The UK’s National Audit Office (NAO) has released its investigation into the British Steel Pension Scheme (BSPS) scandal.
The body found that 47% of transfer recommendations were unsuitable – compared with 17% for the general defined benefit (DB) transfer market at the time – and for a further 32%, it was unclear whether the advice offered was suitable or not.
Additionally, in 17% of BSPS transfers, members pensions were placed into fresh investments by advisers, which “were not appropriate for their requirements”, the NAO found.
Of the estimated 369 advice firm involved in the scandal, the government body said that just five met the Financial Conduct Authority’s (FCA) size threshold for regular engagement with the regulator.
At the time, the watchdog did not have any insight on the number of the DB transfer requests or on the state of local advice markets.
Additionally, steel-working regions saw a “very rapid growth in requests for DB transfer advice”, the NAO said, but “many of the advice firms involved had limited previous experience of processing large numbers of DB transfers and, in many cases, did not respond appropriately to the increased demand for their services”.
Companies were also “financially incentivised” to recommend members to transfer out of the BSPS because, under contingent charging rules – which were banned in October 2020 – they would only get paid if the transfer went ahead.
The NAO said that the three main reasons why firms provided unsuitable advice to BSPS members were:
- Financial advice market was “not prepared for the impact of the BSPS restructure”;
- Financial advisers “responded poorly to the increased demand for their services”; and
- Advice firms “implemented bad practices and approaches”.
FOS and FSCS intervention
The British Steel scandal has seen dozens of advice firms either collapse or exit the DB advice market altogether.
According to the investigation, 44 companies voluntarily withdrew from the sector, while the FCA currently has 30 additional enforcement investigations, with £1.3m ($1.7m, €1.5m) worth of fines issued so far.
But with such a high proportion of companies entering liquidation, BSPS members have lost £18m in compensation.
The NAO explained that usually professional indemnity insurance covers liabilities for unsuitable advice. But 22% of the complaints made to the Financial Ombudsman Service (FOS) have been passed on to the Financial Services Compensation Scheme (FSCS), as firms have not been able to pay and were forced to enter liquidation.
FSCS redress is limited to £50,000 for claims made against firms that failed before April 2019, and up to £85,000 for those that went bust after that date.
The NAO added that the average loss for BSPS claims resolved by the lifeboat scheme is £82,600 with individual cases ranging from £0 to nearly £500,000.
The FSCS estimate for total loss for its upheld claims is £55.3m, while the total compensation awarded so far is £37.3m, resulting in a shortfall of £18m for members.
These high redress figures also meant higher levies for the industry and soaring costs of professional indemnity insurance for advisers, the NAO added.
Redress based on financial markets?
The governmental body also found issues with the recording of compensation awarded.
It said: “Redress calculations use complex financial assumptions that change every three months according to the performance of financial markets.
“This leads to variations in the amounts of compensation provided to consumers, as each calculation is made at a different time. The FCA provides guidance on the calculation of redress and has acknowledged that, in some cases, aspects of its guidance were not being used consistently by advice firms, who risked failing to provide fair compensation amounts to consumers.
“The FCA has issued clarification to firms with the aim to mitigate this risk.”
As a result, the NAO has put forward three suggestions to strengthen preventative measures and avoid another scandal like the BSPS one from happening again.
- Mitigate risk to consumers when seeking financial advice for DB transfers by greater joint work between FCA and HM Treasury;
- Minimise the risks associated with transferring out of a DB scheme, especially when it involves large numbers of members;
- Since “only a small portion of members have made a complaint through statutory redress organisations”, the FCA, FOS and FSCS should do more to reach affected customers, and understand what could be improved in the future.
