Consumer redress scheme for unsuitable advice to transfer out of the British Steel Pension Scheme 

Executive Summary and Context

OAC plc is an actuarial consultancy.  Our redress solutions team are specialists in determining compensation following unsuitable advice relating to pensions and have extensive experience in calculating redress following unsuitable advice to transfer.  We are familiar with calculating redress in relation to transfers out of the British Steel Pension Scheme and have also reviewed calculations carried out by other firms on behalf of investors and their advisors.  We pride ourselves on the quality of our work and on our attention to the specific details of each case, and we keep up to date with developments in redress and wider pensions to ensure that our calculations are in line with industry best practice.

Please note that as redress consultants we have limited our commentary to those areas relating to redress, other than noting broad observations on the proposals for the redress scheme based on our experience with clients and consumers.

Evidence of Harm

• Question 1: Do you agree with our assessment that unsuitable advice to BSPS customers was widespread in the period we looked at?

We are not well placed to comment on this in detail.  We would note that in our experience there is a wide range in the quality of advice given in relation to Defined Benefit transfer.  As such, we would expect that there will be some firms who advised appropriately during the period in question, and it is important that the Scheme recognises this.

• Question 2: Do you agree with our view that BSPS members who received unsuitable advice are likely to have suffered loss?

We expect that many members who received unsuitable advice will have suffered loss, if measured using the approach outlined in guidance FG17/9.  Having said that, we are aware that FG17/9 would not enable an advising firm to make allowance for the financial advantages to a member of early access to their pension funds.  For example, a member could be assessed under FG17/9 to have suffered a loss, but that loss might be (at least in part) offset by savings on the early repayment of a loan.  This is a subjective area, and we are conscious that it may be best addressed during the fuller review of FG17/9 later this year.

• Question 3: Do you agree that the legal test for making a consumer redress scheme under s. 404 of FSMA has been met?

We are not well placed to comment on this.

• Question 4: Do you have any comments on the other ways we considered to ensure that consumers who have suffered financial loss as a result of unsuitable advice receive redress?

No.

• Question 5: Do you agree with the estimates and assumptions that we have made about costs, benefits, scale of reach, and consumer response rates for each alternative option we considered?

We are not well placed to comment on this.

• Question 6: Are there any other alternative options that we should consider?

We are not well placed to comment on this.

Proposals for the consumer redress scheme

• Question 7: Do you agree that the scheme should cover advice given between 26 May 2016 and 29 March 2018, provided the further file review evidence shows that the legal test is met?

We consider that this is a reasonable period to be covered by the consumer redress scheme if the legal test is met.

We note that redress is likely to be materially higher for the transfers effected prior to March 2017 suggesting that members who transferred out before this date are more likely to have suffered harm – this would support including them in the redress scheme.  However, we suggest that the variation of redress between pre and post March 2017 transfers is explicitly incorporated into your modelling to ensure that the cost benefit analysis is appropriate. 

• Question 8: Do you agree that, if the legal tests for the earlier period are not met, the scheme should cover advice given between 1 March 2017 and 29 March 2018?

This would seem a reasonable period for the redress scheme to cover.

• Question 9: Do you agree with the steps we propose for insistent clients?

We are not well placed to comment on this.

• Question 10: Do you have any evidence of harm caused by DB advice firms to insistent clients who transferred out of BSPS?

No

• Question 11: Do you agree that the scheme should exclude cases in the circumstances we have described in the CP?

We agree with the exclusions suggested.

We note that firms who have already carried out a PBR – particularly if they have pro-actively initiated the PBR and used independent parties to review their advice outside of a formal skilled persons process- will consider that they have already done the right thing for their clients.  Carrying out a PBR is a time-consuming process which we believe most firms will have done in good faith.  We therefore believe that consideration should be given to widening the exclusion applying to firms who have carried out a PBR.  For example, it could cover all PBR carried out with a given level of independent oversight so long as the consumer has had the FOS referral rights communicated to them.

• Question 12: Do you agree that the BSPS DBAAT is an appropriate tool for assessing whether advice to transfer out of BSPS was suitable?

This is outside of our area of expertise.

• Question 13: Do you agree that the examples of failures we've identified in the BSPS DBAAT instructions are indications of a failure to comply with suitability requirements?

