British Steel Pension Scheme – consumer redress scheme consultation

The Financial Conduct Authority (FCA) has notified firms which gave transfer advice to British Steel Pension Scheme (BSPS) members between 1 March 2017 and 31 March 2018 (the relevant period) of proposals to implement a consumer redress scheme.

That scheme will be governed under FCA’s rarely used powers under section 404 Financial Services and Markets Act 2000 (FSMA). Whilst the consultation paper will be issued before the end of March 2022, the ‘Dear CEO’ letter from the FCA contains various calls to action prior to its issue.

What is immediately striking is the hiatus of five years between when the FCA began its review of BSPS transfer advice and its conclusion that the standard of advice merits a redress scheme.

This requires explanation, as well as why the FCA may ask for files to be reviewed which passed its suitability criteria during inspection visits of the autumn and winter of 2017/18. Some may suspect that political pressure is driving regulatory behaviour. Criticism of the regulator is perhaps best left to another day but, in passing, key lessons from the regulatory failure during the personal pensions mis-selling debacle of the early 1990s may not have been learned.

Financial resources

Firms are reminded of the need to have adequate financial and non-financial resources  (professional indemnity  cover) under FG20/1 and to notify FCA “immediately” if a firm has inadequate resources. Firms may well be in difficulty in assessing their financial condition without any details of the review and will be concerned at falling victim to regulatory hindsight further down the line.

If a firm concludes that it either has, or is likely to have, redress liabilities,  it needs to consider its solvency position and “if necessary” (whatever the FCA considers that encompasses) seek the advice of an insolvency professional. The FCA requests that it be notified of “any such discussions as early as possible”. This wording is sufficiently wide to require firms to notify it of any discussions they have with an insolvency practitioner, regardless of their outcome. Any such discussions attracting legal professional privilege (those between a firm and an insolvency practitioner with no involvement of a firm’s lawyers will probably not do so), may be exempt from such disclosure as a matter of law, but the FCA may expect firms to waive privilege pertaining to those discussions. Whether by accident or design, the FCA’s letter made no mention of its wind-down planning requirements [WDPG 3.5].

Regardless of a firm’s assessment of its own liabilities, any firm which has advised on BSPS transfers during the relevant period is prohibited from entering into a solvent liquidation or effecting a dissolution without giving notification in advance. This perhaps either repeats or complements existing SUP15 notification obligations.

Preservation of assets

The FCA’s practice has been to ask various firms involved in BSPS transfer advice to enter into voluntary requirements (VREQs) containing undertakings designed to safeguard assets for the benefit of a firm’s creditors. The contents of VREQs are often negotiated between a firm and the FCA and have usually not been contentious; the FCA often agrees to a firm’s VREQ not being published.

The FCA is now seeking to impose unilateral obligations on all BSPS advice firms, the contents of which may differ in some respects from what a firm has agreed with them before.

In essence, day to day expenditure is not affected but payments of “unusual or significant amounts to the firm’s controllers, shareholders, directors, officers, employees or any connected persons” are. Arguably, this catches all dividend payments other than of a trivial amount. Firms are also prohibited from removing assets in anticipation of regulatory action or insolvency. The FCA has not expressly reminded firms of its previous statements about phoenixing and lifeboating.

Avoidance of responsibilities

Affected firms are also prohibited from applying to cancel their authorisations without first discussing their plans with the FCA, which will be easy for the FCA to police.

This section of the letter then migrates to what appears to be, at its most benign, a sterilisation of the careers and businesses of anyone “who gave advice to British Steel Pension Scheme members” during the relevant period, whether by acquiring control of an existing authorised firm or an appointed representative, any new authorisations or additional permissions.

This extends to SMCR vetting for “candidates who have a connection to giving advice to British Steel Pension Scheme members” during the relevant period (emphasis added). Questions about such personnel may well feature in future professional indemnity proposal forms. Whether or not this is a natural consequence of SMCR, this approach is difficult to reconcile with treatment of banking personnel responsible for perhaps more egregious activities causing greater and more widespread consumer harm.

Consultation

It will be interesting to see whether any aspects of the interest rate hedging product (IRHP) review undertaken by banks, including customer interviews to assess their understanding and experience and independent monitoring by a skilled person under Section 166 FSMA, will feature in its proposals. In the case of IRHP reviews, various scenarios (e.g. sale of structured collars) gave rise to automatic redress and it may be that the review will follow that approach for certain cases (e.g. transfers involving members under a certain age without compelling reasons). As ever, the devil will be in the detail.