The Financial Conduct Authority (FCA) has opened a consultation into how it should change the way it calculates compensation for consumers who received unsuitable pension transfer advice and suffered losses as a result.
The regulator said that, if agreed, the updated methodology would be used to calculate and provide redress to victims of the British Steel Pension Scheme (BSPS) scandal.
The methodology the FCA is aiming to implement would put consumers, as far as possible, “back in the position they would have been if they had been given compliant advice and remained in their defined benefit (DB) scheme”, it said.
Although the watchdog’s review of the system deemed the methods as appropriate, it did identify areas of improvement and/or clarification to ensure the regulator continues to provide appropriate compensation.
The consultation paper sets out the improvements the FCA would like to make, which include:
- Consolidating the methodology as rules and guidance in the FCA Handbook;
- Changing the approach to determining the consumer’s retirement date;
- Payment of redress and how it is explained to consumers; and
- How the proposals would affect the proposed BSPS redress scheme.
Details
The watchdog proposed that any compensation owed should be paid into a members’ DC pension as “this will make it more likely that redress payments are invested for retirement”.
This would be the case if the individual cannot be reinstated in the original DB plan or if the scheme wound up. If the pot can be brought back under the original DB scheme, that is likely to be seen as first choice.
Some of the changes would include an increase in compensation to cover initial advice charges. These would be calculated as 2.4% of the defined contribution (DC) fund if the client needs to find a financial adviser with a minimum of £1,000 and a maximum of £3,000 ($3,608, €3,531).
This would apply if consumers are not in any advice arrangement – which would constitute around 25% of savers currently.
This allowance, however, would also apply where consumers are paying for ongoing advice that exceeds the recently introduced fixed rate of 0.5%. The adviser can agree to lower their charges to the fixed rate or below, the FCA added.
Timeline
If the regulator decides to make changes to its approach and implement the proposed British Steel redress scheme, a policy statement including the final rules will be published in the winter of 2023.
If the BSPS scheme is greenlit, it is likely to come into force in early 2023 with members receiving compensation between late 2023 and early 2024, the regulator said.
Any cases that are yet to be settled by the time the proposed rules are supposed to come into force will need to reflect the updated methodology.
The FCA added: “In the meantime, we expect firms to continue to calculate and offer redress in line with existing requirements. Until changes take effect, firms will need to explain to their customers how they have arrived at a figure, and how this puts them back in the position they would have been in, if they had not received unsuitable advice.
“Firms will also need to explain that customers have the option of waiting for the outcome of this consultation to settle their case.”
The consultation will close on 20 September 2022.
