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National Audit Office publishes scathing report on BSPS scandal

A National Audit Office (NAO) report has estimated that redress for British Steel Pension Scheme (BSPS) members has fallen short by £18 million due to constraints in the level of compensation that can be paid.

The NAO’s report, published on 18th March, investigated what led to the BSPS scandal and outlined suggested measures to prevent such a scenario from happening again.

Why is there such a compensation shortfall?

The NAO’s report says the average loss for BSPS claims resolved by the Financial Services Compensation Scheme (FSCS) is £82,600. Some scheme members have been fortunate enough to suffer no net loss after receiving compensation. However, others have lost up to £489,000, even after claiming compensation from the FSCS.

The main reason for the shortfall is the compensation cap on FSCS claims, which is:

  • £50,000 for claims against firms that failed before April 2019
  • £85,000 for claims against firms that failed after this date

While the FSCS has upheld claims to the value of £55.3 million, these caps mean it has only paid out £37.3 million, hence the £18 million shortfall.

Pension compensation claims go to the FSCS when financial advisers or firms go into liquidation; the NAO report said that 263 BSPS members had lost out due to this happening. In total, 22% of complaints made to the Financial Ombudsman Service (FOS), which can award compensation of up to £350,000, were passed to the FSCS, thus becoming subject to a lower compensation ceiling.

Gareth Davies, head of the NAO, said: “Although measures have been put in place aimed at improving how the pensions advice market is regulated and to attempt to remedy the financial losses suffered by British Steel Pension Scheme members, it is clear that many people have not been compensated fully under current arrangements.

“The BSPS case demonstrates the costs and difficulties of remedying failures in financial services and the importance of preventing problems from occurring in the first place.”

NAO: Financial advice industry unprepared

The NAO’s report said the financial advice industry wasn’t ready for the impact of the BSPS restructure, which subsequently led to the pensions mis-selling scandal. It highlighted several issues, including:

  • Financial advisers in steel-working areas had limited experience in processing large numbers of pension transfers
  • Many financial advisers didn’t respond appropriately to the uplift in demand for their services
  • Most financial advisers were incentivised to recommend pension transfers out of the BSPS, even if a transfer wasn’t in the best interests of the scheme member

The statistics surrounding these transfers are damning:

  • 47% of BSPS pension transfers saw unsuitable advice given
  • In a further 32% of transfers, the advice given was unclear

In contrast, according to the Financial Conduct Authority (FCA), the industry average for the defined benefit (DB) pension transfer market is far lower, at 17%.

While the FCA has since put measures in place to enhance regulation in the pension transfer market, including banning contingent fees, several MPs have been critical of the regulator for not being better prepared to prevent the BSPS scandal in the first place.

Labour MP Nick Smith told FT Adviser that the FCA “failed to get a grip on this scandal at the outset,” accusing the body of being too London centric and thus missing what he called the “large scale rip offs” happening to steelworkers elsewhere in the United Kingdom.

Of the FCA, Smith told FT Adviser: “It was totally unprepared for this scandal, with scarce insight into what was happening in the BSPS. By the time they got involved it was too late. Over the subsequent four years, communication has been woeful. Not nearly enough was done to make steelworkers aware of their rights to raise complaints and seek compensation.

“Not enough has been done to hold those responsible for this scandal to account, not just the advisers but also their introducer cronies who have so far evaded action. I believe that many of these instances involved conspiracy and possibly warrant prosecution as criminal cases.”

Another Labour MP, Stephen Timms, the chair of parliament’s Work and Pensions committee, said the NAO’s report proved that BSPS members were “failed by an inadequate financial regulation framework.”

While Timms has spoken in support of the FCA’s strengthening of regulations and punishment of advisers and firms where necessary, he also argues it isn’t right that victims of transfer mis-selling or poor advice should miss out on receiving compensation for all they have lost.

What actions have the NAO suggested?

The NAO’s report outlines several suggestions concerning both the FCA and the Treasury. It also warns that while the circumstances leading to the BSPS scandal may not be replicated, there are still large numbers of savers looking into pension transfers.

In its report, the NAO wrote: “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.”

FCA comments but highlights that there may be a long way to go for BSPS claims

According to FT Adviser, an FCA spokesperson commenting on the NAO report said: “We welcome the report, which highlights the complex issues for government and regulators which arose from the exceptional circumstances around BSPS and the framework for pension freedoms. 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.

“We’ve taken significant action, including since the Rookes Review in 2019 to support them already and are preparing to consult on a consumer redress scheme for BSPS members by the end of March.

“We’ve already acted to raise the standard of pension transfer advice more generally – by introducing new rules, as well as working with our partners to ensure that consumers are supported to make decisions about their pension.”

The FCA also says that only 25% of BSPS members who transferred out of the scheme have sought redress. The regulator is expected to launch a consultation into whether it should launch a consumer redress scheme for BSPS members by the end of the month.

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