Here we go, the biggy! We appreciate the redress consultation paper came out at the end of August, but it’s a big one and we’ve really had to get our teeth into it all. The first point to note is this isn’t just targeted to those who currently give Defined Benefit advice, but also those who have previously given DB advice.
The catchily titled ‘CP22/15: Calculating redress for non-compliant pension transfer advice’ outlines the proposed changes that firms need to implement as part of their redress process, as well as looking at the methodology that actuaries use.
What is redress? Well, straight from the horse’s mouth:
“If there has been a failure to give compliant and proper advice, or some other breach of the duty of care, the basic objective of redress is to put the complainant, so far as is possible, in the position he would have been in if the inappropriate advice had not been given, or the other breach had not occurred.” DISP App 1.2.1
Customers entitled to redress are individuals ‘who have suffered financial loss because a firm’s non-compliant advice caused them to transfer from a defined benefit pension scheme to a defined contribution pension scheme.’ So, when we think transfer-related redress, I’m sure British Steel springs to mind? This shows that redress as a concept needs to go beyond a select few schemes and should be industry-wide. Firms who have previously provided DB advice will need to re-assess if clients were given non-compliant/unsuitable advice which subsequently resulted in a DB transfer.
Now this is a chunky paper, focused on lots of maths and actuarial speak. The new proposals are focused on ensuring that there is a consistent approach amongst firms carrying out redress calculations, and that the calculation method is responsive to individual consumers’ circumstances (retirement age, adviser and product charges, tax treatment of redress and marriage/civil partnership status at retirement assumption) as well as reducing the impact that market volatility has on the calculation. The proposed changes should also help customers understand how their redress offer has been calculated, by ensuring that the calculation is transparent and has been explained fully.
The proposed new methodology looks to estimate the present-day value of retirement benefits if the customer had remained in the DB scheme, and compares this with the current value of the customer’s DC arrangement at the same date. Any shortfall between these values is the redress due to the customer. Simple, right?!
Assuming no changes off the back of the consultation, the new methodology will be consolidated as new rules and guidance within DISP in the FCA handbook. The new methodology will apply to all DB redress cases within the scope of the existing FG17/9, revoking FG17/9 when the new rules come into force.
The FCA has outlined the 5 key dates involved in the process of calculating redress for consumers, outlined in the figure below. Firms should pay attention to the new process the FCA is proposing in regards to how redress should be provided, noting changes as to when the valuation date should be set, and the fact that issue of redress should be within 3 months of the valuation date. The FCA points out that firms should use an actuary to calculate the redress due, or use an approach that has been approved by an actuary.
In order to present a redress calculation, a lot of information is needed, including information from the client. The FCA has specifically stated that information requests sent out to clients for firms to be able to calculate redress must be ‘reasonable’. The FCA specifies that firms must keep requests to a minimum, be clear as to what is needed, ask for information that is likely to be readily available, and give consumers reasonable time to respond. Firms should also make it clear to clients that they may have to make a decision based on the information available to them if customers fail to respond.
Once a firm has carried out a calculation, it should be explained to consumers, even if the calculation finds that there has been no financial loss. Customers must be made aware of the minimum 3 month period from the offer issue date to consider if they would like to accept or reject, and understand how they go about doing this. Firms must strongly encourage customers to read the explanation provided to them and ensure they understand the process they need to follow if they have any questions to ask, challenge any information used, and how to submit a complaint should they wish to.
Assuming a redress payment is due, the FCA’s preference is that redress is paid by augmentation into the client’s DC scheme. On client request (or where augmentation will result in the consumer exceeding their lifetime or annual allowance) firms can make cash lump sum payments. If clients have suffered a consequential loss as a result of a redress payment (i.e. lifetime allowance charges), compensation to reflect this should be offered in addition to the redress sum.
Clients’ personal circumstances should be taken into account by firms paying redress, to ensure that the customer is not left in a worse position than they were prior to it being paid. It should be clearly explained to the client how redress will be paid and that the customer’s tax position has been considered.
The policy paper can be expected this winter outlining the finalised rules.
Alanis Daniel, Regulatory Support