Being the victim of a massive financial scandal must be as frustrating as it is heartbreaking. While the heartbreak comes from potential financial ruin, the frustration develops through not knowing when, or even if, one will receive compensation.
British Steel workers have waited years for good news about their missold pensions and they finally seemed to get it, late last year, in the shape of the Financial Conduct Authority’s redress scheme. This aims to restore individuals to the financial position they would have been in if they had remained in the British Steel Pension Scheme (BSPS).
This scheme adversely affects BSAG members but indirectly sets a precedent
In November 2022 the FCA published its final rules that confirmed it would proceed with the implementation.
The redress scheme is set to commence on 28 February, so advice firms will have to be ready by this date.
The regulator stated that 352 advice firms were in scope of its compensation proposals. It estimated these comprised three large firms, 24 medium-sized firms and 325 small firms.
Those firms will have until 28 March to identify and write a letter to all BSPS consumers within scope of the redress scheme. The letter must explain that the consumer’s advice firm will review the advice given to transfer out of the BSPS (unless the consumer decides to opt out).
It would have been better had a fixed set of economic assumptions been applied
If a particular case falls outside the scope of the scheme, the letter must explain that the consumer may still be able to make a complaint in certain circumstances.
The FCA stressed that advice firms must consider the cases of all BSPS consumers who had not opted out of the redress scheme, and contact them with the outcome of the review, by 28 September.
Firms must pay redress within 28 days if the advice was unsuitable and if the consumer has accepted the redress offer.
The regulator estimates that around 1,100 BSPS members who received unsuitable advice will receive compensation, amounting to a total of £49m. Of this, firms are expected to pay redress of £33.6m and the Financial Services Compensation Scheme will pay £15.4m.
We took into account extensive stakeholder feedback
The FCA believes 90% of advice firms in the redress scheme will be able to complete their payouts without becoming insolvent.
What has changed?
For Echelon Wealthcare principal Al Rush, the changes in the final rules are “more evolution than revolution”.
He says: “Most of the modifications are sensible. As time passes, the circumstances in society change. The changes just reflect that.
“There’s nothing drastically big or dramatic about it. Most of it is just common sense.”
Clarke Willmott senior associate Damian Pitts observes two significant changes since the consultation was published on 30 March 2022: the application of the assumption relating to marital status at retirement in the new redress methodology; and how the allowance for product/adviser charges will be applied.
There are many who have had compensation, but it’s been low or incorrectly done
The FCA expects firms to take account of adviser charges when calculating redress. In November, it warned it would tackle firms that did not properly calculate defined benefit (DB) transfer compensation.
Pitts, in fact, finds the redress scheme underwhelming in some regards.
He says: “It is disappointing that the redress scheme does not cover all steelworkers who received unsuitable advice to transfer.
“The reason why steelworkers in the North were left behind is because many transferred out of the BSPS in early and mid-2016 and the scheme only covers those steelworkers who transferred out after 24 November 2016.
“Any steelworker who transferred out before 24 November 2016 and who has not already filed a claim is now out of time.”
The BSAG believes the scheme is being used to deflect scrutiny of the role of the FCA
It is a point Clarke Willmott partner Laura Robinson raised shortly after the publication of the consultation paper.
Pitts also finds it disappointing that the FCA has applied general redress methodology, applicable to all DB schemes, in the redress scheme for steelworkers.
However, more significant for Pitts is what the FCA has not changed in its final rules, rather than what it has.
“We understand from actuaries we speak to that the prevailing economic conditions have the greatest impact on the amount of redress a person may receive at a given point, and the changes to the redress methodology do little to cushion the impact of a harsh economic climate,” he says.
Dire economic circumstances
The UK economy has been through a lot over the past year, with inflation at its highest since the early 1980s due to an energy shock, among other things. The changes in the Bank of England (BoE) base rate and the long-term gilt yields are affecting the compensation steelworkers can expect.
