Ben Rees, Technical Director of the Investment Fraud & Mis-selling group, argues for a better government response to pensions mis-selling in Law 360.
Ben’s article was published on 14 September 2022 and can be found here.
Pension mis-selling is a pervasive and widespread problem in the UK. Legislative changes such as the Pension Freedoms introduced in 2015 inadvertently paved the way for mis-selling by rogue intermediaries and advisers on an industrial scale.
The introduction of pension freedoms removed tax restrictions that ensured that the majority of retirees were forced into annuities that had become financially unattractive, and made it far easier for people to move their defined benefit pensions into defined contribution schemes.1 This resulted in some unscrupulous advisers offering unsuitable or misleading advice. These freedoms helped precipitate the 2017 British Steel Pension Scheme mis-selling scandal, where some 8,000 workers transferred £2.8 billion from the company’s pension scheme to less secure pensions.
The latest mis-selling scandal to come to light involves a Qualifying Recognised Overseas Pension Scheme (QROPS). The Treasury developed these pensions in 2006 for British overseas workers. HMRC found that ten years after their introduction, 101,700 pensions valued £9.7 billion were transferred to QROPS.
It is now becoming clear that QROPS were, in a significant number of cases, used to facilitate both scams and pensions mis-selling on a remarkable scale. A significant investigation recently conducted by the Sunday Times found that there had been cases of mis-selling alleged by British expatriates in France, Greece, Spain, Switzerland, South Africa, Thailand, Australia and the United Arab Emirates.4
Many expats have been left shouldering substantial losses. Class actions are now being launched against some of the companies involved. British expatriates are claiming that financial advisors intentionally provided dubious advice on QROPS while operating overseas, where they were outside of the Financial Conduct Authority’s regulatory reach.
A class action worth up to £200 million has been launched in the Isle of Man High Court on behalf of 800 British expats. The defendants are Royal Skandia Life Assurance Ltd, which is now part of Utmost International, and Friends Provident International Limited, which is now part of RL360. These subsidiary firms are accused of creating products that break regulatory standards in multiple jurisdictions, and of failing to report wrongdoing. This case may just be the first of many similar cases to come. It has been reported that some expats who transferred their pensions into QROPS wrongly believed that the pensions schemes they transferred into were approved by the British government. Others appear to have been misled into thinking that the schemes they were transferring into were low risk, when they were in fact high risk.
Niall Coburn of Coburn Corporate Intelligence was invited by the Work and Pensions Select Committee to make submissions to it during its 2020 investigation into pension scams. The overview of his written evidence to the committee put forward his view that the FCA failed in its duty to prevent companies from selling high-risk investments.
The FCA responded to the British Steel scandal by telling the BBC that the UK watchdog has “introduced new rules to raise the standard of pension transfer advice and we’re taking action, both with individual firms and across the sector, to ensure that where consumers lost out because of unsuitable advice they receive compensation.” However, in the case of the QROPS scandal, many of the firms and advisors involved were unregulated, or based overseas, which means that victims may struggle to easily achieve compensation.
Pension mis-selling takes a variety of different forms, including the common transfer of defined benefit (or final salary) funds. This is where victims are given misleading advice which results in them giving up the various guarantees and protections of the defined benefit scheme. This means they will almost invariably be left bearing losses, unless the recommended investment strategy performs extremely well for extended periods of time.
Another common form of mis-selling involves inappropriate and sometimes even fraudulent advice being given in the context of investments recommended within SIPPs and Small Self-Administered Schemes (SSAS). In other cases, pension holders are advised to over-draw on their pensions so that the funds dry up long before they die.
Other times, we see negligence by advisors in terms of appropriately assessing a client’s objectives and requirements, which can lead to unsuitable recommendations being made. Some unscrupulous firms charge excessive costs and charges when carrying out a recommended transfer. Other advisers unnecessarily churn pensions from provider to provider in order to generate fees and commissions, which is to their own benefit, but which causes losses to clients.
The negative outcomes resulting from pension mis-selling arise over both the short-term and the longer term. In the short term, the rolling series of mis-selling scandals we have seen in recent years reduces public confidence in the financial advisory profession as a whole. Needless to say, mis-selling also harms consumers and their families directly when their pension funds are decimated.
The long term consequences of pensions mis-selling are that it disincentivises people to invest in pensions at all. It also may turn off consumers from taking professional investment advice more generally, out of fear of being scammed or wasting their money on unnecessary fees. This increases peoples’ chances of ending up with a sub-standard retirement fund.
This in turn means that they will tend to become more reliant on the state during their retirement. Mis-selling scandals can also result in the taxpayer picking up the bill. For example, the British Steel Pension Scheme scandal prompted the government to set up a dedicated compensation scheme for those who were affected but who could not obtain full compensation elsewhere. The public interest in finally tackling pensions mis-selling is abundantly clear.
The government response must be swifter and more effective than it has been to date. Regulators need to deal more effectively with whistleblowers, and act fast in order to prevent losses before they are incurred. To deter wrongdoers, regulators should be active in pursuing more criminal investigations and prosecutions. Of course, only a small minority of advisors act improperly, but these few are damaging the reputation of the entire financial advisory sector.
It is remarkable that the FCA has failed to adequately tackle financial advisers who conceal improper activities within the labyrinthine British pension transfer market. It is all often the case that by the time the FCA takes meaningful action, millions of pounds worth of pensions have already been mis-sold.
In June 2022, the House of Commons’ public accounts committee recommended a review of the FCA’s regulation of the pension transfer market. The committee’s report into the British Steel scandal was highly critical of the regulator’s performance. The committee of MPs found that “the regulatory system left British Steel Pension Scheme members open to being manipulated by unscrupulous financial advisers who personally profited from giving bad advice”. It also suggested that there may still be thousands of cases of pension mis-selling that remain undetected.
Even where the government has introduced potentially useful reforms, the manner of their implementation can render them ineffective. For example, in November 2021 the government introduced new regulations requiring pension trustees to pause or block the transfer of a pension if they suspect the member of the retirement scheme is being misled. The consumer impacted is then put in contact with the Money and Pensions Service’s (MaPS) dedicated Pension Wise service for further guidance.
MaPS carried out a breakdown of 2,875 referrals made between April and June 2022, which found that 37% of transfers were paused due to investments in overseas funds. A further 10% were paused due to vague or high fees. However, in 44% no reason was given at all. If no reason is given, then the regulators will obviously lack the information required to identify scams or misleading practices and tackle them early. A truly robust, data driven, well-funded regulatory regime is required in order to finally put an end to the pensions mis-selling scandals we have seen emerge in recent years. Sadly, the governmental response we have seen to date has typically been too little, too late.
The reality is that pensions mis-selling scandals will continue to come to light for the foreseeable future. These have ultimately arisen due to both inadequate regulatory enforcement and unwise legislative innovation in UK pensions law that created opportunities for unscrupulous advisors to mis-sell pensions. The government needs to firmly address both of these factors in order to effectively clamp down on pensions mis-selling.