Fourteenth Report - Investigation into the British Steel Pension Scheme

Select Committee

Public Accounts Committee HC 251 21 July 2022

Report Status Government responded

Conclusions & Recommendations 23 items (5 recs)

Source View on Parliament website

Government Response (AI assessment · 23 of 23 classified)

Accepted 1

Accepted in Part 1

Acknowledged 15

Deferred 1

Not Addressed 2

Rejected 3

Recommendations

5 results

2 Acknowledged

The Financial Conduct Authority has consistently been behind the curve in responding to the catastrophic...

Recommendation

The Financial Conduct Authority has consistently been behind the curve in responding to the catastrophic impact on British Steel Pension Scheme members. The FCA has been slow to respond at all stages of the BSPS case, for example it failed … Read more

Government Response Summary

The FCA acknowledges that there are lessons to learn, but is concerned that the report does not fully acknowledge the ways the FCA has responded since 2017. The FCA will provide updates in line with the Committee’s recommendations and a response to some of the wider conclusions of the report in a letter dated 22 September 2022.

HM Treasury

3 Accepted in Part

The Financial Conduct Authority has not been sufficiently proactive or timely in using its enforcement...

Recommendation

The Financial Conduct Authority has not been sufficiently proactive or timely in using its enforcement powers. To date, the FCA has issued one fine in response to the BSPS case, and while it has 30 more enforcement actions in place, … Read more

Government Response Summary

The FCA will provide a high-level update on enforcement activity and the Treasury outlined existing mechanisms to address activity outside the FCA's perimeter, but did not commit to specific changes to enforcement powers or the regulatory perimeter.

HM Treasury

4 Acknowledged

The way that compensation has been provided in the British Steel Pension Scheme case has...

Recommendation

The way that compensation has been provided in the British Steel Pension Scheme case has been slow and unfair. BSPS members face significant delays in receiving compensation. Complaints made to the Financial Ombudsman Service take on average eight months to … Read more

Government Response Summary

The FCA has considered how further redress mechanisms can be implemented more quickly and provide fair compensation and its plans to improve the redress framework is in the FCA Business Plan for 2022/23, but it does not offer specific changes to resolve differences in compensation levels.

HM Treasury

5 Accepted

Seven years after the Pensions Schemes Act, regulated bodies are still not clear on the...

Recommendation

Seven years after the Pensions Schemes Act, regulated bodies are still not clear on the Financial Conduct Authority’s expectations for consumer protection. The 2015 Pensions Schemes Act provided consumers with greater flexibility for Investigation into the British Steel Pension Scheme … Read more Seven years after the Pensions Schemes Act, regulated bodies are still not clear on the Financial Conduct Authority’s expectations for consumer protection. The 2015 Pensions Schemes Act provided consumers with greater flexibility for Investigation into the British Steel Pension Scheme 7 accessing their pension savings and allowed DB pension scheme members the opportunity to transfer out to a DC scheme to access their savings. The FCA recognised the potential harm these reforms could cause some consumers and was concerned with the speed at which they were introduced. In response, the FCA provided guidance that advisers should assume that, in most cases, a transfer will be unsuitable, creating confusion among advice firms. 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. Recommendation: The FCA should be more proactive and consumer-focused in its engagement with stakeholders. It should have a better mechanism for responding to consumer harms and collect more evidence on a regular basis to pick up on issues that are being raised, especially from emerging risks in financial markets. The FCA must also review how effective the Financial Services Consumer Panel is at consumer protection and how it influences policy debates within the FCA fro Show less

Government Response Summary

The FCA agrees with the Committee’s recommendation to be more proactive and consumer-focused in its engagement with stakeholders. The FCA’s Business Plan sets out its commitments for tackling conduct that can cause serious harm and how the organization is joining up its tools to act efficiently, effectively, and consistently. On BSPS, working in partnership with the FOS and the FSCS, the FCA has engaged extensively with former BSPS members over a significant period of time.

HM Treasury

6 Rejected

The current compensation arrangements do not always protect consumers, can create wider costs to firms...

Recommendation

The current compensation arrangements do not always protect consumers, can create wider costs to firms and may not have the capacity to cope with future risks in the advice market. The standard approach to redress relies on consumers seeking compensation … Read more The current compensation arrangements do not always protect consumers, can create wider costs to firms and may not have the capacity to cope with future risks in the advice market. The standard approach to redress relies on consumers seeking compensation themselves, but only 25% of BSPS members who received unsuitable advice have raised claims with redress organisations. Similarly, despite the redress process being free to use, 72% of complaints to the Financial Ombudsman and 40% of claims to FSCS being made through third party representatives such as claims management companies and solicitors. This points to the general complexity of the redress system and the FCA’s failure to recognise the specific vulnerabilities of BSPS members that prevent them from seeking compensation directly. For redress arrangements to work effectively firms should have PII cover to afford the cost of compensation, however many advice firms are unable to access the insurance and, since 2018, 60% of firms have left the DB pension transfer market entirely. For firms that have entered insolvency, compensation is funded by an FSCS levy, which forces compliant firms to shoulder the cost of unsuitable advice. Given that the Financial Ombudsman is dealing with a significant backlog of complaints and the FSCS levy is forecast to increase to £406 million in 2022–23, the redress system may not have the capacity to respond to further instances of significant consumer detriment within financial services. Recommendation: The FCA, FOS and FSCS should write to the committee in 6 months to explain what they are doing to manage risks in the redress system for financial service. The FCA’s handling of the wider DB pension market should be reviewed as there could be thousands more cases of mis-selling which may be eligible 8 Investigation into the British Steel Pension Scheme for financial redress, given the significant amount of unsuitable advice seen across the sector. The review should include consideratio Show less