We need to meet strict legal tests to implement a redress scheme
The BoE base rate stood at 1.25% when the consultation for the redress scheme closed on 30 June 2022, but increased to 3.00% on 3 November 2022 and hit 3.5% on 15 December.
Also, long-term (15-year) gilt yields increased from 2.4% in late June 2022 to 3.48% on 25 November and 3.9% on 20 December.
Rush says: “When [former chancellor] Kwasi Kwarteng gave his emergency Budget, the gilt yields rocketed and then went down again. Members who have had their compensation calculated in that pocket would be disadvantaged because the yields went down again.
“At the moment, it depends on the day of the week you get your compensation calculated.”
It’s the old premise: you leave no man behind
As a result, Clarke Willmott is also disputing the way compensation payments are being calculated.
Pitts says: “The methodology for calculating redress is heavily influenced by economic conditions at the time of the calculation and the BSPS redress scheme does nothing to mitigate that issue as it pertains to calculating steelworkers’ losses.
“We are seeing steelworkers, whose circumstances are almost identical, receiving markedly different amounts of compensation just because their losses were calculated at different points in time.
“We also think it is unfair that the risk of compensation being too low falls onto the shoulders of the steelworkers. We think it would have been better had a fixed set of economic assumptions been applied to redress for BSPS members so that the compensation each steelworker received was directly comparable to what his or her colleagues received.”
Many of the victims will be directly affected if the judicial review succeeds and there is no compensation scheme
But the FCA disagrees that its redress scheme fails to consider changes in economic circumstances. The regulator explained it had taken into account “extensive” stakeholder feedback from the consultation process in deciding to introduce the scheme.
For the City watchdog, redress payments aim to ensure those who transferred out of their pension receive a retirement income in line with what they would have received from their original DB scheme. To do so, they must calculate how much it would cost to buy a guaranteed income through an annuity.
A spokesperson for the FCA says: “Changing economic circumstances affect the cost of annuities. So, when annuities cost less, the amount of redress required to secure a guaranteed income similar to what would have been received through a DB scheme is less.
“Each redress calculation therefore responds to the changing economic environment as well as to people’s individual circumstances.”
For most steelworkers, the best course will be to pay any redress into their DC scheme
While calling for the redress scheme to be scrapped, FS Legal — which represents the British Steel Action Group (BSAG) — has similarly argued that the scheme does not “properly” take worse economic circumstances into account.
It is one of the reasons FS Legal listed in its application at the Upper Tribunal (Tax and Chancery Chamber) for the BSPS redress scheme to be overturned.
Advice firms strike back
The BSAG represents firms that advised members of the BSPS during the ‘Time to Choose’ exercise in 2017. This group has been set up over concerns about the regulator’s approach to compensation related to the BSPS.
In August 2022 the BSAG fired a warning shot, stating it would take legal action if the FCA decided to implement the redress scheme.
The first people who had the courage to come forward when it was more difficult are the ones we think should not be overlooked
Apart from the consequences of the change in economic circumstances, the BSAG disagrees with the number of unsuitable advice cases the regulator upheld. The FCA found 46% of the advice it reviewed related to the BSPS was unsuitable.
The BSAG has particular concerns about the scoring of 65 files called “Group 2” by the FCA. The regulator scored 28 of these as “unsuitable”, but the BSAG found a lower number — 15 — in that category and asked independent industry experts to review them.
The output of these re-reviews reversed the “unsuitable” assessment to “suitable” or, in a handful of cases, to “unclear”, it alleged.
FS Legal partner Gareth Fatchett said the FCA had not disclosed information about the tools, methods and processes used to assess suitability. Nor had it shared information about the independence of data, differing data entry cohorts and the different Conduct of Business rules.
We are confident that our decision to set up the scheme is appropriate
Fatchett added there might have been a significant number of unsuitable advice cases but he did not believe the advice could have been so uniformly unsuitable.
