The FCA has played a critical role in the handling of the British Steel Pension Scheme (BSPS) scandal, and recent developments have once again thrust the FCA into the spotlight. The FCA has published its “main decision letter“, which addressed and rejected a complaint regarding its handling of the BSPS affair. We unpack this below and consider whether the FCA is justified in its “glowing” self-assessment.

Background

While there will be few people operating in the pensions industry who are not at least vaguely familiar with the history of the BSPS scheme, it is always helpful to rewind and put things into context.

Before finding infamy, the BSPS (not to be confused with the British Show Pony Society) was a large defined benefit (DB) pension scheme sponsored by Tata Steel UK (Tata). It was one of the UK’s largest private pension funds, with around 130,000 members and assets worth circa. £13 billion ($16.3 billion).

In 2016, Tata announced that it was facing financial difficulties and was looking to restructure the BSPS. As part of this restructure, members of the BSPS were presented with a “Time to Choose” exercise, offering them two options:

• remaining in the original scheme (renamed BSPS1) which would be transferred into the Pension Protection Fund via a Regulated Apportionment Arrangement (RAA); or
• transferring to a new scheme (BSPS2) which would provide the same benefits as BSPS, but with lower future increases.

Approximately 83,000 members opted to move into BSPS2, with 39,000 either failing to respond or opting to remain in BSPS1.

A total of 7,834 deferred members (that is, members who were no longer accruing benefits, and had yet to access their pension) opted out of both schemes. Instead, they elected to fully transfer their pensions out of the BSPS into entirely separate Defined Contribution (DC) schemes, where funds will not provide a guaranteed income and will be subject to investment performance fluctuations.

In order to transfer out of the BSPS, in accordance with the Pensions Scheme Act 2015, most members were required to take financial advice from an FCA regulated adviser. The FCA has estimated that 95% of the BSPS members who opted to transfer out received advice from an FCA-regulated firm, and that 46% of those transfers were guided by advice that was unsuitable, from advisers who were financially incentivized to advise the members to transfer.

As the regulator responsible for the regulation of financial advisers, the FCA has faced significant criticism from MPs and the media and has been the subject of a number of unfavourable reviews since the scandal started to make headlines in late 2017 / early 2018. These included the National Audit Office review published in March 2022, which noted that the regulated advice market had “failed to protect” pension scheme members and highlighted the importance of preventing problems rather than looking to rectify after the event.

Recent developments

In January 2023, a formal complaint about the FCA’s handling of the scandal was brought on behalf of 354 former BSPS members. The complaint alleged that the FCA:

• had been “consistently behind the curve” in responding to the impact BSPS transfers had on members;
• had failed to take steps to protect consumers in accordance with their own operational objectives of consumer protection (despite knowing these were likely to have been mis-sold);
• had not been sufficiently proactive in using its enforcement powers; and
• that its actions had resulted in inconsistent outcomes for those consumers entitled to compensation.

In its main decision letter published on April 19, 2024, which ironically took over a year to publish, the FCA broadly dismissed the complaint on the basis that:

• The FCA had taken appropriate action based upon the information available at the time and that there was sufficient guidance in place for advisers to ensure that the transfers were in the members’ best interests;
• The situation was fundamentally novel, and the times frames that members had to make a decision on whether or not to opt for BSPS2 were very short, so it was not reasonably possible for the FCA to have prevented harm from occurring; and
• That a complaints-based approach was appropriate, and that the FCA took steps to provide a sufficient level of security to consumers.

Our views

An assessment of the FCA’s handling of the BSPS scandal is in reality a question of politics, and how interventionist one considers a regulator should be; there are camps who argue the FCA did not do enough, and camps that consider their actions draconian.

Any evaluation of the FCA’s conduct must avoid the benefit of hindsight. The FCA’s regulatory framework is designed to provide presumptions and guidance which enable the FCA to take a more hands off approach. Specifically, the Guidance contains a starting presumption that a transfer from a DB to a DC scheme is unsuitable unless a firm is able to demonstrate that the transfer is in the client’s best interest. Beyond this, COBs 19 sets out in detail the FCA’s requirements of an advisor when advising on a pension transfer.

Unless the FCA had ignored and overlooked this framework, there is arguably little more it could have done in the way of prevention, short of somehow banning such transfers. Furthermore, the FCA took active steps to highlight the risk of transfers from BSPS as early as December 2017, when it worked with the scheme trustees to issue a letter to the members of BSPS who had requested a transfer value, to warn them to be careful when considering this option.

With the best will in the world, there is always going to be a delay between unsuitable advice being given and any sanction.

To argue that the FCA was behind the curve could be viewed as unfair (and the FCA’s letter in response to the complaint sets out in detail the work they completed on DB transfers in general (and BSPS specifically) following the advent of Pension Freedoms). Also, with the best will in the world, there is always going to be a delay between unsuitable advice being given and any sanction, as concerns will need to come to light, the advice will need to be reviewed and ultimately, a conclusion reached.

While the FCA itself has lamented the regulatory framework, and the lack of robust ‘naming and shaming’ powers, it would have been highly unfair to advisers if a proper process had not been followed at the relevant time, as this could lead to unfair punishments being meted out.  

It’s certainly true that the FSMA 2000 s404 redress scheme was not implemented until sometime after concerns became apparent, but it must also be remembered that this really was a “nuclear option”. An industry-wide redress scheme will affect good and bad actors alike, with considerable time and expense needing to be incurred to meet the requirements of such a scheme.

It should also be remembered that this was prompted (at least in part) by a relative lack of complaints being made by former members (one of the factors that led to the scheme being implemented using an “opt-out” rather than the more usual “opt-in” process). This was despite the FCA having contacted the transferred population on multiple occasions informing them of their right to complain. Whilst some former members undoubtedly received poor advice, this could simply mean that the majority of the transferred members were happy with the outcome of the transfer.

The fire caused by the BSPS scandal has cooled down, but it was a fire started by a combination of Pension Freedoms, Time to Choose and high relative transfer values for DB pensions at the time (a trend that has now been reversed). Some will undoubtedly argue that the FCA should have done more to put it out, but it’s hard to see what more could have been done without heaping yet more regulation onto an already very heavily regulated industry.

A full list of enforcement actions taken by the FCA in connection with the BSPS can be found in this article on GRIP.