FCA urged to utilise PPF in BSPS compensation

The Personal Investment Management & Financial Advice Association (PIMFA) has said that members who were wrongly advised to transfer out of the British Steel Pension Scheme should be transferred into the Pension Protection Fund (PPF).

In its response to the Financial Conduct Authority’s (FCA) consultation on a potential £71.2m compensation scheme, PIMFA said that past BSPS members should be given an opportunity to be put back in the position they would have been had they not transferred out.

This would require past members of the BSPS to be placed into the Pension Protection Fund (PPF), which would pay out the guaranteed income those past members had given up, in line with similar suggestions recently made by the Personal Finance Society.

However, advice firms would still be required to pay redress by topping up an individual’s pension provision to a level that would be invested directly into the PPF to ensure they received a guaranteed income for life.

PIMFA head of public affairs, Simon Harrington, suggested that this would be the "fairest and most logical way" to put individuals back into the position they would have been, particularly given that the FCA considers the major driver of unsuitability to be an individual giving up their guaranteed income.

In contrast, Harrington argued that the current proposals to provide a cash lump sum, "simply perpetuate the problem of BSPS members having a cash lump sum which, in the FCA’s view, is unequal to the value of the benefits derived from a defined benefit income".

“We accept that such a proposal would have to take consideration of member withdrawals to date, as well as whether or not the top up would be to the original cash equivalent transfer value (CETV) or the CETV required to receive the same level of income from the PPF," he continued.

“But we do strongly believe that it is in keeping with the broad principle of putting these consumers back in the position they would have found themselves in.”

In addition to this, PIMFA raised concerns about the influence of claims management companies (CMC) encouraging large numbers of people to make claims against advice firms, even where those clients consider themselves to have a had a good outcome.

In particular, given the high-profile nature of the scheme, the association warned that there could be potential for CMCs to take advantage of instances where clients are referred to Financial Ombudsman Service (FOS), with an increased level of claims likely to contribute to an already slow process rate that will contribute to further uncertainty.

PIMFA also suggested that this could mean that the overall cost to firms of the redress scheme is likely to be significantly higher than the FCA has set out in its cost benefit analysis.

This has in turn raised concerns about how realistic it is of the FCA to expect professional indemnity insurance (PII) providers to cover claims to the level the regulator has set out.

Indeed, PIMFA noted that there have already been instances where providers have withdrawn cover ahead of claims, also suggesting that renewed insurance cover taken out before the redress scheme is implemented may have specific BSPS carve outs in the event of potential claims.

In light of the high-profile nature of the scheme, it also suggested that the FCA should consider an opt in process as being more beneficial, as those who are most deserving of redress will be processed quicker and made good in a more efficient manner.

Harrington added: “We are extremely concerned about the ability of firms to be able to withstand a high number of claims and do not believe it is reasonable to expect firms who are subject to multiple claims to be able to draw on capital reserves to cover them, regardless of whether or not they hold adequate PII. These firms will fail.

“The risk of firms subject to multiple claims to default is an acute risk. It follows logically that this is in turn will lead to further pressure on Financial Services Compensation Scheme levies for other firms as well as inevitably leading to further centralisation in the market.”

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