This is outside of our area of expertise.

• Question 14: Do you agree with the proposed steps for firms to take under the scheme?

The steps outlined look reasonable.  It is unclear however where information about the current status of the personal pension (fund value, charges and transactions) will come from where the advising firm is unable to obtain this information – which could be the case where the member has changed advisor.  Similarly, if an annuity has been purchased then it will be necessary to obtain information about the terms of the annuity. 

It appears that the member will be asked to request any information that is not accessible to the advising firm from their plan provider.  In our experience, asking customers to request plan information can cause some confusion and the information returned from the customer can be incomplete. Therefore, any steps that can be taken to standardise the process would be desirable.  For example, it might be a good idea to set up a standard request letter which the member can issue to their plan provider, and any previous providers since the point of transfer from the BSPS.   The request letter would need to be well considered to address a range of possible scenarios (for example consolidation of the BSPS transfer with other monies).

• Question 15: Do you agree with the proposed deadlines in the draft rules for firms completing the steps of the scheme?

We believe it may be challenging to ensure that letters to BSPS members are issued within 5 days of determining that further information is required in relation to a case.  We suggest that this timescale is extended.

We consider that three months should be sufficient to calculate redress in most instances.  However, we note that there may need to be some leeway on this timeframe if data gathering is protracted (for example in the situations outlined in question 14), or if the calculations are complex (see question 16).

We consider that allowing 28 days to pay redress is a reasonable period.

• Question 16: Do you agree that we should require firms in the scheme to pass consumer details to the FCA so we can take steps to facilitate referrals to the Financial Ombudsman Service for all cases that are assessed as suitable?

We believe that it is important that the redress scheme provides consistent outcomes and that cases are able to be processed quickly.  This is important for both the BSPS members and for advising firms.

We are unclear in what circumstances the FCA would approach members to ask them if they would like the Ombudsman to review their case.  We feel that it would not be desirable for large numbers of members to be approached in this way because of the impact it could have on the speed of case resolution and the ongoing uncertainty for advising firms around the potential costs of redress.

We also note that the Financial Ombudsman Service is currently operating with long turnaround times.  Thus if additional work is to be passed to them then we consider that additional staff may be required to ensure that BSPS redress scheme cases referred to them are resolved quickly.  There would also need to be a robust training process for the Ombudsman staff to ensure consistency of outcome.

• Question 17: Do you agree that the proposed scheme will provide a proportionate level of independence and oversight?

This is outside of our area of expertise.

• Question 18: Do you agree with the proposed implementation period?

We consider this is a reasonable implementation period on the assumption that the FCA is able to put in place appropriate processes within that period.  For example, if a redress “calculator” is built, it will need to be fully tested for a variety of scenarios.  We also consider that it would be best practice for the calculator to be independently checked and for different firms to be used for the development of the calculator and for checking it. 

We also note that any changes to the redress guidance which emerge later this year may impact on the coding used in the calculator, and this may have implications for the speed with which a calculator can be developed.

• Question 19:  Do you have any comments on the high-‑level proposals for redress calculations?

We consider that it would be desirable for a calculator to be developed.  We would expect this calculator to work out the redress due to a given individual.   We assume that the proposals in paragraph 6.6 should be interpreted to mean that redress will reflect both the loss already crystallised (ie the difference in the benefits received prior to the date of calculation and those that would have been received had suitable advice been given) and the future loss (ie the difference between the future income stream that would have been obtained from the BSPS pension, and the value of the personal pension at the date of calculation).

Developing a calculator would ensure consistency across calculations which we consider to be important given the various complications of the BSPS scheme – which we have seen treated differently across the various calculations that we have reviewed:

• The unusual increases in payment
• The unusual revaluation methodology for post April 97 pension
• The unusual revaluation methodology for pre April 97 pension (interaction of GMP and non GMP)
• The changes in revaluation on the transition from the Old BSPS to the New BSPS
• The impact on redress of allowing for early retirement and the challenges of obtaining early retirement factors for BSPS members (see further comments regarding early retirement under question 20)
• The uncertainty around possible top up of benefits from the New BSPS at the point of buyout with an insurance company
• The uncertainty in redress given that the suitable advice might have been to remain in the Old BSPS
• The need to ensure that the correct benefits from the Old BSPS (including any top up above PPF benefits) are valued

It would also ensure a consistent approach where the BSPS member has drawn monies from their plan prior to the calculation date.

