Last year, we saw the FCA doubling down its efforts in the defined benefit transfers space. And 2022 will be no different. In fact, the FCA made a surprising U-turn at the end of 2021 with a ‘Dear CEO’ letter outlining its intention to consult on a redress scheme for British Steel Pension Scheme members who were advised to transfer – despite previous assurance this wasn’t on the cards.

Ultimately, this puts additional strain on an advice industry that’s already feeling the pressure from all angles.

Harry Eastwood, our Actuarial & Redress Director, examines what we know so far and gives his insights as to what firms need to do next as we wait to see the results of the FCA’s consultation.

Why is the FCA considering a redress scheme now?

The FCA has spent the past couple of years encouraging BSPS members who transferred out to complain about the advice they received. Measures included writing directly to members and holding clinics alongside the FOS and FSCS.

Nevertheless, the regulator clearly believes previous measures haven’t resulted in the right outcomes – out of the 8,000 members who transferred out, only a small proportion have complained, despite the fact the FCA believes over 50% of advice could be potentially unsuitable.

And let’s not forget this is a politically-charged issue. The FCA itself was squarely in the National Audit Office’s firing line back in October 2021, which may well have swayed the decision to open a consultation so late in the day.

What can we expect from the scheme?

We don’t know exactly what the proposals will entail. The industry has only ever seen one other consumer redress scheme on this scale – when 15,000 investors were given unsuitable advice to invest in Arch Cru investment funds back in the 2000s. It’s likely that the regulator will follow a similar approach and methodology as it did then.

Other redress schemes – for example, the review into the sale of Interest Rate Hedging Products (IRHPs) by banks to SMEs – included automatic redress for the sale of specific product types. It’s possible the FCA could mandate automatic redress for specific client circumstances, but that remains to be seen.

What does the FCA expect of firms?

The FCA’s ‘Dear CEO’ letter made a few things very clear:

  1. Firms must have adequate financial and non-financial resources (e.g. PI cover), and must notify the FCA asap if this isn’t the case.
  2. Firms that have advised on BSPS cases during the period between March 2017 to March 2018 must not enter solvent liquidation or dissolve the business without notifying the FCA first. Importantly, the FCA is considering regulatory action against firms that use insolvency or company law to avoid paying consumer redress.
  3. Firms must preserve assets and not attempt to dispose of any outside the usual, day-to-day expenditure of the business. This includes any unusually large dividend payments, the sale or transfer of any part of the business, or the sale of client data to CMCs.
  4. Firms should not avoid responsibilities by cancelling authorisations or applying for authorisation under a different legal entity.

What do I need to do now?

The main concern for most advice firms at this stage should be taking stock of your liabilities, understanding your solvency position and preparing for it.

Firms can’t escape their liability. In fact, the FCA has already been clear that firms who use compromises, such as Scheme of Arrangements, to avoid paying consumer redress could face regulatory action.

But firms can stay firmly in the driver’s seat by proactively addressing it. Ultimately, when the regulator does release the output of the consultation, the industry should be poised to offer swift and fair compensation to those former BSPS members who did receive poor advice and have suffered harm as a result.

Redress provisioning is a good place to start, which can help with your forecasting and planning. Provisioning calculations can be completed without any time-consuming data gathering, so experienced providers like TCC can turnaround cases quickly.

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