Background to the report
The British Steel Pension Scheme (BSPS) was a large Defined Benefit (DB) scheme sponsored by Tata Steel UK. After Tata Steel experienced financial difficulty, in 2017, the BSPS was restructured. Around this time, 7,834 members chose to transfer their benefits out of the scheme; 95% of these decisions were informed by independent financial advisers. Subsequently, there have been concerns that these members received unsuitable advice and may have made poor financial choices and lost significant sums of money as a result.
A wide range of bodies have been involved in the BSPS restructure, the regulation of the pensions and advice markets, and the provision of redress to affected steelworkers. This includes the Financial Conduct Authority (FCA), which regulates over 50,000 financial services firms and is responsible for supervising financial advisers, including the regulated advice provided to BSPS members. The Financial Ombudsman Service (the Financial Ombudsman) resolves complaints between financial services providers and their consumers. The Financial Services Compensation Scheme (FSCS) pays compensation to consumers in cases where a financial services firm is unable to pay claims made against it, because they are no longer in business.
Scope of the report
This investigation focuses on setting out how DB pension transfer advisers were regulated in the BSPS case and the extent to which compensation is being delivered to members who were affected. It sets out:
- what the BSPS was and what happened to it;
- how the FCA was organised to prevent, identify and respond to unsuitable financial advice in the BSPS case, and how this was undertaken in practice;
- what the FCA, FSCS and the Financial Ombudsman have done to resolve detriment experienced by BSPS members who were mis-sold pensions advice, and to what extent compensation has been delivered; and
- what the impact of the BSPS case has been on pension members, the regulatory framework and the Defined Benefit pension transfer advice market generally.
Concluding remarks and matters for consideration
A large number of BSPS members have suffered a significant degree of financial detriment after transferring out of the scheme. Whilst the total loss experienced by members is not recorded, for claims made to the FSCS the average individual loss is £82,600. Pension scheme members were placed in a vulnerable position and the communication and support provided at the time of the BSPS restructure was not adequate. Furthermore, the regulated advice market, which was intended to be a key protection against financial loss, failed to protect them adequately, with 47% of advice deemed to be unsuitable.
The FCA has put in place measures aimed at improving the regulation of the pensions advice market, such as a ban on charges where advisers are paid only if a transfer proceeds, and along with the Financial Ombudsman and FSCS is attempting to remedy the financial detriment suffered by BSPS members. However, the redress arrangements have not compensated all individuals fully, the costs of redress have impacted on the wider financial services industry and the number of firms providing DB pensions transfer advice has more than halved. This case demonstrates the costs and difficulties of remedying failures in financial services, the importance of preventing problems occurring in the first place and the inadequacy of the arrangements for protecting BSPS members during the DB pension transfer process. We have therefore set out matters for consideration aimed at strengthening preventative measures:
- The introduction of pension freedoms in the Pensions Schemes Act 2015 relied on a number of measures to protect consumers, such as the provision of financial advice. The FCA and HM Treasury should consider whether there are lessons to be learned about the way they work together to identify and mitigate any risks to consumers as policy is being developed.
- While the exact circumstances of the BSPS may not be replicated, the risk of large numbers of pension members looking to transfer out of a DB pension remains. The regulators and oversight bodies with responsibilities for protecting pension scheme members should consider what further changes can be made to minimise the risks associated with transferring out of a scheme. This should include consideration of key regulatory factors, such as the strength of existing safeguards to protect consumers in the DB pension transfer process; the regulatory data needed to support proactive intervention and the powers to collect this; and the mechanisms and approaches that can be used to communicate key messages effectively with less accessible firms and consumers.
- The FCA, the Financial Ombudsman and FSCS have undertaken a range of activities to raise BSPS members’ awareness of their right to complain and seek redress. Despite high levels of unsuitable advice, to date, only a small proportion of these members have made a complaint through the statutory redress organisations. The FCA, the Financial Ombudsman and FSCS should reflect on their experiences in trying to reach affected consumers to understand what worked well and what could be improved in future. This analysis should also feed into how they operate the new joint working framework, aimed at addressing similar issues that could have a wider impact across the financial services industry.