Mark Blyth says the regulator could be more proactive in its approach to settlement, and calls for shorter and more focussed s.89 reports
In a recent article for PP, I talked about fixing the investigation and regulatory process where The Pensions Regulator (TPR) exercises its powers in complex cases. I noted how some of the problems were of the regulator's own making.
A common theme emerges when looking at how TPR could facilitate settlement by being more pro-active and using properly the tools at its disposal.
The regulator is not, of course, a commercial party. It has statutory duties and objectives, in particular, to protect members and the Pension Protection Fund. Taking a case to the end of a long, expensive and uncertain litigation process is not usually the best approach to meet those duties and objectives, particularly as the regulator has finite resources and other competing priorities.
Settlement on appropriate terms should therefore be the goal, unless there is some need to establish a precedent. In my experience, however, TPR does not approach settlement in this proactive way or suggest solutions. It waits for the parties to come up with them. It also typically refuses to give even an informal view on a possible solution until the parties have spent often very considerable time and costs on a detailed proposal. Unfortunately, a common outcome is for TPR to say the proposal is not good enough but be rather circumspect as to what would be good enough. The regulator's stock response of ‘is this your best and final offer', is not constructive to putting a deal together. It leads to costly, time-consuming and unnecessary iterations of a deal.
The good news is there is an easy fix; TPR should have the confidence to initiate settlement discussions, express informal views and have a clear two-way dialogue during the process.
The problems do not end after an agreement in principle. The regulator is overly cautious about giving certainty around settlement that parties need. This can get in the way of progressing deals.
The regulator is often only prepared to say in return for the deal, it will not continue pursuing the specific ongoing regulatory action. But, in moral hazard cases, TPR has power to give a formal clearance statement as part of the settlement process to give parties greater certainty. Clearance can be given where TPR is of the opinion, that, in the circumstances of the proposed settlement, it would not be reasonable to impose a liability under the moral hazard provisions. The regulator did ‘unusually' make use of this tool as part of the settlement over BHS (see its s.89 Report). I believe this is the only time it has done so and has been unwilling to do so since.
What possible reason is there for a regulator to not use all tools at its disposal to facilitate a settlement that it wants? How can it make any sense to put obstacles in the way of a desired deal by refusing to give parties the certainty they need through clearance? The danger for parties is that, since this statutory procedure exists to allow the regulator to enter into a binding settlement, TPR will not be legally bound by a less formal process.
Linked to this is the way in which the regulator has framed its own clearance guidance more narrowly than required under the legislation and been reluctant to move outside it. Such a fettering of discretion is unhelpful. While the regulator is open to the expansion of its clearance powers, it should first fully utilise the powers it already has.
If the regulator is prepared to change its approach and offer clearance to facilitate settlement, it also should do so flexibly. Unfortunately, my experience in agreeing draft clearance applications for transactions, is the regulator is determined at all stages to constrain the scope of clearance to such an extent that it becomes of questionable value. This is a reason why parties often think there is no point engaging with the regulator.
A final discouragement to settlement is the way the regulator self-publicises the settlement outcome. It has wide power under s.89 in the Pensions Act 2004, to issue reports on its activities and will usually do so following a settlement. Clearly, it is right for TPR to set out regulatory lessons for the industry. Problems however arise with the current approach, which operates to discourage settlement.
Historically, the regulator has issued succinct reports of a few pages, but they are becoming longer - the world record being the 45-page report on BHS. The problem is the detail and prominence given by the regulator, to the negative allegations of ‘bad behaviour' from its case where settlement occurs at an early stage.
Settlement at an early stage should be TPR's objective, but it will often be before the opposing party has had the opportunity to set out its defence. Indeed, the desire to avoid the enormous front-loaded costs of answering the regulator's case in its warning notice and supporting documents is an incentive for settlement.
In these cases, it is most inappropriate for the regulator to rehash its unanswered allegations in the s.89 report. Putting out its unanswered 'case' (even with a caveat) builds a false perception of proven allegations. The report will undoubtedly be replayed by the press in less qualified terms leading to ‘fake news'. The potential bad press a party will get at the hands of the regulator from the s.89 report is a strong disincentive to settlement.
The regulator would say in answer that it consults with the parties involved on the text of the draft s.89 report. That is true, but, we all have experience of how consultation operates in practice, particularly against a short timetable. The only other recourse for an unhappy party is to sue the regulator for defamation, but this is highly unattractive. There is a need to show malice, because of TPR's statutory protection. In most cases this will be impossible.
The solution is shorter, more focussed and neutral s.89 reports and a proper consultation process. As the regulator would itself acknowledge, "consultation" requires an open mind and willingness to listen.
Mark Blyth is partner at Linklaters
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