This summary of the FCA consultation was written by Carly Phillips-Jones
On 2 August 2022, the FCA published a consultation paper (CP22/15) on changes to the methodology for calculating redress for consumers who suffered financial loss from transferring from a defined benefit (DB) to a defined contribution (DC) pension scheme following non-compliant advice.
This comes after the FCA appointed Deloitte Total Reward and Benefits Limited (Deloitte) to conduct a periodic review of the FCA’s methodology for calculating redress for consumers in this position. Alongside the consultation paper, the FCA published the technical report and a technical manual provided by Deloitte and legal advice provided by Michael Furness QC reviewing the FCA’s proposed methodology.
The objective of the methodology is to put consumers, so far as possible, back in the position they would have been in if they had been given compliant advice and remained in their DB pension scheme. The outcome of the review was that the current methodology remains broadly appropriate to achieve the objective and fundamental changes are not yet needed. However, it did identify some areas where the methodology could be improved or further clarified to ensure it continues to provide appropriate redress. The improvements seek to address four key challenges:
- ensuring consistency of approach between the large number of firms carrying out calculations;
- making the methodology as responsive as possible to consumers’ individual circumstances;
- ensuring consumers understand how any offer of redress they receive has been calculated; and
- reducing the impact of market volatility on the calculation.
In the paper, the FCA sets out proposals which primarily relate to:
- consolidating the methodology as rules and guidance in the Dispute Resolution (DISP) sourcebook of the FCA Handbook;
- changing the approach to determining the consumer’s retirement date to reduce the risk of undercompensating; and
- clarifying the payment of redress and how it is explained, particularly, making calculations more understandable and transparent for consumers.
The paper also notes that the FCA are using the findings and recommendations of the periodic review to inform the rules for calculating redress for consumers affected by unsuitable advice to transfer out of the British Steel Pension Scheme.
This consultation will be of interest to:
- regulated firms involved, or previously involved, in providing advice on DB transfers
- actuaries who carry out redress calculations for regulated firms
- industry groups / trade bodies
- individual consumers, including BSPS members who transferred their pension, and their representatives
- consumer groups
- insurers who provide professional indemnity insurance (PII) for financial advisers
The consultation will close on 20 September 2022 and any final rules are likely to be published in the winter. In the meantime, firms are expected to continue to calculate and offer redress in line with existing requirements and explain to consumers that they may opt to wait for the outcome of this consultation to settle their case.
Our review concluded that the current methodology remains appropriate and fundamental changes are not necessary. However, the review identified some areas where we could improve or clarify the methodology to ensure it continues to provide appropriate redress.