On 26 August 2022 the FCA replied: “We need to meet strict legal tests to implement a redress scheme. An independent QC has advised that these tests have been met.
“We have also carried out a robust analysis of a sample of the suitability of advice to former British Steel members, supported by independent analysis from a respected statistician.
“We have consulted widely on the scheme and are currently considering responses before making a final decision on whether to proceed.
“The circumstances around British Steel Pension Scheme transfers were exceptional, with former members receiving significantly higher levels of unsuitable advice compared with other cases. However, firms that have provided suitable advice, and are able to demonstrate they have done so, will not have to pay redress.”
There has to be clarity on how these processes work and we hope this case will achieve this
In a letter to the regulator dated 30 November 2022, Fatchett requested a range of documents and information.
He gave the FCA a 14-day deadline to reply and said the BSAG would also challenge the regulator if it failed to re-consult.
As the FCA did not answer favourably to this request, the BSAG took legal action against the regulator via FS Legal shortly before Christmas.
The BSAG is challenging the FCA’s policy statement (officially known as PS22/14 Consumer redress scheme for unsuitable advice to transfer out of the British Steel Pension Scheme) and its “inadequate response” to the request for a re-consultation.
The outcome the BSAG is seeking is that the FCA should permanently withdraw PS22/14 and provide public confirmation of that withdrawal.
A redress scheme that will generate minimal redress has little benefit, other than to virtue signal
Fatchett says: “The BSAG strongly believes that the scheme is being used to deflect scrutiny of the role of the FCA during the ‘Time to Choose’ exercise.
“It is very telling, after the FCA ran roadshows and wrote direct to clients, that a significant number of clients steadfastly refuse to engage in bringing claims. The reason for this, we believe, is that the clients were happy with the advice they had received.
“The BSAG has asked the Upper Tribunal to quash the proposed redress scheme. Whether this happens or not, time will tell. What will be interesting for every regulated firm is the extent to which the FCA has gone to shape the data to justify its actions.
Unfortunately, any legal challenge has the potential to delay steelworkers receiving appropriate redress
“This scheme adversely affects BSAG members but indirectly sets a precedent for future schemes. There has to be clarity on how these processes work and we hope this case will achieve this.”
Fatchett adds: “The FCA took its redress data in its policy statement from Q3 2022. But the mini-Budget of 23 September 2022, and the knock-on effects to the economy as a whole, have made redress numbers shrink.
“A redress scheme that will generate minimal redress has little benefit, other than to virtue signal.”
The FCA, however, has outlined its intention to defend its redress scheme, and has warned of the consequences for steelworkers should the redress payments be delayed.
A spokesperson for the regulator says: “We are confident that our decision to set up the scheme is appropriate. In making our decision, we took into account extensive stakeholder feedback from the consultation process. Our reasons are set out in detail in our policy statement.
An independent QC has advised that these tests have been met
“We will vigorously defend our decision. Unfortunately, any legal challenge has the potential to delay steelworkers receiving appropriate redress.
“It would not be appropriate to comment on the detail of matters that may be subject to legal proceedings.”
Second judicial review
Although the BSAG effectively has taken legal action against the FCA, another party is mulling over whether to begin its own judicial review. Indeed this is one of three options Al Rush is considering.
Hausfeld partner Ned Beale, who represents Rush, says they think the FCA’s redress scheme does not go far enough. Two aspects worry them.
Each redress calculation responds to the changing economic environment as well as to people’s individual circumstances
First, the scheme is not retrospective. As a result, there is no route for steelworkers who have already received compensation to have it reviewed and adjusted if necessary.
Rush says: “There are many who have had compensation, but it’s been low or incorrectly done.
“It’s the old premise: you leave no man behind. The first people who had the courage, dare I say it, to come forward when it was more difficult are the people who we think should not be overlooked.”
The other aspect is the basis on which the regulator has advised that compensation should be calculated.
A spokesperson for the FCA says: “For most steelworkers, the best course will be to pay any redress into their DC [defined contribution] scheme.
