BSPS members’ compensation falls short by £18mn, NAO finds

In a document published on March 18, the NAO stated that the average loss for BSPS claims resolved by the Financial Services Compensation Scheme is £82,600, with individual cases ranging from zero up to £489,000.

Compensation awarded by the FSCS to BSPS members is limited to £50,000 for claims against companies that failed before April 2019, and £85,000 for businesses that failed after that date.

However, the FSCS has estimated that the total loss for its upheld BSPS claims is £55.3mn, and that the total compensation awarded by FSCS is £37.3mn, resulting in a shortfall of £18mn.

FTAdviser reported in February that the lifeboat scheme had paid out £36.5mn at the end of January.

The report by NAO found that 263 pension scheme members have lost £18mn of redress to date, due to financial advisers going into liquidation and the limits to the compensation that can be provided.

Around 22 per cent of complaints made to the Financial Ombudsman Service have been passed to the FSCS due to companies being unable to pay compensation.

Additionally, 72 per cent of the FOS’s cases and 40 per cent of the FSCS’s claims have also been made through claims management companies or legal representatives, who charge a fee for their service, meaning some BSPS members have not received the full amount of redress owed to them.

Gareth Davies, head of the NAO, said: “Although measures have been put in place aimed at improving how the pensions advice market is regulated and to attempt to remedy the financial losses suffered by BSPS members, it is clear that many people have not been compensated fully under current arrangements.

“The BSPS case demonstrates the costs and difficulties of remedying failures in financial services and the importance of preventing problems from occurring in the first place.”

Financial advice market unprepared for BSPS

The NAO said the financial advice market was not prepared for the impact of the BSPS restructure.

Advisers in the local steel-working areas saw very rapid growth in requests for DB transfer advice, with the Financial Conduct Authority stating that many of the advice companies had limited experience of processing large numbers of transfers and did not respond appropriately to the increased demand for their services.

Most advisers were financially incentivised at the time to recommend to members that they transfer out of the BSPS, even when it was clearly not in members’ interests.

In 47 per cent of BSPS cases, financial advice was unsuitable, and in a further 32 per cent of transfers it was unclear. The FCA said this percentage was much higher than for the DB transfer market in general (17 per cent).

The regulator estimated that 79 per cent of BSPS members who received advice transferred out of the scheme.

The FCA has since put in place measures aimed at improving the regulation of the pensions advice market, such as a ban on charges where advisers are paid only if a transfer proceeds, and, along with the FOS and the FSCS, is attempting to remedy the financial detriment suffered by BSPS members.

However, the redress arrangements have not compensated all individuals fully. The costs of this redress have also impacted on the wider financial services industry and the number of companies providing DB pension transfer advice has more than halved.

The NAO has therefore set out matters for consideration by the FCA and HM Treasury.

It said that both entities should consider whether there are lessons to be learnt about the way they work together to identify and mitigate any risks to consumers as policy is being developed.

The NAO warned that while the exact circumstances of the BSPS may not be replicated, the risk of large numbers of pension members looking to transfer out of a DB pension remains.

“The regulators and oversight bodies with responsibilities for protecting pension scheme members should consider what further changes can be made to minimise the risks associated with transferring out of a scheme,” it said.

“This should include consideration of key regulatory factors, such as the strength of existing safeguards to protect consumers in the DB pension transfer process, the regulatory data needed to support proactive intervention and the powers to collect this, and the mechanisms and approaches that can be used to communicate key messages effectively with less accessible firms and consumers.”

FCA’s monitoring was limited

There have been wider market impacts from the costs of compensation, such as the FCA’s requirement for companies to have enough resources to cover liabilities for unsuitable advice through their own capital and professional indemnity insurance.

The price of the relevant insurance cover for financial advisers has increased significantly since the BSPS case, with some insurers refusing to cover this type of risk altogether.

Meanwhile, the investigation by the NAO found that only five out of the estimated 369 companies that provided advice to BSPS members met the FCA’s threshold for having regular engagement with the regulator, than it would have with larger financial institutions.

“Instead, its approach to monitoring most of the small, local advice firms involved was limited to undertaking thematic work on key issues and specific casework identified through intelligence,” the NAO stated.

The FCA also estimated that 95 per cent of the BSPS members who transferred out of the scheme received financial advice from an authorised company.

It identified approximately 369 different companies that provided advice to BSPS members, with 235 of these advising on fewer than 10 transfers each.

The FCA said it had limited insight into the DB transfer advice market and what was happening in the BSPS at the time of its restructure, as data on the number of transfer requests were held by the scheme trustees and administrators, who are not FCA authorised.

The City watchdog outlined that it did not have any data on the number of DB transfer requests that were taking place, or on the adviser market in the local areas.

An FCA spokesperson said: “We welcome the report, which highlights the complex issues for government and regulators which arose from the exceptional circumstances around BSPS and the framework for pension freedoms.

“We recognise the harm these circumstances caused to steelworkers and communities, and that’s why we continue to work to ensure that former BSPS members who lost out financially due to poor advice receive compensation.

“We’ve taken significant action, including since the Rookes Review in 2019 to support them already and are preparing to consult on a consumer redress scheme for BSPS members by the end of March.”

The FCA added: “We’ve already acted to raise the standard of pension transfer advice more generally, by introducing new rules, as well as working with our partners to ensure that consumers are supported to make decisions about their pensions.”

The watchdog said that so far only 25 per cent (1,878) of members who transferred out of the BSPS have sought redress through complaints, and that the regulator is yet to decide whether to implement a consumer redress scheme for BSPS members, in which all companies involved would have to review their advice and potentially offer compensation.

The FCA must gather evidence to meet certain legal tests before it can implement this scheme. The watchdog started assessing the suitability of a consumer redress scheme in April 2021 and expects to launch a consultation on this by the end of March 2022.

This article originally appeared on FTAdviser.com