In 2019, the UK's FCA commissioned an in-depth review into defined benefit (DB) pension transfer advice. Since that time, there has been a package of measures aimed at improving standards in this area. Just last month, the FCA’s regulatory initiatives grid confirmed that detailed scrutiny and enforcement work aimed at redressing previously unsuitable advice will continue until at least spring 2022, and it already seems clear that the regulator is staying true to its word. It was reported last week that the FCA has written to several thousand individuals who could be owed money for transferring from their DB pension schemes following unsuitable financial advice. It appears from the report that the letters were being sent to customers of independent financial advisers (IFAs) who are now in liquidation, encouraging members to take action before it is too late.
Among the recipients were former members of the British Steel Pension Scheme (BSPS). That is perhaps unsurprising in light of the FCA’s new webpage dedicated solely to BSPS complaints, which was published earlier this month. The webpage makes it clear to some 7,700 steelworkers who transferred out of the BSPS during the high-profile ‘time to choose’ exercise that compensation may be available to them, and encourages complaints to the relevant IFA. If members do not want to complain directly to their IFA first, the FCA suggests bringing a complaint to the Financial Ombudsman Service. If the IFA has gone out of business, the member will need to make a claim with the Financial Services Compensation Scheme.
Although the claims are currently being encouraged against IFAs who are no longer in business, these claims may signal the start of a wave of complaints against additional parties. We have suggested before that employers and pension scheme trustees might also be attractive defendants for dissatisfied individuals due to their deep pockets. For example, former members might look to bring a claim against the employer if the transfer was an employer-led exercise. In the same vein, these types of exercises are typically implemented with the cooperation of the pension scheme trustee, so they could also be a potential target. But IFAs (bust or otherwise) remain the most likely targets for any future claims.
It looks like the FCA’s efforts might be having their desired effect. Lane Clark and Peacock LLP (LCP) recently published an analysis of DB transfer data which shows that, for the third quarter of 2020, just 1 in 400 members transferred their DB pensions, down 62% from the peak in 2017. While the more recent figures may be low, we don’t see this problem going away any time soon. Individuals generally have six years from the date of the transfer to complain and that time limit can be extended where the member didn’t have the requisite knowledge. The increasing regulatory noise will likely encourage those who have already transferred to consider complaining, even if they were originally happy with their decision to transfer. In any event, LCP’s data also indicates that we may be seeing the beginning of a post-Covid-19 rebound in the numbers of members wanting to consider a transfer. The risk for the industry is that it is only a matter of time before a wave of lawsuits are brought by members who question the wisdom of their decision to give up their valuable DB pension rights.