The UK Public Accounts Committee has released its latest report into the British Steel Pension Scheme (BSPS) scandal which found a series of shortcomings from the financial regulator.
While the financial advice market is “designed” to safeguard consumers from making poor decisions, that was definitely not the case in the BSPS case where advisers were “financially incentivised” to provide unsuitable recommendations, the committee found.
The regulatory system left members “open to being manipulated and taken advantage of”, resulting in around 7,800 steelworkers transferring out of their defined benefit (DB) pension, losing an average of £82,600 ($98,600, €97,300) in savings.
The committee slammed the Financial Conduct Authority’s (FCA) role in the scandal, saying it had “consistently been behind the curve in responding to unsuitable pension transfer advice”.
The members of parliament (MPs) added that despite being aware of the potential risks to consumer brought by pension legislation in 2015, the FCA “failed to take preventative action” to protect them.
The watchdog had “limited insight” and a lack of access to timely data on the DB transfer market which meant the regulator was “slow to understand the risks” BSPS members were facing and how to effectively monitor them.
This was made even worse by the FCA’s regulatory focus on larger firms, which left smaller companies “out of the spotlight”, the report found, which was also admitted by former chief executive Andrew Bailey.
But, the committee noted that the regulator proved it can act swiftly and fairly, including, when it took emergency action to protect businesses and consumers during the pandemic, and that it should have applied the same framework to cases such as BSPS.
Lack of enforcement
MPs also criticised the FCA’s failures in being sufficiently proactive or timely in using its enforcement powers.
So far, just one fine has been issued in response to the British Steel scandal while 30 enforcement actions are currently in place, which have been “ongoing for years without progress”. “[The FCA] relied on ineffective interventions during its initial response such as issuing letters to advice firms reminding them of their obligations […] rather than taking enforcement action.
“In doing so, the FCA failed to distinguish between rogue advisers and isolated instances of bad advice. Similarly, within the BSPS case there have been reports of phoenixing, in which rogue advice firms voluntarily leave the market only to repaper under different names; in response the FCA updated its guidance to raise firms’ awareness of the issue and is yet to take enforcement action.
“This highlights the FCA’s failure to deter bad actors from operating within the market.”
But the Public Accounts Committee also found that enforcement action has not been the only instance where the regulator has been slow to act.
The FCA’s handling over compensation to BSPS members has caused them to face “significant delays”, with many yet to receive the full sum owed to them.
Those who went down the Financial Services Compensation Scheme route “lost £21m due to FCA-imposed financial limits” – which currently stand at £85,000.
MPs noted several incongruences in compensation awarded as well, since sums have often changed according to when calculations were made.
The committee added: “Members who sought compensation early have received significantly less than those who claimed compensation after 2021. 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.
“Despite gathering evidence on the case since 2018, the FCA only began considering the potential use of a scheme and analysing its impacts in early 2021.”
But problems have been found with the proposed redress scheme. The regulator has estimated it would cost around £71.2m to compensate all those who received bad financial advice, but the committee is concerned the figure “may end up being significantly higher”.
Seven years since the Pension Schemes Act, regulated bodies are “still not clear on the FCA’s expectations for consumer protection”, the report found.
Although the FCA identified potential risks of harm being caused to consumers when pension freedoms were introduced and regarding the speed the legislation was being implemented, it provided guidance claiming that in most cases a transfer would be unsuitable, causing confusion for advice firms.
MPs continued: “Adding to this confusion, the FCA consulted 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.
“There are also 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. The FCA has also failed to clarify its regulatory approach to other areas emerging areas of consumer risk, such as crypto asset investments.”
A spokesperson for the FCA said: “The circumstances around British Steel Pension Scheme 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.”