Government Response Summary

The FCA, FOS and FSCS will write to the committee on 21 January 2023 to explain what they are doing to manage risks in the redress system for financial service; the FCA disagrees with the recommendation to review its handling of the wider DB transfer market.

HM Treasury

Conclusions (18) Observations and findings — click to expand

1 Conclusion Acknowledged

On the basis of a report by the Comptroller and Auditor General, on 27 April 2022 we took evidence from the Financial Conduct Authority (FCA), the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS) on the British Steel Pension Scheme (BSPS).2 The session included evidence provided by …

Government Response Summary

The government acknowledges the Committee's report and states it is the FCA’s response to the Committee’s report.

7 Conclusion Acknowledged

The impact on members has been catastrophic, both financially and emotionally.15 Alongside losses caused by unsuitable advice to transfer, many members face ongoing advice charges to manage their remining pension savings.16 The FCA is unaware of the total financial loss experienced by members, it told us that it is conducting …

Government Response Summary

The FCA acknowledges the catastrophic impact on members and shares concerns about unsuitable advice, referencing meetings with steelworkers and the consultation paper CP 22/6.

8 Conclusion Acknowledged

The FCA failed to take swift and effective action at all stages of the BSPS case. It first became aware of the risks of unsuitable transfer advice in 2015 after the introduction of the Pensions Schemes Act but failed to take sufficient action to prevent consumers from being harmed. At …

Government Response Summary

The FCA acknowledges that it failed to take swift and effective action at all stages of the BSPS case and shares concerns about unsuitable advice, referencing meetings with steelworkers and the consultation paper CP 22/6.

9 Conclusion Acknowledged

The former Chief Executive of the FCA told us that, as the BSPS case unfolded, the FCA did not have the data to tell it which firms had provided advice to members and found it difficult accessing this information when it needed it. This delayed its response and meant it …

Government Response Summary

The FCA agrees with the committee's recommendation and shares concerns about unsuitable advice, referencing meetings with steelworkers and the consultation paper CP 22/6.

10 Conclusion Acknowledged

In response to the BSPS case, the FCA had to gather further evidence to understand the scale of the problem and in June 2018, out of a sample of 192 files, it found that 47% of transfer recommendations were unsuitable.25 In order to take action against regulatory non-compliance, the FCA …

Government Response Summary

The FCA provided a high-level update on enforcement activity related to BSPS, stating it is a high priority and investigations are at an advanced stage.

11 Conclusion Acknowledged

The FCA implemented ineffective regulatory interventions in its initial response to the BSPS case. For example, the FCA issued letters to advice firms reminding them of their obligations to provide advice that is in consumers’ best interests, showing its naivety in failing to understand the behaviour and motivations of unscrupulous …

Government Response Summary

Intervention work carried out by the FCA has also led to 48 firms withdrawing from the defined benefit pension transfer advice market. Interventions made by the FCA have required firms to cease all regulated activities relating to DB pension transfers and have stopped firms providing DB pension transfer advice to BSPS customers.

12 Conclusion Acknowledged

To date, the FCA has only issued one fine in response to the BSPS case.36 It told us that it is working on a further 30 enforcement cases, but despite working as “swiftly 22 Qq 37, 38 (27 April) 23 Qq 37, 38 (27 April) 24 Qq 72–75 (27 April) …

Government Response Summary

The FCA is able to provide a high-level update on enforcement activity related to BSPS, stating that enforcement activity related to BSPS is a high priority. The FCA currently has c.30 ongoing investigations into firms and individuals relating wholly or partly to BSPS advice and five of them have entered either Stage 1 settlement discussions or the Regulatory Decisions Committee.

13 Conclusion Rejected

Alongside the unsuitable advice provided by firms, there have been other issues of non-compliance within the BSPS case, including unregulated introducers and phoenixing. The FCA has identified that in 30% of BSPS cases members were introduced to their adviser by third parties, and whilst some introducers are authorised and regulated …

Government Response Summary

The government disagrees with the Committee’s recommendation but welcomes the Committee’s view on the need for effective mechanisms to consider and, where appropriate, address concerns about activity that is not within the FCA's regulatory perimeter. The government has concluded that, on balance, the key mechanisms that currently exist are appropriate to address the types of concern highlighted by the Committee.

