Source · Select Committees · Public Accounts Committee
Recommendation 6
6
Rejected
The current compensation arrangements do not always protect consumers, can create wider costs to firms...
Recommendation
The current compensation arrangements do not always protect consumers, can create wider costs to firms and may not have the capacity to cope with future risks in the advice market. The standard approach to redress relies on consumers seeking compensation themselves, but only 25% of BSPS members who received unsuitable advice have raised claims with redress organisations. Similarly, despite the redress process being free to use, 72% of complaints to the Financial Ombudsman and 40% of claims to FSCS being made through third party representatives such as claims management companies and solicitors. This points to the general complexity of the redress system and the FCA’s failure to recognise the specific vulnerabilities of BSPS members that prevent them from seeking compensation directly. For redress arrangements to work effectively firms should have PII cover to afford the cost of compensation, however many advice firms are unable to access the insurance and, since 2018, 60% of firms have left the DB pension transfer market entirely. For firms that have entered insolvency, compensation is funded by an FSCS levy, which forces compliant firms to shoulder the cost of unsuitable advice. Given that the Financial Ombudsman is dealing with a significant backlog of complaints and the FSCS levy is forecast to increase to £406 million in 2022–23, the redress system may not have the capacity to respond to further instances of significant consumer detriment within financial services. Recommendation: The FCA, FOS and FSCS should write to the committee in 6 months to explain what they are doing to manage risks in the redress system for financial service. The FCA’s handling of the wider DB pension market should be reviewed as there could be thousands more cases of mis-selling which may be eligible 8 Investigation into the British Steel Pension Scheme for financial redress, given the significant amount of unsuitable advice seen across the sector. The review should include consideratio
Government Response Summary
The FCA, FOS and FSCS will write to the committee on 21 January 2023 to explain what they are doing to manage risks in the redress system for financial service; the FCA disagrees with the recommendation to review its handling of the wider DB transfer market.
Government Response
Rejected
HM Government
Rejected
The FCA, FOS and FSCS will write to the committee on 21 January 2023 to explain what they are doing to manage risks in the redress system for financial service. 6b: PAC recommendation: The FCA’s handling of the wider DB pension market should be reviewed as there could be thousands more cases of mis-selling which may be eligible for financial redress, given the significant amount of unsuitable advice seen across the sector. The review should include consideration of solutions in circumstances in which an industry-wide levy is insufficient to pay out compensation to those who are eligible. The FCA disagrees with the Committee’s recommendation and does not consider that a review of how it is handling the wider DB transfer market should be undertaken. Based on the evidence the FCA holds and the extensive work it has undertaken in this market, the FCA considers the harm associated with BSPS is unique and not replicated elsewhere. Our evidence suggests 46% of BSPS transfer advice was unsuitable compared to 17% in higher-risk firms in non-BSPS pension transfer cases. The FSCS is funded by the collection of two levies from the financial services industry, the compensation costs levy and a management expenses levy covering operational costs. Compensation costs can vary significantly from year to year, depending on the number of firms that fail and the extent of any liabilities that they leave behind. The current funding model includes a number of mechanisms to ensure that there is sufficient funding to compensate claimants who are entitled to receive compensation. Each FSCS funding class has a levy limit or ‘threshold’. This is the maximum amount of costs which can be allocated to that particular class in a financial year. If compensation costs in a funding class are so high that the threshold is breached, firms in other classes are called upon for contributions via the retail pool. In highly exceptional circumstances where all classes breach their thresholds and the retail pool is maxed out (if the annual compensation costs exceed £1,225,000,000), the FSCS can apply for funding from the National Loans Fund.