Mark Blyth says there are real problems in how the regulator exercises its powers, and suggests how to solve them
This is about the exercise of powers by The Pensions Regulator in large and complex cases. There are real problems in the system and they should be fixed.
Before I get into it, I note that I come to this topic with some baggage in that I act for employers and trustees who are directly affected parties in cases before the regulator.
Let us start with problems which are not, at their root, the regulator's fault. It is the way the process is set up. It concerns the need for cases to go before the Determinations Panel before they can proceed to the Upper Tribunal by way of an appeal known as a reference. The Determinations Panel is an independent committee of the regulator which exercises the power. In practice, it does not consider the case with the same degree of scrutiny as the Upper Tribunal, which conducts a rehearing and has powers to call for evidence. Some important cases are bound to be referred to the Upper Tribunal.
However, it is still necessary to expend a fortune in costs which cannot be recovered, going through the panel stage. Those costs are increased by two things. First, the extensive case presented by the regulator in its warning notice (often over a hundred pages supported by thousands of documents) and second, the requirement to respond to each aspect, leading to front-loading the costs of expert and witness evidence. Many cases settle just because the process is so cumbersome, expensive and the delays involved. That is why so few cases reach the Upper Tribunal.
Cases should be settled on their merits and not because of a dysfunctional process. The simple solution is to redesign it so that if all parties agree, the matter is leap-frogged straight to the Upper Tribunal. That will probably require legislation, but it would save a huge swath of costs and delay at the Determinations Panel stage and generate some Upper Tribunal precedents that the industry and the regulator would find useful. I note that in the financial services context, there is now an ‘expedited reference procedure' by which parties can fast-track their matter to the Upper Tribunal, bypassing the FCA's internal processes.
But, within the process as it stands, there are also problems of the regulator's own making that should be fixed.
They start at the information-gathering stage. The regulator has powers to compel the production of documents and information under section 72 of the Pensions Act 2004. This is a blunt instrument with criminal sanctions for non-compliance. It causes havoc for recipients if the regulator sends out unfocussed notices with short deadlines attached to them. These notices are extremely disruptive to the running of businesses and costly to comply with. It is not unusual for costs to run into several hundred thousand pounds for an unfocussed notice which requires extensive recovery of historic databases. It is not surprising that notices are unfocussed when the regulator does not know exactly what it is looking for and therefore casts the net wide. But the wider the net, the more problematic the notice usually is for the recipient.
There is a simple solution. Save in a rare case where there is extreme urgency or the regulator has reason to believe documents are going to be destroyed, they should engage with the party concerned and discuss what they want. The default position should be a jointly-agreed list of the documents that the regulator wants and agreed timescales for production before the regulator issues the notice in the agreed form. There is no downside for the regulator. It can always issue a further notice if they want more.
There is a big upside as well. It will get more focussed documents more quickly and more co-operation from the recipient. It also will not be deluged in documents, so that it has difficulty seeing the wood for the trees. BHS was an important case, but how can it really be necessary to issue a staggering 123 notices? The exertion of pressure caused by the issue of a notice is also an obvious temptation for the regulator, which a joint and co-operative process should help remove.
Then comes the stage of the case where the regulator prepares its warning notice. It is reasonable to expect the case team of a regulator to only put forward the unvarnished facts in its case as the basis for the decision taken by the Determinations Panel. Unfortunately, in my experience this is not how warning notices are drafted. They are presented as argument. Of concern is the tendency to quote selectively from documents and cherry pick evidence and the use of emotive and value laden language. Unless this is challenged, the regulator's argued case will stand as the ‘facts'. This correction process by parties in their representations adds significantly to costs and the whole process unfortunately takes on the character of combative litigation. Part of the solution is for the regulator to present its case in a far more neutral way, so that parties do not feel the need to fight fire with fire. One suggestion is a neutral and agreed list of facts to narrow the issues. After all, if the facts really require spin to persuade the panel to exercise the power, how can that be a right and proper result?
A further area that concerns me is the time that parties are allowed by the regulator to respond to the warning notice. About three months is the typical starting period in significant cases, although the regulator is prepared to agree to extensions. This sounds a long time, until you consider two things. First, the regulator will have prepared its case usually over a very much longer period and second, the volume and scope of that case, combined with a requirement to then deliver in response, front-loaded representations (with expert evidence, documents, witness statements). Meeting the deadline is always an enormous challenge, made costlier by the compressed time available. Given the litigation character of the process, it is also unfair in my view, for the case team (the opponent) to decide whether you should have more time. The temptation to compress the time for representations is obvious. The simple solution would be to give that role to the panel.
My final point goes to the regulator's case management strategy. Decisions over the running of cases can cause delay and very significant wasted costs. The following is a practical example. After a long period of investigation, the regulator issued a warning notice and extensive documents and expert evidence in support. The time for a response was extended to five months. Just over two weeks before the representations were due and a fortune had been spent, the regulator decided not to pursue the warning notice. It said it was investigating a new case for another warning notice. There is also the Silent Night case, where the regulator has issued a second warning notice with an alternative case. There may be case specific and perfectly good reasons for the regulator's actions, but I do wonder whether with earlier and more in-depth consideration, costs could be saved.
I could go on to talk of other areas including the regulatory process over settlement and clearance, but enough said for now.
Mark Blyth is a partner and the head of Linklaters' pensions dispute resolution group.
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