Law firm Hausfeld & Co is threatening legal action against the Financial Conduct Authority (FCA) unless the watchdog fixes several issues identified within the proposed redress scheme for victims of the British Steel Pension Scheme (BSPS) mis-selling scandal.
In a letter on behalf of 324 steelworkers, seen by International Adviser, the law firm highlighted the issues that would eventually see scheme members be unfairly undercompensated.
The problems relate to:
- Financial adviser charges;
- Early drawdown;
- Inflation; and
- ‘Point in time’ redress calculation.
Hausfeld explained that, if steelworkers did not have a financial adviser at the time they filed their claim, they could face lower compensation as a result. This is because during calculations, it is assumed that if a member did not have an adviser, they will not require one going forward.
The law firm added that it is “unlawful and/or irrational” to not inform consumers that by not having a financial adviser they could receive significantly less compensation.
“BSPS members are financially unsophisticated, but in a position where they have to make complex financial decisions about their pensions,” it said in the letter. “In these circumstances, it seems inevitable that, even if they do not have an adviser at the time they make a complaint, they will require one in the future.
“Therefore, it is arguably unlawful and/or irrational for the FCA/Financial Services Compensation Scheme (FSCS)/Financial Ombudsman Service (FOS) to assume that if a BSPS member has not instructed an adviser at the time they make a complaint they will not need one going forward and to reduce their redress accordingly.”
Drawdown and inflation
The second problem relates to lower level of redress being awarded because a member entered early drawdown.
Hausfeld explained that calculating compensation will depend on firms making appropriate assumptions about the age at which retirement benefits from the defined benefit (DB) pension would have been accessed had the members received suitable financial advice and remained in the scheme.
But some steelworkers decided to draw down from their defined contribution (DC) scheme as recommended by a financial adviser. They continued to work and did not retire; but when calculating redress, the FSCS and FOS “wrongly assumed that the BSPS members would have likely retired had they remained in their DB pension, and calculated redress on that basis”, the law firm said.
As a result, it argues that it is “unlawful and/or irrational” for the three bodies to reduce the levels of compensation due to early drawdown on the assumption that it “equates to retirement when in fact BSPS members did not retire”.
Inflation is proving problematic in calculations as well. This is because benefits in DB schemes are often linked to inflation.
But in March 2021, the FCA updated its guidance following changes to the way the retail price index (RPI) is calculated. This impacts the methodology because it sets a “differential between the RPI and the consumer price index (CPI) which is used in the valuation of CPI-linked DB benefits”, Hausfeld explained.
As a result of the changes, compensation calculated after January 2021 was “significantly higher”. The law firm added that the updated methodology “unfairly penalises those who followed the FCA’s guidance and sought compensation early”.
“Members are unable to seek further compensation, and many feel they have been treated unfairly because of the timing of their complaint.”
The law firm added that if the FSCS was aware of the changes in the calculation of RPI, it was “unlawful” to not advise victims to delay registering claims as they would have received a higher sum after January 2021.
‘Point in time’ calculations
The last issue highlighted by Hausfeld is an “overarching” one and it relates to ‘point in time’ calculations.
The law firm explained that DC scheme members can choose to use some of the money from their pension to buy a series of short-term annuities to provide themselves with an income, and that the value of the annuities will depend on the market forces in place at the time.
For DB pensions, however, the sum paid out depends on the scheme’s rules, meaning that they are protected from market fluctuations in a way their DC counterparts are not. BSPS members cannot choose when to receive compensation, which is also subject to market movements, Hausfeld added.
As a result, it argued victims should be protected by any fluctuations of the market to reflect the fact that BSPS was a DB scheme.
“As we understand it, this methodology [point in time] seeks to place the member, the consumer, so far as possible, back in the position they would have been in if they had received compliant advice and remained in their DB scheme,” the law firm said. “However, the FCA has also acknowledged that absent being placed back into the scheme, which is not an option, the best option would be to purchase an annuity, but there is no market for deferred annuities, thus this is not (currently) an option.”
This means that firms will calculate compensation as the difference between the estimated value of benefits given up in the DB scheme and the current value of their DC pot, and pay the redress as a lump sum.
“Such arbitrary results are exacerbated by delays on the part of the FOS and FSCS in the processing of compensation claims. Many steelworkers have been awarded redress this year after a lengthy delay; if such steelworkers had been awarded compensation in a timelier fashion, economic conditions for the ‘point in time’ calculation would have been more favourable, therefore producing fairer offers,” the law firm continued.
After setting out all the issues that need addressing, the law firm said it is ready to take the matter forward if the regulators do not act swiftly to make things right for BSPS victims.
“We currently have a critical window of opportunity to give steelworkers fair compensation. Accordingly, whilst our client and stakeholders would welcome further engagement, regardless of any such dialogue, it is requested that the FCA:
- “Provide its decision to the issues we have outlined by no later than the date on which the FCA publish their final plans for the proposed BSPS consumer redress scheme.
- “Specifically, please explain how the FCA/FSCS/FOS intends to remedy these issues for all BSPS members, whether they have already been awarded redress or not.
- “Alternatively, if the FCA/FOS/FSCS does not intend to remedy these issues, please provide a written summary of the decision, explaining the grounds on which this decision has been made, and providing copies of all documents considered by the relevant decision-makers when making it.
“If the FCA needs any more information or authorities to respond fully to this group of people and the examples, then it should confirm this to us by return, so that we may seek authority. In contrast the FCA should not send a response declining to engage on points or examples because it has failed to raise this with us in advance.
“Once we receive the FCA’s decision, our clients and stakeholders will consider taking further legal action if necessary, including but not limited to issuing judicial review proceedings. Our client is confident that a relevant steelworker, or group of steelworkers, will have standing to bring a judicial review claim, having a sufficient interest through being personally affected, and that the issues identified in this letter will reach the standard necessary for a successful judicial review should the FCA decline to address them.”
When contacted by IA, the FCA confirmed it had received the letter but declined to comment further.
IA also reached out to the FOS and FSCS, but they both declined to comment.