kind or in-specie contributions amounted to "pension contributions paid" as specified under s.188 of the Finance Act 2004.

The appeal was dismissed on the basis that the FTT was bound by the judgment in Revenue and Customs v Sippchoice Ltd [2020] UKUT 149 (TCC), where it was held that contributions paid by a member are restricted to money contributions and not non-monetary assets. Killik & Co intend to challenge the Sippchoice judgment in the Upper Tribunal.

To read the judgment of the FTT in Killik & Co LLP v Revenue and Customers Commissioners [2023] in full, please click here.

Pensions Ombudsman finds no duty for employer to advise on tax consequences when paying redundancy money into a pension scheme

The Pensions Ombudsman (TPO) has rejected a complaint from an employee who claimed against his employer for failing to advise him on the tax consequences of paying redundancy money into his pension scheme. The redundancy money was paid into the scheme in part as an Additional Voluntary Contribution (AVC).  

The complainant argued that his employer told him to pay part of his redundancy payment into his scheme as an AVC but that it did not make him aware of the impact this would have on his Money Purchase Annual Allowance. He also complained about the trustee and the scheme administrator for their role in this.

TPO rejected the complaint. In doing so it has said that the employer's duty was to inform the complainant of his options under the scheme and that this extends only to the terms of the scheme. The alleged failure was about the tax consequences affecting the future pension contributions, which was not related to the scheme. A finding of a duty in these circumstances would widen the scope of duty owed, as it would require employers not only to be aware of the scheme rules, but also external matters such as tax issues and even other employer's schemes. 

This will be welcome news to employers, who otherwise could have found themselves exposed to complaints about matters outside of the schemes they operate.

To read the decision on the TPO website, please click here.