Alessio Ianiello explores the fallout from the British Steel pensions mis-selling scandal

Associate Alessio Ianiello explores the fallout from the British Steel pensions mis-selling scandal, highlighting the need to address regulatory failures and negligent advice to prevent future scandals.

Read Alessio’s article below.

In 2017, thousands of members of British Steel’s pension scheme (“BSPS”) were advised to transfer their existing defined benefit pensions scheme, commonly referred to as a “final salary pension”, into self-invested personal pensions. The resulting scandal has led to considerable financial and legal fallout over the past five years.

This scandal was sparked after BSPS members were issued a deadline of December 2017 to decide whether or not to move their defined benefit scheme to a new scheme, or alternatively to keep the existing pension fund which would then be restructured.

During that period, an estimated 8000 BSPS members transferred their pensions, with a collective transfer value in the region of £2.8 billion. Shortly afterward, concerns were raised that led to the discovery of a large-scale operation of mis-sold pensions advice. The FCA waded into the scandal and reached out to some 7000 former BSPS members, advising them to have any financial advice that they received regarding their pensions be professionally reviewed.

Those who may have suffered negligent advice relating to BSPS should be mindful of the quality of the documentation of the advice they were given. They should also consider the integration of advice and wealth management, and scrutinise the quality of the wealth management solutions offered to them by their advisers.

The aftermath of the BSPS scandal has resulted in thousands of pension mis-selling claims being referred for the consideration of an already backlogged Financial Ombudsman (FOS), whilst concurrently imposing a significant burden on the Financial Services Compensation Scheme (FSCS), which became the lifeboat fund for claims against beleaguered financial advisory firms, many of whom collapsed in the wake of the scandal.

Despite the involvement of regulators, many former BSPS members will unfortunately never truly have full access to justice. Even more importantly, a large number of former BSPS members will never receive the full amount of compensation which they are rightly due as claims against collapsed advisory firms have a redress cap to the FSCS maximum of £85,000 per investor. This is important when considering that some of the former BSPS members’ losses have been valued at approximately £500,000.

An October 2021 report stated that only 1200 of the 8000 BSPS members believed to have been affected had complained to either the firm, the FOS or the FSCS. However, this figure is problematic for two reasons. Firstly, it suggests that there are still a huge amount of BSPS members who have not yet had access to justice – emphasised further when we consider that 85-90% of complaints have been upheld.

Secondly, this figure will only continue to rise as the scandal unravels, which will apply further pressure on the already overwhelmed regulatory redress schemes, and will ultimately result in increased levies.

The FCA’s role in the scandal has deepened of late, with the watchdog invoking emergency powers on 26 April 2022 to prevent financial advisory firms involved in the scandal from offloading their assets to avoid paying compensation. The FCA now requires firms to provide confirmation to the regulator that they have sufficient assets to pay their share of any potential compensation bill – something the FCA estimates will be in the region of £71 million.

This latest development is only the fourth time that these emergency powers have been used in the past eight years, and came some four months after the FCA first wrote to the CEOs of the affected advisory firms, warning them not to do anything to avoid redress responsibilities.

Estimations suggest that the FCA’s emergency powers will affect some 90 advisory firms involved in the BSPS scandal. However, it is important to consider that these powers only extend to firms which advised five or more BSPS members to transfer out of the scheme between May 2016 and March 2018.

Whilst the FCA’s decision to invoke these emergency powers has been praised by former BSPS members, the regulator has also attracted considerable criticism, with many questioning whether its actions are “too little, too late”.

Indeed, the FCA should really have invoked these emergency powers when news of the scandal broke in 2017, rather than some five years after the event. The regulator’s delay in invoking these powers is a disservice to those claimants affected by the scandal, especially those in situations where their original advisory firms have already transferred assets out of the business in order to avoid paying the compensation claims.

The FCA’s tardiness when invoking these powers will no doubt have a long-term impact on the FSCS, which has become the workhorse burdened with the liability of processing and meeting the claims against financial advisory firms which have already defaulted.

If the FCA is really serious about its intervention and ensuring that all those affected have access to justice, they should remove the limit that restricts these emergency powers to firms which advised five or fewer BSPS members to transfer out of the pension scheme, as otherwise there will be a number of claimants who will not be left out to cold and will not feel the benefits of the regulator’s intervention.

The FCA’s arrival on the scene also included the announcement of the BSPS redress scheme, with the watchdog’s first consultation on the scheme published on 31 March 2022. As part of its consultation process, the FCA is currently reviewing guidance issued to firms on how to calculate redress for unsuitable and negligent defined benefit pension transfers. The FCA will consult on these detailed rules for redress calculations in July 2022, with the main BSPS redress scheme set to begin in early 2023.

The redress scheme itself will apply to advice that was issued to BSPS members between 26 May 2016 and 29 March 2018, and will require financial advisory firms to take a three-stage approach.

Firstly, firms must conduct pre-scheme checks, and will need to identify the population of potential cases that fall both in and out of the scope of the redress scheme. Secondly, they must undertake a suitability assessment, which will require firms to assess the suitability of advice issued to the member using the FCA’s proposed BSPS Defined Benefit Advice Assessment Tool (DBAAT). Finally, if the advice is determined to be unsuitable, firms must appropriately calculate and pay redress to the former BSPS member.

The FCA’s BSPS redress scheme focuses on obtaining further redress from the advisory firms, which on the face of it appears to be good news for former BSPS members as it will enable them to access higher levels of redress. However, questions have been raised as to whether in reality an increase in redress levels may only push more advisory firms to the point of collapse, leaving even more claims to be met by the FSCS.

Current estimations suggest that the BSPS redress scheme will add a further £20 million to the FSCS’ redress bill, which will of course have ramifications for the wider financial advisory industry, and will lead to increased FSCS levies paid by “good” firms who had no connection to the mis-selling scandal.

Ultimately, lessons must be learned from the BSPS scandal, and the event should bring about true change to the industry. The fight for justice experienced by former BSPS members has gone on for far too long – five years have now passed since news of the mis-selling broke, and the financial advisors responsible are still avoiding any criminal penalties.

Whilst it is easy to focus on the advice issued by rogue advisory firms, we should not overlook the responsibilities of the BSPS trustees who allowed all of these transfers to take place. It has been widely reported that representations were made by a number of experts to the BSPS trustees about the deluge of transfer requests. However, these experts were not informed of the history of transfers from the scheme, and relied on historic confidence.

Most of the main offenders in terms of advisory firms appeared on directories to which the trustees referred members in relation to their pensions. Many of the firms that once appeared in the directories have since collapsed, and their PI policies have lapsed. A prime example of this is Active Wealth Management, one of the leading independent financial advisors detailed within these directory, has since defaulted and claims are now being considered by the FSCS.

Above all else, the scandal has shown that we need more regulation, rather than legislation. Whilst legislation is part of the issue, regulation remains the key to preventing a similar scandal from occurring again in the future. Arguably, the entire scandal may well have been prevented had the FCA actively regulated this sphere, rather than the reactive approach which they commonly adopt too long after the damage had been done. Most importantly, increased regulation would have prevented the considerable distress that thousands of former BSPS members have faced over the past five years and will continue to suffer long into their retirement.