Financial Services Compliance Blog - Thistle Initiatives

FCA Redress Scheme and Dear CEO Letter – British Steel Pension Scheme

Written by Thistle Initiatives - Compliance consultancy | Aug 22, 2022 11:00:00 PM

What has happened?

In December 2021, the FCA’s Board asked for a consultation to be prepared on a redress scheme under s404 of the Financial Services and Markets Act for former members of the British Steel Pension Scheme (BSPS) who received defined benefit pension transfer advice.

Why is this happening?

The FCA consulted on this subject in March 2022, having gathered further evidence and following engagement with stakeholders. In the autumn or winter of 2022, the FCA intends to publish its final plans for the redress scheme and more information for affected firms.

The redress scheme will be limited to BSPS transfer advice. BSPS is a highly exceptional case, with the FCA’s analysis indicating significantly more unsuitable advice (47%) than was observed in reviews of higher-risk firms in non-BSPS cases (17%).

In a Dear CEO letter issued in December 2021, the FCA had set out its expectation that firms in the scope of a potential redress scheme (that is, those that gave BSPS advice between 1 March 2017 and 31 March 2018) should retain assets and should not try to avoid their regulatory responsibilities. Specific areas covered by this letter included;

  • The need for these firms to review their financial resources if they have redress liabilities,
  • The need for these firms to retain assets that may form part of their redress liabilities,
  • The need for these firms to accept their responsibilities, and in particular to avoid any attempt to apply to cancel their Part IV permissions, and also to carry out robust due diligence on any of their Controlled Function applicants previously involved with BSPS advice, and
  • That the FCA would contact these firms in early 2022 in order to confirm its understanding of the BSPS business written by them and to collect information to understand firms’ potential exposure to liabilities relating to BSPS transfer advice.

The FCA has warned firms that it will take action if a firm attempts to avoid redress liabilities. This warning was followed up in February 2022, when the FCA stopped AJH Financial Services Limited, a firm that advised on transfers from the BSPS, from disposing of assets without FCA permission. The FCA was concerned that AJH did not have sufficient financial resources to pay potential redress claims and appeared to have paid out dividends rather than retaining the assets.

The FCA commented, in relation to AJH, that “We will act to prevent firms from disposing of assets which may be required to pay redress. We will look to impose requirements where firms have not acted in accordance with the expectations in our Dear CEO letter or have attempted to phoenix or put in place structures to avoid potential redress liabilities. We will continue to monitor firms who have advised on BSPS transfers and take action where necessary”

The FCA sent a questionnaire to around 2,500 advice firms in January 2022, asking for details about defined benefit pension transfer advice given to British Steel members, The questionnaire was part of the FCA’s preparation and further analysis of advice given to members of BSPS ahead of its creation of the redress scheme.

If a firm said it did not provide advice, the questionnaire ended and simply required firms to confirm that the answers given were true and to sign the form. If a firm said it did provide advice, it needed to answer further questions. The form had to be submitted by February 10, 2022.

In August 2022, the FCA announced that new emergency asset retention rules now apply to 101 firms that provided pension transfer advice to former BSPS members; 26 of these firms are subject to an asset restriction.

The FCA announced emergency rules on 25 April 2022 to prevent firms that advised BSPS members to transfer their benefits out of the scheme from disposing of assets to avoid paying compensation under a potential consumer redress scheme. The rules came into force on 27 April 2022 and will continue until 31 January 2023. These emergency rules increase the likelihood that former BSPS members will get compensation directly from firms for any losses they suffered from being given unsuitable pension transfer advice. This will help make sure the firms responsible for these redress liabilities meet the cost of them, rather than the costs being borne by other Financial Services Compensation Scheme levy payers, and ultimately being passed on to consumers.

There are 101 firms in the scope of the rules, which apply to firms that provided pension transfer advice to BSPS members between 26 May 2016 to 29 March 2018, unless specifically excluded. Firms are out of scope of the requirements if they are:

  • a firm that provided BSPS advice during the relevant period to fewer than 5 BSPS members,
  • unlimited partnerships
  • sole traders
  • already subject to similar restrictions
  • dual regulated by the Prudential Regulation Authority, or
  • subject to an insolvency order

Under the rules, firms had until 27 May 2022 to complete an initial financial resilience assessment (FRA) to establish whether they had sufficient financial resources to meet potential BSPS redress liabilities. An initial FRA has been completed by all 101 in-scope firms. As of August, 26 of these firms confirmed they failed the assessment and so are subject to an asset restriction. This number may change as firms must complete the FRA every month or immediately following any material change in their financial circumstances.

How can we help you with reviewing defined benefit pension transfer advice?

If you’d like to know more about how we can help you with your back book reviews of any defined benefit pension transfer advice cases, or with any other regulatory compliance issues, our specialist team is here to help. Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.