Having said this, we consider that there are some scenarios for which a calculator will not cater.  For example, where the investor has consolidated the transfer proceeds with other monies, where the investor is (or may be) affected by the Lifetime Allowance or where the investor is in receipt of means tested benefits.

We consider that it will be important for the inputs to the calculator to be simple and objective so that the BSPS member can easily verify them. 

Some element of independence between the firm doing the calculation and the advising firm may also increase the BSPS member’s confidence in their redress offer.   Furthermore, depending on the complexity of the tool, there may a risk of input error which would be mitigated by a requirement for calculations to be carried out by a suitably qualified and experienced actuarial firm.  Having said this, such a requirement would likely result in a very high volume of work for a small number of firms and this could lead to the slow processing of calculations (and failure to deliver all cases within 10 months of the scheme effective date).  Furthermore, as noted above given the complexity of the BSPS arrangements, we consider that it is vital that any actuarial firms who are to prepare calculations under the Scheme should be familiar with the specific details of the BSPS benefit structure.

It might be preferable therefore to allow advising firms to use the calculator themselves for simple cases but to set clear criteria for cases that must be referred to an actuarial firm (for example based on the magnitude of the transfer value paid, the amount of redress and complex scenarios as outlined above).  This approach would allow a small number of trusted firms (for whom sample calculations could be reviewed by the FCA to prove their competence and understanding of BSPS) to focus on the most complicated cases. 

Finally, we note that under 6.4 you state that redress will be made as a lump sum payment, as set out in the existing redress guidance.  It is worth noting that the default position in the existing guidance is that redress should be granted as a plan top up (and we consider that this may be practically possible for smaller redress payments).  It would be helpful if this point could be clarified in the review of the redress guidance. 

On a related note, we believe that consideration should be given to the risk of paying individuals large cash payments in lieu of pension benefits. This may be something to consider as part of the review of the redress guidance but is a particular concern for BSPS cases given the perceived level of financial literacy in the population.  We appreciate that attempting to secure the BSPS income directly would be practically difficult but perhaps there could be conditions attached to the use of the redress payment itself, for example with the compensation calculated under the redress guidance being used to purchase an annuity.  Alternatively, there could be access for BSPS members to financial advice regarding the investment of the compensation payment.

• Question 20: Do you agree with our estimates of the costs and benefits of our proposed scheme?

We believe that the cost of a simple redress calculation could be less than £1,000 assuming that a calculator is developed, and that (actuarial or advising) firms are able to rely on it without independent checks.  However, some cases will be complex and for these cases, a cost of £1,000 would be too low and a more suitable cost estimate might be £1500 - £2000.  On balance, allowing for a cost of £1,000 per case does not feel unreasonable given that we would expect there to be relatively few complex cases.

In terms of the assumed average redress payment, we observe a wide range of redress payments (as expressed as a percentage of the ceded pension) for BSPS members, particularly for those who transferred out before March 2017 (before the change to the transfer value basis).  

In our experience the range of redress outlined in the consultation document (16% - 22% of transfer value effected) might be appropriate for transfers effected after March 2017 but is low for pre March 2017 transfers.  Adjusting this figure upwards would increase costs anticipated to be incurred by PI insurers and the FSCS. It could also lead to an increase in the number of advisors who may become insolvent as a consequence of operating the redress scheme. 

One key factor affecting the magnitude of redress is the allowance made for early retirement.  We are aware that there are discrepancies between the approach being adopted by FOS in relation to early retirement (typically no allowance is permitted) and that used by the FSCS and in FCA led PBR.  We consider this to be an unsatisfactory situation which it would be helpful to address in the review of FG17/9.

It is important to note that where allowance is made for early retirement (particularly where it is assumed the investor would have retired from the Old BSPS), the relatively penal early retirement factors applying in the BSPS mean that redress is significantly reduced.  We consider that this is an important factor to consider, particularly if the 16% - 22% suggested range for redress reflects cases where allowance has been made for early retirement.