Technical Director Ben Rees and Associate Alessio Ianiello analyse the British Steel pensions scandal and the FCA’s proposed redress scheme in Law360. Ben and Alessio’s article was published on 24 May 2022 and can be found here.
This article provides a comprehensive overview of the British Steel pension mis-selling scandal to date, and explores the flaws with the FCA’s proposed redress scheme. Put simply, the FCA’s current proposal fails to ensure that those affected by the British Steel pension scheme mis-selling scandal are compensated in full, and therefore fails to fulfil its own stated aims. The FCA’s failure to create a comprehensive and just redress scheme to effectively tackle the myriad of issues arising from the scandal simply adds insult to injury for those affected by the mis-selling.
The Financial Conduct Authority’s (FCA) £71.2 million redress scheme for victims of the British Steel Pension Scheme mis-selling scandal has been described[i] by critics as “compensation on the cheap” and labelled “absolutely disgusting” by steelworkers. The mis-selling scandal involved workers being wrongly advised to transfer their guaranteed retirement benefits to riskier arrangements, following a 2017 restructuring by Tata Steel.
The scale of the mis-selling scandal first began to come to light in 2018. It has since emerged that financial advisers had persuaded some 7,700 workers to transfer[ii] around £2.8 billion out of the workplace scheme between May 26, 2016 and March 29, 2018.
A regulatory review[iii] found that some 47 per cent of the advice given to British Steel workers was unsuitable. Whereas the original defined benefits British Steel pension provided a guaranteed income for the pensioners’ lifetimes, those persuaded to move into defined contribution schemes found that their pension income became dependent on the performance of the stock market. The Financial Conduct Authority found that a remarkable 54 per cent of recommendations made by financial advisers were unsuitable and exposed members to potential future losses in pension income.
Some scheme members suffered losses of up to £489,000, according[iv] to a report by the National Audit Office (NAO). The NAO report found[v] that 2,000 scheme members who had sought redress lost a collective £55.3 million. However, because of the compensation limits on advice given by firms which have become insolvent, they only received £37.3m in compensation.
The Financial Services Compensation Scheme (FSCS) limits compensation to £85,000 per person in respect of advice given by firms which collapsed after April 2019 and £50,000 for those failing before April 2019. The chair of the Public Accounts Committee, Dame Meg Hillier, has called[vi] the scandal “a failure from top to bottom”, adding that “the FCA, whose job it is to regulate these firms, was asleep at the wheel”.
The FCA has issued[vii] £1.3m in fines to advisers involved in mis-selling, and is currently undertaking 30 enforcement investigations in relation to the scandal. The FCA has said, “We recognise the harm these circumstances caused to steelworkers and communities, and that’s why we continue to work to ensure that former British Steel Pension Scheme members who lost out financially due to poor advice receive compensation.” However, actions speak far louder than words, and many regard the FCA’s recently announced proposed compensation scheme as being grossly inadequate.
FCA’s Proposed Redress Scheme
The FCA’s proposed redress scheme[viii] has been roundly slammed by critics, particularly in light of the FCA’s announcement that only some 1400 cases would be eligible for compensation under the scheme, out of 7,700 individuals impacted. Ordinarily, a formal redress scheme should be well received by the financial planning profession and the victims of the scandal alike. However, the FCA’s proposed scheme is such that it looks set to create further problems, rather than resolving them. The consultation[ix] is open for responses until 30 June 2022, and it is to be hoped that in light of the responses received, the FCA will significantly revise its proposals, and create a more effective scheme.
As it stands, the FCA has announced its plans, “to implement a consumer redress scheme” which “will require firms who advised [British Steel pension scheme] members to transfer to review the advice they gave, identify if it was unsuitable, and calculate and pay redress to consumers where required.”
The FCA estimates[x] that the proposed scheme will mean that 1,400 scheme members receive £71.2m in total redress. It says[xi], “That is £56.1m more than if we simply continued with our current supervisory and enforcement work” to ensure that scheme members who received unsuitable advice received redress. The FCA estimates that the scheme will apply to 343 advisory firms.
