The FCA estimate that 46% of the 7,800 “consumers” who transferred out of BSPS in the “time to choose” were wrongly advised. The loss from this advice is stated.
“We have used data from firms and FSCS to estimate loss to consumers from unsuitable advice to transfer out of BSPS in the relevant period. The data from our survey of firms suggests the average loss is about £60,000 per consumer”.
So says the FCA deep into their consultation document on redress for steelworkers.
By my calculations , around 3,600 steelworkers were poorly advised. If this redress system works properly £215mn should be paid in total. So far £37mn has been paid out, so what’s happened to the £178 mn shortfall?
It looks like the FCA see the compensation bill will be increasing by £56mn more than would have been paid if the new system wasn’t in place. Even making allowance for the substantial number of claims in the pipeline, there seems to be a substantial shortfall between what’s been lost and what’s expected to be paid. That’s not redress but compensation on the cheap.
What seems to be changing isn’t the scale of the compensation , but the numbers of people getting it. Just over half of all the transfers will automatically be reviewed under this redress scheme and this automatic review seems to be what’s new.
Where a case is put into the review process, advisers have the choice of putting their hands up and paying compensation on a pre-determined formula or referring matters to the ombudsman.
I would hope that the latter option would be “doubles or quits” or else advisers will simply game the system. The FOS option needs to have penalties if complaints are upheld, penalties to compensate FOS and claimants put through the mill
And the mill grinds slowly, compensation is expected to start being paid late in 2023 but if complaints are referred to FOS it could be much much later till steelworkers see their compensation. Al Rush estimates some will need to wait a decade since the transfer was made.
So what’s on offer?
The FCA estimate steelworkers will get an extra £71m, my calculations suggest that’s an extra £40,000 for each of the 1400 expected claimants who are successful. The FCA’s estimates of successful claims is mathematically difficult
Under the redress scheme an estimated 4,000 consumers, around 50 to 52% of the total number of consumers who transferred out of BSPS in the relevant period, will be eligible to have their advice reviewed without needing to make a complaint or opt in.
Those excluded from redress will include
• People who have already accepted redress in full and final settlement following a
complaint or past business review (PBR).
• Customers of firms who have appointed a skilled person to carry out a PBR and who
have been told that they can go to the Financial Ombudsman Service.
• People who have already submitted a complaint to the Financial Ombudsman
Service about unsuitable advice to transfer out of BSPS during the relevant period
before the scheme starts. Around 800 have already done so but some of these
people have been referred to FSCS.
• People who were given advice outside the relevant period.
In total, do these exclusions add up to the 3,800 workers who transferred who don’t get an automatic review? I am not sure they do. And even if they do , why are they excluded from further redress,
The FSCS has so far paid £37mn in compensation in 700 BSPS cases with a further 500 being processed. However, a National Audit Office report this month found that BSPS members had been short-changed £18mn in compensation from the FSCS because of a payment cap. I cannot tell if the new compensation formula is more generous but if those who have been compensated have no claim on this new scheme, that is of no matter.
It seems, the FCA considers that the early complainants have “jumped the gun ” and should have waited. I can’t see anything fair about this, people who went through the proper channels promptly shouldn’t be denied further redress if further redress is due. Let’s remember that many of the advisers who have been banned from offering transfer advice were found by steelworkers from a Government (MaPS) website, following the proper channels is what lead them into trouble and kept them there.
And of the 4,000 due a review, just over a third look like being successful – (35% (1,400) of in-scope BSPS consumers in the relevant period receive redress). The FCA’s own estimate is that 46% of all 7800 who transferred got poor advice, so how does 4,000 reduce to 1400, is the FCA supposing that because these workers haven’t complained, they most likely have nothing to complain about?
The FCA expects that in total, firms pay redress of £31.2m and FSCS pays redress of £20.6m. It expects £19.4m to be paid by professional indemnity (PI) insurers.
This assumes that 89% of firms in the scheme are able to complete the scheme without becoming insolvent and 90% of cases in the scheme are completed by firms within time periods set out in the rules, which include deadlines for assessing suitability and paying redress.
There are 343 advisory firms involved, I hope these assumptions hold up, though if I was protecting my livelihood , I would be fighting each case, especially if I had no more to lose by referring cases to the Ombudsman as by paying up in the first instance. This looks like dragging on.
What’s the problem with the advice?
Of the cases the FCA reviewed and found to be unsuitable, it has identified the
following common drivers of unsuitability. I rehearse them as this is valuable data to prevent future problems. There is a substantial amount of money in funded DB plans yet to paid as pensions and it remains vulnerable.
The BSPS and the State Pension were all the steelworker had as future income.
In 66% of unsuitable cases the client relied on the income from this DB scheme.
In most cases, the client and their spouse (where relevant) did not have any other
significant pension provision above the state pension
The Steelworker was sold better death benefits as a reason for transfer
In 60% of unsuitable cases a key reason for the transfer was to maximise death
benefits. However, in these cases the firm had not properly explored alternative
ways of doing that, had not established that the client could bear the risk of the
transfer (as the client relied on the income), or the evidence on file suggested the
client was young and in good health.
The steelworker had no clear plans for their retirement, In 50% of unsuitable cases the client was under 50. This meant they were under the
minimum age that they could access their pension and, as a result, many members
did not have clear plans for their retirement. Some of these members were in their
The investment return needed to replicate BSPS benefits was unfeasible.
In 46% of unsuitable cases the firm’s transfer analysis did not support the decision
to transfer. The critical yield (the rate of return needed from a DC scheme to
replicate the benefits of their DB scheme) did not appear to be possible.
The client was not financially literate. In 40% of unsuitable cases the client did not appear to have the knowledge and experience to understand the risks of the transfer. In many of these cases, the adviser did not correct a client’s misunderstanding about the options available to them or the protection provided by the PPF.
What are the FCA banking on to exclude 65% of potential claims?
This is the question being asked by solicitor Philippa Hann, who has acted in many cases so far. It’s also why Al Rush is claiming this is compensation on the cheap.
My early guesses are
- That a great many claims will be disputed by advisers
- That many of these claims will be turned down by FOs
- That some of these claims will have no surviving claimant
Which suggests that the uncertainty that steelworkers faced in the years leading up to the transfers and the years since, is likely to continue for a time to come.
As Al Rush says “compensation on the cheap“.
I can’t comment on the exclusions, Henry, but I can draw attention to some fairly obvious flaws in the FCA’s reasons for failing files it assessed.
These are reasons that would be challenged by a court on the basis of the contemporaneous rules and guidance. These instances of hindsight are then hardwired into the DBAAT form with the effect of biasing the findings. This is presumably deliberate. Worse, the legal opinion actually quotes the individual rules (as presumably fed to the QC by the FCA) relevant to each of the examples given as part of the DBAAT process. They are riddled with hindsight and in no way reflect standard practice at the time. Most are supportive only in the context of the rules that took effect after Time to Choose closed.
The BSPS DBAAT form perpetuates an error frequently made by FOS staff of testing advice to draw down rather than buy an annuity against a critical yield that assumes an annuity. The form allows almost no scope to justify transfer on grounds of higher probable income even though that is almost certainly the commonest motivation. Many of the other motives the FCA picks on are subsidiary.
Most of these flaws are ones that need to be tested in court but I suspect the FCA will do everything in its power to avoid that scrutiny.
Obviously there is scope to challenge before the consultation closes but I don’t expect that to have much effect.