14 Conclusion Acknowledged

The FCA oversees the consumer redress process which intends to put consumers back into the financial position they would have been in if unsuitable advice had not been given.45 Consumers must raise complaints directly with advice firms or the FOS within six years of receiving unsuitable advice. However, BSPS members …

Government Response Summary

The FCA has considered how further redress mechanisms can be implemented more quickly and provide fair compensation. The FCA Business Plan for 2022/23 sets out its plans to improve the redress framework, including carrying out redress exercises with firms where appropriate, so they can quickly remedy harm.

15 Conclusion Acknowledged

The FCA provides guidance on how compensation should be calculated and sets the rules for how compensation is delivered. Calculations use complex financial assumptions which are updated every three months in accordance with market performance, and therefore are subject to changes in the market which causes significant variation in the …

Government Response Summary

The FCA states it will consider the Committee's feedback as part of its wider response to the BSPS redress consultation. The FCA explains its redress calculation methodology is designed to respond to changes in financial markets and produce an appropriate redress figure at the point at which the redress is calculated.

16 Conclusion Acknowledged

Many BSPS members have not received the full amount of compensation owed to them due their advisers being unable to pay compensation. The FCA imposes limits on the compensation awarded by both FOS and FSCS, and the FSCS’s compensation limits are significantly lower.52 This unfairly impacts those whose advice firms …

Government Response Summary

The FCA states it will consider the Committee's feedback as part of its wider response to the BSPS redress consultation. The FCA explains its redress calculation methodology is designed to respond to changes in financial markets and produce an appropriate redress figure at the point at which the redress is calculated.

17 Conclusion Acknowledged

The FCA and redress organisations worked to engage with and encourage BSPS members to seek compensation through direct letters and in-person events.54 Despite these efforts only 25% of all members who received unsuitable advice have raised claims with redress organisations, and the remaining 75% of members who may be eligible …

Government Response Summary

The FCA agrees with the committee's recommendation and describes its Business Plan commitments and engagement efforts with BSPS members and other consumer engagement methods.

18 Conclusion Rejected

The FCA’s response to the BSPS case highlights wider issues within its regulatory approach. Alongside the estimated 369 firms and advisers that provided unsuitable advice to BSPS members, the FCA found that 17% of DB transfer advice was unsuitable within the wider market. This is a significant proportion of non-compliance, …

Government Response Summary

The FCA disagrees with the Committee’s recommendation and does not consider that a review of how it is handling the wider DB transfer market should be undertaken, stating that the harm associated with BSPS is unique and not replicated elsewhere.

19 Conclusion Not Addressed

There is a fundamental misalignment between legislation and regulation of the DB pensions advice market, which has caused confusion over the suitability of transfer advice.60 The 2015 Pensions Schemes Act introduced by HM Treasury was intended to provide greater freedom and flexibility for consumers to manage their pensions, allowing DB …

Government Response Summary

Seven years after the Pensions Schemes Act, regulated bodies are still not clear on the Financial Conduct Authority’s expectations for consumer protection.

20 Conclusion Acknowledged

In direct response to the 2015 Act, the FCA announced a new starting position for advisers who should assume that in most cases a transfer will be unsuitable.63 Subsequently in 2017, the FCA sought to align itself with the government’s underlying philosophy of choice within pensions policy and consulted on …

Government Response Summary

The FCA removed the starting position rule in October 2020, has found a deterioration in the quality of advice, and published CP22/6 which if implemented would require firms to review their advice and pay redress to consumers where that advice was unsuitable, and will publish a Policy Statement on this later in 2022.

21 Conclusion Deferred

There are also wider uncertainties within the advice market, including the provision of Professional Indemnity Insurance (PII). PIMFA told us that the availability of PII has become severely limited because insurers are struggling to accurately predict the risk of 58 C&AG’s Report, para 9, 2.5 59 Qq 83, 86 (27 …

Government Response Summary

The FCA, FOS and FSCS will write to the committee on 21 January 2023 to explain what they are doing to manage risks in the redress system for financial service.

22 Conclusion Acknowledged

The standard complaints-based approach to redress, which relies on consumers seeking compensation themselves, has proved ineffective in the BSPS case. Only 25% of members who received unsuitable advice have raised a claim with redress organisations.69 The FCA told us that it was surprised that more members hadn’t raised a complaint …

Government Response Summary

The FCA agrees with the committee's recommendation and describes its Business Plan commitments and engagement efforts with BSPS members and other consumer engagement methods.

23 Conclusion Not Addressed

Redress arrangements also impact on the wider pension’s advice market. Firms should have PII cover to afford the cost of compensation, and whilst firms had cover when they provided advice, many are unable to access insurance for subsequent years.72 This leads to firms being unable to pay compensation and forced …

Government Response Summary

The Government restates the committee's conclusion regarding PII cover and the FSCS levy.