The FCA is in an awkward position as it consults on the redress it is looking to pay to British Steel workers who claim they were advised poorly to leave the BSPS scheme.
On the one hand they have disgruntled IFAs who see substantial claims coming their way for actions they were no part of or for advice that they feel they gave in good faith but is now questioned because of the special circumstances of the BSPS redress proposals.
On the other, they have disgruntled steelworkers who argue that the time elapsed since Time to Choose has allowed a toxic compensation culture to grow up in steel towns leaving many excluded from the redress scheme and subject to what they see as arbitrary and opaque payments from FSCS or through FOS. Although there is general acceptance of the redress scheme as fair going forward, the steelworkers argue that it should also cover existing claimants whose claims should be reviewed.
Sadly the compensation culture which both IFAs and steelworkers accept has developed in steel towns has led to a breakdown in trust, where trust has been earned. This has to be expected – it needs to be managed.
The FCA face a complex situation where IFAs are arguing with the benefit of five years hindsight, where markets and annuity rates are extremely fluid , where large numbers of claims have been settled and may need to be reviewed and where many claims will be made, some bogus and some genuine claims won’t be made, because of loyalty to advisers – or simply because some people don’t claim.
Recognising all these dynamics will be tough for the FCA, though many – myself included – will argue that its failure to act earlier , on market intelligence – is the cause of the problems it faces today.
IFAs organising opposition to the redress scheme.
Impacted IFAs have created a lobby group called the Association of Pension Transfer Specialists (APTS) who have produced a well researched argument that has been submitted to the Work and Pensions Committee in parliament.
It argues that a combination of a weakening employer covenant to support BSPS, improved CETVs as a result of a lower discount rate applied to scheme liabilities and consequently a low target return for the reinvestment of transferred money made it good advice for many members to transfer.
Despite this , the FCA continues to argue, that on the basis of the evidence it has collected from IFAs, 46% of the transfers were poorly advised.
Andrew Bailey, in his evidence to the WPC referred to the methodology cited by the APTS when explaining how the FCA assessed the quality of advice.
Bailey went on to explain that the FCA initially had no data on which to act. Most recently Nikhil Rathi, the new FCA CEO has reinforced Andrew Bailey’s excuse for FCA’s lack of proactive intervention prior to and during Time To Choose on the lack of real time data available to the FCA. Although the FCA has the power to create rules to get real time data,
collecting data from firms in real time would likely introduce additional cost for firms and is less valuable to us than the collection of aggregate data on a periodic basis…
firms with full permissions to advise on pension transfers are currently required to provide us with data about their activities (and those of their appointed representatives). These data include numbers of customers advised to transfer, transfer values and revenue generated from pension transfer advice. Collected every six months on a backwards-looking basis, these data can be used to inform our supervision of the market.
The FCA’s “backward-look” doesn’t however explain how long it took for it to come up with a redress scheme, nor indeed the delay in banning contingent charging , nor its inability to work with tPR on protecting members when the RAA was being drawn up, nor its inability to respond to the warnings from the media which grew throughout the summer and autumn of 2017. In short, the FCA were blind-sided by the shortcomings of a data driven approach that took no account of the vulnerability of Tata’s steelworkers or the urgent timescales of the RAA.
So the FCA may be considered by many IFAs to have colluded in the transfer activity it is now seeking redress for. Did the FCA lead them on?
We hear that 300 IFA firms are being invited to a meeting to discuss the proposed redress scheme which the FCA reckons will see 1400 former BSPS members get £71m in redress.
I expect IFAs to argue from the position laid out by the APTS and question how nearly half of the advice could be deemed to be poor when their analysis of the CETVs on offer suggests that they would generally be attractive.
Arguing from a moral high-ground – as the ATPS is doing , shows that the many IFAs who practice as transfer specialists take pride in their work and are extremely professional in their approach.
Indeed we know that a large number of steelworkers not only felt well advised , but got good advice. Many steelworkers who are being urged to come forward and claim against their IFAs are not doing so. We should not assume that because 46% of the advice was bad that 54% wasn’t good.
But in arguing from a professional standpoint , they risk making the same mistake as the FCA did. The transfers made by many BSPS members were made by people who often had no means to manage the financial opportunity and were, in any event, pressured into decisions by time, distrust and high pressure sales tactics. The professional arguments fall away when you talk to the steelworkers.
Not only were steelworkers not ready to understand what they were giving up but many were in no position to take advantage of the financial opportunity of the CETV.
