UK mis-selling updates
Sign up to myFT Daily Digest to be the first to know about UK mis-selling news.
The UK’s financial regulator is considering triggering rarely used powers to force financial advisers to pay compensation to thousands of steelworkers who were victims of pension mis-selling.
In a letter to MPs earlier this month, Nikhil Rathi, chief executive of the Financial Conduct Authority, said he was looking at invoking its so-called Section 404 powers to help many of the 7,700 people who had received unsuitable advice when they transferred out of the British Steel defined benefit pension scheme.
Consumer experts said the power, last invoked in 2012, could lead to a compensation bill for financial advisers running into hundreds of millions of pounds after the workers swapped guaranteed pension benefits for cash lump sums which were transferred to riskier defined-contribution plans.
“We can exercise this power where we have seen evidence of a widespread, or regular failure by firms to comply with requirements which has resulted in consumer loss and where it is desirable to make rules for securing redress,” Rathi said in the letter to the Treasury select committee.
“This power represents a serious intervention in a market and can have far-reaching consequences when used.”
In the letter, the FCA disclosed that it had launched around 30 enforcement investigations against firms involved in providing pension transfer advice to members of the British Steel Pension Scheme (BSPS) going back to 2017.
Past business reviews by these advice firms, covering around 1,500 BSPS members who had received transfer advice, were also under way.
Because of their financial situations and the risks involved, the FCA’s view is that most people should avoid exchanging a final salary-style pension benefit — which pays a guaranteed retirement income — for a cash lump sum. By law this must be transferred to another pension arrangement, which includes personal pensions and other DC workplace pensions, before it can be accessed.
The mis-selling occurred after the Pensions Regulator allowed BSPS to be spun off from Tata Steel, its struggling sponsoring employer, in 2017.
As part of the restructuring, 42,000 members of BSPS were given three months to decide whether to stay in the scheme or transfer out. Just over 18 per cent opted to take the lump sum payment.
In a 2018 report, the Work and Pensions select committee found that the communications to BSPS members about their pension choices was “woefully inadequate”. It also criticised the FCA for having done “too little, too late” to address concerns about the suitability of advice given to those considering a transfer.
A subsequent FCA review of the advice that was provided found that only 21 per cent of transfer recommendations appeared to be suitable.
Mick McAteer, a former board member of the FCA, believes the conditions have been met for the regulator to invoke a redress scheme, last triggered for investors in the failed Arch Cru funds in 2012.
“Given that the FCA can use an S404 power where there has been widespread failure by firms to comply with requirements, it is difficult to see how the FCA can avoid this, given how few transfer recommendations were found to be suitable,” said McAteer, who is co-director of the Financial Inclusion Centre, a not-for-profit think-tank.
McAteer estimates that the compensation bill for steelworkers could be up to £350m if the FCA redress scheme were based on previous pension transfer mis-selling payouts.
The FCA said it would decide by the end of the year whether to invoke its S404 powers.