The Financial Conduct Authority (FCA) was “behind the curve” in its response to the British Steel Pension Scheme (BSPS) scandal and failed to protect members from “unscrupulous” advisers who were financially incentivised to provide unsuitable advice, according to the Public Accounts Committee (PAC).
A report on the findings of PAC's investigation into the British Steel scandal, published on today (21 July), looked into the regulator's handling of it, the proposed redress scheme, wider issues within the regulation of financial advice and the FCA's preparedness for future risks in the advice market.
In April 2017, around 8,000 British Steel workers (18% of eligible scheme members) transferred their benefits away from the company's defined benefit (DB) scheme, representing £2.8bn of the pension fund. The PAC report hinged on an earlier National Audit Office (NAO) investigation into the scandal, which said the FCA had found a much higher rate of unsuitable transfer recommendations (47%) than for the wider DB transfer advice market more generally (17%).
Among the report's many conclusions, it found that the BSPS members were put in a vulnerable position by pensions regulators, whose failure to provide adequate information and support left members "open to manipulation".
It found that advisers were "financially incentivised" to recommend DB pension transfers, and 79% of the advice provided to BSPS members encouraged them to transfer out, causing "serious financial harm".
The report then highlighted the failures in the FCA's response to this case, which "has consistently been behind the curve". It called out the regulator's lack of "effective preventative action after identifying problems with the advice market in 2015" and its slowness in implementing a ban on contingent charging and temporary asset retention restrictions.
It also pointed to the FCA's lack of access to timely data and insight into the DB pension transfer market, its focus on regulation of big firms which left smaller firms out of the spotlight and requirements for high levels of evidence to inform its decisions, as causes for its delayed response.
"The FCA has proved it can act fairly and swiftly in other circumstances, such as taking emergency action to protect firms and consumers during the Covid-19 pandemic," said the report, calling for the regulator to take a similar approach in cases like the BSPS.
Significantly, it said that the FCA has only issued one fine in response to the BSPS case, despite having 30 more enforcement actions in place, which have been "ongoing for years without progress".
It also pointed to the FCA's lack of enforcement action, relying instead on "ineffective interventions during its initial response such as issuing letters to advice firms reminding them of their obligations" which allowed firms to voluntarily withdraw from the market.
When reports of phoenixing firms - rogue advice firms which voluntarily leave the market only to reappear under different names - emerged, the FCA response was to update its guidance to raise firms' awareness of the issue, instead of enforcement action, which it is still to take, the report said.
"The FCA's response was all a case of ‘too little, too late'. They were too slow to respond at the start of this scandal when they were first made aware of issues in the steelworks," said Labour MP Nick Smith - a lead PAC member on this inquiry who has led the campaign on behalf of BSPS members.
He added: "They then dithered for years, failing to use their enforcement powers properly to deter unscrupulous advisers, failing to properly look into smaller firms who were at the heart of the mis-selling, and even providing inconsistent advice on whether DB transfers were suitable for pensioners."
The report found the way that compensation has been provided in the BSPS case to be "slow and unfair," given the significant delays faced by members in receiving compensation, with complaints to the Financial Ombudsman Service (FOS) taking an average eight months to be resolved.
It also pointed to the "significant variations" in the amount of compensation awarded to BSPS members based on when redress is calculated, with those claiming compensation before 2021 receiving significantly less.
"Only 25% of all BSPS members who received unsuitable advice have raised claims with redress organisations, yet the FCA has taken five years to propose a consumer redress scheme for members," the report said.
Smith told Professional Pensions' sister title Professional Adviser that he was concerned there could be a much higher compensation bill than the FCA is expecting, pointing to the ballpark figure of £300m-£500m.
The report said that regulated bodies are "still not clear" on the FCA's expectations for consumer protection. In the wake of the Pensions Schemes Act 2015, the regulator - recognising the potential harm these reforms could cause some consumers - provided guidance that advisers should generally assume that a transfer will be unsuitable. This created confusion among advice firms, it said, which grew greater as a result of the FCA's consultation on removing its starting position in 2017, despite finding a 17% unsuitability rate for DB transfer advice across the market.
"Such contradictions and misalignment between the legislation and regulation of transfer advice contributed to the failings of advisers within the BSPS case," the report said.
Professional indemnity insurance
The report highlighted the uncertainties around the provision of professional indemnity insurance (PII) as the availability of cover has "become constrained by limited providers and high costs." The FCA is yet to define its expectations for the PII industry or fully consider its effects on the stability of pension transfer advice market, it said.
"The regulatory system is supposed to stand up for those consumers who are not pensions savvy. It clearly didn't in this example, and many have lost faith in the regulators, so it is now up to them, and the wider financial industry, to show they are serious about rebuilding trust. They have a long way to go.
The report made the following recommendations:
- The FCA should provide the committee with an update on the extent and impact of unsuitable advice on BSPS members; and what it has done to prevent a similar case from occurring again, and in particular, changes to its approach to regulating small advice firms.
- The FCA should examine what can be done to improve the data and insight that they need to inform a more proactive approach to regulation, and what lessons can be learnt from its response to the Covid-19 pandemic.
- The FCA should report to the committee on the progress being made on its 30 active enforcement cases, how it is updating its approach to make a clearer distinction about how it enforces against poor conduct and rogue advisers, and how it signals the outcome of its actions to the wider market. The FCA should review whether it has sufficient enforcement powers to deal with bad actors in the financial industry. HM Treasury should consider how to address concerns about activity relevant to, but not within, the FCA's remit, for example the actions of introducers in cases such as the BSPS.
- In considering the implementation of a consumer redress scheme for BSPS members the FCA should consider how further redress mechanisms can be implemented more quickly and provide fair compensation. It should also consider how to resolve differences in the levels of compensation received by BSPS members to date, and how this compares to the amount that other members will receive from the proposed FCA redress scheme.
- The FCA should be more proactive and consumer-focused in its engagement with stakeholders. It should have a better mechanism for responding to consumer harms and collect more evidence on a regular basis to pick up on issues that are being raised, especially from emerging risks in financial markets. The FCA must also review how effective the Financial Services Consumer Panel is at consumer protection and how it influences policy debates within the FCA from a consumer angle.
- The FCA, FOS and Financial Services Compensation Scheme should write to the committee in six months to explain what they are doing to manage risks in the redress system for financial service. The FCA's handling of the wider DB pension market should be reviewed as there could be thousands more cases of mis-selling which may be eligible for financial redress, given the significant amount of unsuitable advice seen across the sector. The review should include consideration of solutions in circumstances in which an industry-wide levy is insufficient to pay out compensation to those who are eligible.
"The circumstances around BSPS transfers were exceptional, and we know that many members lost out due to poor advice. We will carefully consider the recommendations of the report and respond to the committee.
"We've proposed a scheme which should see advice firms pay over £70m of compensation to steelworkers. That's in addition to over £70m which has already been paid out. And people affected don't have to wait for the scheme to be in place to make a complaint.
"We've also made sure that only firms with the right skills and experience can provide advice on pension transfers in future - over 700 firms have stopped doing so due to our work. We've also learnt real lessons for the future, including improving how we work with other regulators."