The redress program is going to have to make extremely difficult judgement calls going forwards and do so, in the face of a determined and well organised group of IFAs.
And the IFA’s are only part of the FCA’s challenge. Now let’s look at what is happening among steelworkers.
Steelworkers arguing for existing claims to be reviewed.
The general position as I understand it , is that steelworkers are generally happy with the redress scheme. This is how Rich Caddy opens his response to the FCA’s consultation
The proposed redress scheme has been well constructed with the aim of seeking 100% redress for members who have not yet raised a complaint
The problems centre around those who have made complaints and had their claims calculated and paid either by the IFA or FSCS.
Claims against IFAs and against FSCS have been made and settled for some years now. These claims will not form part of the redress scheme which is worrying many steelworkers who see the payments made to them as arbitrary and inconsistent.
The FCA is now facing calls from steelworkers to include in the redress scheme,
- People whose compensation has been reduced by fees from lawyers and claims companies
- Steelworkers who have transferred but get no compensation for the cost of advice (due to having no adviser)
- Steelworkers whose compensation has been cut by a notional tax-charge (which isn’t understood)
- Concern that the compensation was calculated by advisers who the steelworkers are claiming against ( a conflict in their view)
- “Insistent clients” (who transferred despite being advised not to)
Not all of these demands are equally compelling, but the list shows how confused claimants have become. FSCS in particular, stands accused of being obfuscatory in explaining the rules for calculating compensation. Many claimants believe they have been tricked out of compensation to which they were entitled.
There has indeed been a growing “compensation culture” created by Claims Management Companies (CMCs). Steelworkers claim that this has been allowed to develop because of the slowness of the FCA to put in place a proper redress scheme.
And CMCs are now very much part of the problem. According to the Financial Services Compensation Scheme, 18% of compensation awarded to BSPS members through third-party representatives has been paid in fees to these firms. That represents £3.2m.
In his response to the FCA’s redress scheme proposals, Rich Caddy explains how the CMCs have prospered. (Rich is himself a steelworker).
Due to the slow response in recognising the harm, many members who were informed that something may be wrong with the advice were left unsupported. For a long period of time, the suggestion was that ‘You may have received unsuitable advice to transfer your pension, if you think you have received unsuitable advice, then contact the firm to raise a complaint‘.
So the option for members was either challenge the firm (financial professional) or recruit a solicitor or CMC (claims management company). The result of this is that members will only receive a % of the compensation they should have received.
Steelworkers confused by tax deductions
Infact, many of the steelworkers who have already received compensation through FOS are complaining that they cannot understand the basis of the payment. FOS claims are paid after the deduction of a 15% tax charge (the effective rate of tax the FCA’s FG17-9 guidance estimates would have been paid on the benefit foregone).
This 15% is not deducted from FSCS claims , which mystifies steelworkers comparing notes.
Steelworkers confused by lack of compensation for future advice costs
Further problems have arisen where advisory firms have walked away from clients they have advised, refusing further fees. The result is that such claimants are considered as “non-advised”. Many claimants have found their original adviser is no longer trading and are claiming against FSCS. They will not get compensation for future advisory bills unless they get a new adviser
The currently toxic atmosphere is making it hard for many steelworkers to get ongoing advice and will get no redress for advisory costs because they have no adviser to help them.
Calculation of compensation and exclusions
Understandably many steelworkers are as confused by their claim as they are about the original transfer. The claims were calculated by firms against whom the claim was being made and though these calculations are overseen by the FCA, the steelworkers want an independent check.
There is a feeling that advisers are using every trick in the book to minimise claims, including using the 15% tax deduction to reduce the advisory claim (which is not tax privileged).
Finally, some steelworkers who were advised not to transfer, found a way to get their money as “insistent clients”. Some claim that they were tricked into being insistent clients so that advisers would not be on the hook if trouble arose. These steelworkers claim that they had become so vulnerable that they should not be held responsible for their action.
Redress – progress or regress?
Undoubtedly the situation in Scunthorpe, Port Talbot and elsewhere is still toxic. The redress scheme will hopefully put on a lid on the sorry BSPS RAA saga.But it will do so at great cost to many existing IFAs who risk suffering substantially from claims.
The FCA are in a no-win situation , one largely of its own making. It now has to satisfy not just those still to claim but those who have claims made and paid, that they don’t feel happy with.
The progress out of the mess that BSPS has become is going to create a lot of collateral damage, but it is damage to the advice industry that could and should have been avoided. This blog has been saying as much for five years and is not going to stop now.