Consequences of the Proposal
Outsourcing the task of offering compensation to the very firms who caused the problem in the first place is fraught with rather obvious difficulties. The process of seeking compensation looks likely to be complex for many victims, who could face delays running into months or years if firms or their PII insurers fight claims. They may also face significant delays in waiting for the Financial Ombudsman Service to address the relevant issues.
Another unintended consequence of the FCA’s scheme that threatens to have serious ramifications for the industry is that good firms may find themselves involved, as their clients may be encouraged to lodge complaints “as a free hit”.
As mentioned above, a regulatory review found that 47 percent of advice given to British Steel employees was unsuitable. We must, however, bear in mind that over half of the advice given was by definition not unsuitable. As a result, it may well transpire that firms who gave suitable advice to their clients are unfairly caught up in the fallout from the scandal.
In previous mis-selling cases we have dealt with in practice, we have seen PII insurers fighting individual claims robustly, which can cause delays running into years before the matter is ultimately resolved. In addition to the effects of the delay, is the impact of the claimant stress and cost risks that can fall on claimants who find themselves contending with hard-fought cases. We have also seen the Financial Ombudsman Service taking 18 months to determine issues.
It now seems likely that a majority of the advisory firms which gave negligent advice to multiple British Steel Pension Scheme members will be forced into insolvency. This means that many such claims will then fall onto their Professional Indemnity (PII) insurers, where cover is available, or else onto the FSCS, where compensation is limited.
The FCA proposes that “For people who were advised by a firm that is insolvent or no longer exists (around 2,100), FSCS, rather than the firm who gave the advice, will assess claims.” Such compensation will also be subject to the limit of £85,000 per person, which will mean that many scheme members will be left substantially out of pocket.
The FCA also states that the proposed compensation scheme will not cover:
“People who have already accepted redress in full and final settlement following a complaint or past business review (PBR).
Customers of firms who have appointed a skilled person to carry out a PBR and who have been told that they can go to the Financial Ombudsman Service.
People who have already submitted a complaint to the Financial Ombudsman Service about unsuitable advice.”
However, many who fall into these categories may not receive full compensation for the actual losses incurred. For example, the Financial Ombudsman Service can only award capped compensation, which may not cover all losses in some cases. The blanket exclusion of these categories of people seems particularly unjust, since it is arguably the case that the regulator itself bears some significant responsibility for failing to adequately oversee the advisors involved.
The bottom line is that the FCA’s proposed scheme simply fails to ensure that those affected by the British Steel pension scheme mis-selling scandal are compensated in full. It therefore fails to fulfil its own stated aims. The failure by the FCA to create an effective, comprehensive and just redress scheme would only add insult to injury to those workers impacted by this scandal.
Such a failure would also inevitably lead to a long drawn out litigation battles, which could force many financial services firms into insolvency and cause a rise in Financial Services Compensation Scheme (FSCS) levies, which in turn could have a wider impact across the industry. The ongoing fallout from the pensions scandal already looks likely to lead to a host of legal battles, disruption and reputational damage across the industry.
The inadequate nature of the FCA’s proposed compensation scheme means that the fallout from the scandal looks only set to roll onward with increasing acrimony. For now, we can only hope that the responses to the FCA’s proposed scheme are sufficient to cause it to radically overhaul its proposed compensation scheme, and to instead introduce one which fully compensates all those impacted.
Ben Rees is Keller Lenkner UK’s technical director, in the Firm’s Investment Fraud and Mis-selling group. Ben has a wealth of experience in financial and legal services and specialises in regulatory matters, and is frequently enlisted as an expert witness in complex financial services litigation matters. Over the last decade, Ben has held a number of senior manager, controlled and regulated functions with both the FCA and the SRA.
Alessio Ianiello is an associate at Keller Lenkner UK, and works in the Firm’s Investment Fraud and Mis-Selling team on behalf of group and individual claimants. Alessio has extensive experience in handling FOS complaints and pursuing FSCS claims to recover client’s losses in relation to mis-sold pensions, investments, mini bonds and other financial products.