Since I had written extensively about the feasibility of a redress scheme to cover advice to members of the British Steel Pension Scheme (BSPS), I want to comment briefly (even if too quickly) on the consultation paper published today by the FCA. I had set out in my previous posts what I would be looking for and I can at least comment in light of those expectations. I’m not planning to repeat the observations themselves so these remarks should be read in the context of my two earlier articles.
- The form of redress will be cash sums without any requirement to alter the replacement investment strategy, leaving wide open the scope to game the redress scheme. This may or may not be countered by a requirement for self-marked ‘suitable’ advice to be reviewed by the FOS, as the Ombudsman may take the preferences for the existing investments into account when assessing ‘true’ risk attitudes.
- I disagree with the QC’s opinion that there is no hindsight in the application of the contemporaneous COBS suitability rules and guidance. There are multiple cases in the BSPS DBAAT tool. I do not believe this would go unchallenged in court where it would reference standard industry practice for DB transfers at the time and would be supported by interpretation of the implications of the prescribed format for DB transfers. The specific DBAAT form is essentially the same as its standard version and has the hindsight features I described.
- Because the standard DBAAT form has not been materially altered, it will not ensure consistency or objectivity in assessment. I have already referred to the fact that external and FCA assessments have disagreed, undermining the FCA’s evidence (on which the QC relied) about the prevalence of unsuitable advice. This will inevitably now be replicated across the scheme and is likely to involve many more firms in dispute with the FCA for reasons that are the fault of the regulator, not their own. The likely result is a large percentage will end up being judged by FOS, negating the redress scheme purpose. I assume that ongoing arguments between the FCA and firms subjected to PBRs or s166 orders not related to BSPS will also bring this dispute into a different domain, but this is more likely to be the courts than FOS. It would be best that the common areas of dispute be tested in court.
- In terms of those common areas, there is still no recognition by the FCA that the primary motive for transfer is likely in most cases to have been improved outcomes as a consequence of exercising the rights of transfer and the rights not to buy an annuity. This is stunningly incompetent or else a cynical strategy to deter transfers. The DBAAT does not allow for this measure of ‘best interests’ to be addressed appropriately by the firm completing the form. I assume advisers will write this in as comments, but the form remains fundamentally unsuitable because of this omission.
- A serious weakness of the scheme proposal is that the redress calculation has not been included in the consultation or in the scope of the QC’s opinion, because it is already generally under review. The proportionality (cost relative to the nuance of the suitability) will not therefore be tested legally as s404 requires. The calculation needs to be highly specific to the BSPS arrangements due to the impairment of the inflation protection. This is likely to be, or should have been, a key element in the adviser’s assessment of the relative real outcomes when determining the client’s best interests.
The FCA estimates the redress bill resulting from the scheme coming to £71m of which £19m will be met by PI insurers and £20m will end up with FSCS. The last two are the costs that will impact firms like ours that did not advise any BSPS transfers. Arch Cru, which was not nuanced and easy to assess, cost the FSCS about £60m.