BSPS redress scheme - understanding the potential magnitude of redress

A version of this article was published by https://www.threesixtyservices.co.uk in their Q1 Round up of 2022.  

On 22 December 2021 the FCA announced, via the publication of a “Dear CEO” letter, that it would be consulting on a consumer redress scheme for individuals who were advised to transfer out of the British Steel Pension Scheme (BSPS). 

The intention is that the scheme would apply to advice provided between 1 March 2017 and 31 March 2018, this period covering individuals who transferred out during the “Time to Choose” window operated by the BSPS Trustees.   If the redress scheme goes ahead then all advice on these transfers would need to be reviewed for suitability, irrespective of whether the customer has made a complaint. Compensation will then need to be paid if the advice is deemed to have been unsuitable and a financial loss has arisen as a consequence of the advice.

How much might compensation payments be?

Both the spectre of potential past business review of BSPS advice, and the reference in the FCA’s letter to the adequacy of advising firms’ financial resources in relation to compensation payments, draw attention to the risk associated with the rectification of unsuitable Defined Benefit transfer advice.  Understanding how much compensation payments might amount to: in other words, the potential magnitude of redress; is therefore increasingly important – both to assist with discussions with the FCA and as part of a robust risk managing framework.

However, understanding the potential magnitude of redress is also challenging.  Broadly speaking there are three factors which drive the liability in relation to potential future compensation payments:

• How likely is it that the case will need to be reviewed? In the case of BSPS advice, the likelihood of review is high – even in the absence of the consumer redress scheme, the FCA are actively communicating with investors, flagging their right to complain about their advice.
• Will the advice be found to be unsuitable or have material information gaps?
• If the advice is found to be unsuitable, what might the compensation payment be?

It is the third of these which is particularly difficult to determine – the financial loss that a given customer is deemed to have suffered can vary materially to that suffered by other individuals, depending on their specific circumstances.  Furthermore, the liability is not static – it is affected by changes in market conditions and there is an exposure to regulatory change (with a review of redress guidance on the FCA’s to-do list for 2022).

Ironically, the loss suffered by individuals who transferred out of the BSPS is particularly variable and this muddies the water further for firms trying to assess the adequacy of their financial reserves.  Indeed, the FSCS has issued specific guidance Defined benefit pension transfers | FSCS to address consumer concerns about apparent discrepancies between the compensation made to different former members of the BSPS.

Analysis by OAC suggests that losses for transfer values paid from the BSPS in late 2016 / early 2017 are around twice the losses incurred where the transfer was implemented later in 2017.  This reflects a change in the BSPS transfer value calculation methodology which was implemented by the Scheme Trustees at that time, with transfer value quotes (per £1pa of pension ceded) stepping up significantly from Q2 2017.  Other factors which can materially affect redress are the age of the customer at the point of transfer and the date that the investor joined the BSPS. 

Taking into account the observations above, it can be seen that establishing suitable reserves to support a book of transfer advice requires judgement as well an understanding of the factors that affect redress calculations.  Advising firms who have BSPS transfers in their portfolio are therefore likely to need support in determining whether their financial resources are sufficient to cover potential redress.  

OAC can assist with this sort of exercise – either considering transfers from a range of ceding schemes, or looking at transfers from the BSPS in particular – analysing the key features of the book to provide insight into the potential magnitude of redress, and helping firms understand what adequate financial resources might look like, taking into account any existing PI cover.

What about the consumer redress scheme itself?

There are some practical questions relating to the establishment of a consumer redress scheme and various immediate observations spring to mind:

Will redress be calculated in line with the current redress guidance FG17/9 or could a more simplistic approach be taken? 

The latter would expedite the redress process but there is a need to ensure that compensation offered to each investor is fair. 

Will the window of advice covered by the scheme be extended as some claims managers are requesting? 

Concerns around the advice given during “Time to Choose” have attracted much attention, but as OAC’s analysis shows, earlier transferees are likely to have suffered higher losses than those who transferred out during the proposed March 17 – March 18 window.

What impact could this have on firms’ ability to provide advice (and redress if necessary)?

Prior to issuing the letter in December 2021, the FCA had already started engaging with firms who they consider have written a substantial amount of advice to former members of the BSPS.  It is reasonable to assume that larger firms who have written a substantial amount of BSPS advice may already be conducting a past business review. This suggests that the redress scheme will impact particularly on smaller IFAs who have only implemented a small number of BSPS transfers. These firms may have limited reserves to pay compensation.  

The redress scheme could therefore mean that - as a result of payments being made to individuals who have not complained about their advice (despite firm encouragement from the FCA to do so), and who are presumably happy with their outcomes – small IFAs (particularly those with less comprehensive PI insurance) find themselves in financial difficulty.

If at the extreme, such firms were to fail, the liability for the loss would pass to the FSCS.  Ultimately this would lead to undesirable outcomes for any firms affected, unaffected firms (who could incur further increases to the FSCS levy), and consumers who are dissatisfied with their advice (who would, under the FSCS, receive capped compensation).

What if we’ve not advised members of the BSPS?

Even if your firm has not advised on any BSPS transfers, it will still be sensible to pay attention to the outcome of the FCA consultation, and to consider whether the FCA’s activity in relation to BSPS transfers could have implications for your portfolio of advice.

For example, it may also be appropriate to consider whether you have any exposure to a particular ceding scheme in your portfolio:

• Have you advised a substantial number of individuals to transfer out of the same scheme, as a result of a redundancy exercise or subsequent to a scheme closure?
• Do you have any feel for whether the transfer value basis adopted by the Trustee was generous or penal?

Final thoughts

No matter how the proposed redress scheme resolves, it’s certainly worth being aware of the complexity of redress.  Extending your understanding of the potential associated risk is worthwhile for any firm who is giving, or has given, advice on Defined Benefit transfer.