Applying new rules to earlier cases that have been resolved would be at odds with the general presumption that legislation does not apply retrospectively
“Our methodology works out how much money a consumer should have in their DC pension today so that, when they retire, they can buy an annuity that provides a guaranteed income similar to what they would have received from their DB scheme.
“It is, therefore, necessary for the methodology to make assumptions about future annuity prices and investment returns to estimate this amount.”
The FCA regards this method as consistent with the approach a court would take to calculating damages in cases like this. It ensures that the assumptions it requires firms to use are based on robust, publicly available data from reputable sources, such as the BoE.
The regulator stresses that the alternative approach, which is to wait until the consumer has retired to calculate redress, is not practical.
The FCA spokesperson adds: “This would depend on the firm continuing to trade until the consumer’s retirement date. As this could be many years in the future, it would not be possible to be certain about this.
We think it is unfair that the risk of compensation being too low falls onto the shoulders of the steelworkers
“We did not include people who had already accepted compensation in the scheme as they have already received redress.
“Applying new rules to earlier cases that have been resolved would also be at odds with the general presumption that legislation (including regulators’ rules and guidance) does not apply retrospectively.”
Alternative actions
Apart from a separate judicial review, Beale and Rush are considering two alternative options. One is to become part of the judicial review initiated by the BSAG, as an interested party or intervener.
Beale says: “The judicial review rules provide that, if there are parties who will be directly affected by the outcome of a judicial review, they can apply to be interested parties.
“Many of the victims, who we represent, will be directly affected if the judicial review succeeds and there is no compensation scheme.”
The other option is to continue the process of liaison that Rush and Beale have had with the FCA.
At the moment, it depends on the day of the week you get your compensation calculated
“We have had meetings with them and some of the things that we’ve wanted have been put in the scheme,” Beale adds.
Beale and Rush have set the end of February as their deadline to move to the next step.
Therefore, although the FCA has decided to proceed with the implementation of the redress scheme, there are still several challenges ahead.
It remains to be seen whether the scheme starts on the agreed date — if at all.
Damian Pitts, senior associate at Clarke Willmott, on the issue of professional indemnity insurance:
One of the particular issues we have encountered [in this BSPS case] is the insufficiency of professional indemnity insurance within the professional advice industry.
Many of the respondent businesses have become insolvent because they did not have cover for BSPS cases.
This is because the insurers removed BSPS cases from their standard cover once they became aware of the issue, leaving many firms to be uninsured in relation to BSPS cases at the time when such claims were being notified.
Many respondent businesses have become insolvent because they did not have cover for BSPS cases
As solicitors, we are not permitted by our regulator to carry professional indemnity insurance that doesn’t cover any and all historical advice.
So it is a frustration to us that the FCA does not insist that either the insurers must provide adequate cover for all previous advice given by a firm, or a business must have cover in place for all historical business it may have written.
Damian Pitts is senior associate at Clarke Willmott
This article featured in the February 2023 edition of MM. If you would like to subscribe to the monthly magazine, please click here.
But, as ever, the FCA still hasn’t disclosed the identities of the “stakeholders” it consulted (were there five or five hundred of them?), what questions were put to them (they may well have been slanted in such a way as to make it very difficult to respond in such a way other than in accordance with what the FCA wants to support its position) and what (in full) were those responses (all of them, not just a select few)? Without such information in the public domain for all to see and to debate in open forum, the FCA’s claim might well be open to the accusation of being largely fiction or, at the very least, that its consultation has been reverse engineered in such a way as to produce the feedback that it wanted from the word go.
What would be the FCA’s reaction to a claim from the BSAG that the results of its own extensive consultation with stakeholders show strong disagreement with the redress methodology currently proposed and that the FCA is seeking to impose verdicts of unsuitability that, in the overall scheme of things, don’t take account of all the relevant considerations and therefore aren’t really valid? That question, of course, is rhetorical.