The consultation document on the BSPS consumer redress scheme states that redress should be paid in the form of a lump sum to the customer – the possibility of a top-up of the personal pension has been dismissed.
This is peculiar given that the FCA estimates the average loss per member to be around £60,000, suggesting that a good number could be redressed via a top-up without breaching tax restrictions.
There is a lot of concern about the payment of redress as a cash lump sum.
Partly this is due to a perception that consumers are being offered a 'win-win' scenario, whereby an individual who is actually happy with the outcome of their transfer can complain and receive a compensation payment without having to give up the flexibility of their defined contribution pot.
The other big issue with redress via a cash lump sum is that it will not necessarily result in better retirement outcomes.
This is particularly true for younger people who may choose to use the money for other purchases, and for individuals with low financial literacy – a feature the FCA says it believes to be prevalent in the BSPS population.
Vulnerability is an issue too, and there is a possibility that any individual who has been poorly advised will be vulnerable as a result of the distress associated with the complaint process.
Unfortunately, alternatives to cash payments are practically difficult.
The trustee of the ceding scheme cannot easily allow reinstatement of the benefits because it would not be in the interests of the remaining members whom it has a fiduciary duty to protect.
As the FCA notes in the consultation document, requiring a company to buy an annuity for a consumer relies on the advising company being in business at the date of retirement.
The alternative of immediately purchasing a deferred annuity for younger transferees is prohibitively expensive.
There are also issues around the recouping of funds invested in personal pensions in order to use them for annuity purchase, not to mention the complications where people have already taken money out of their pot.
Magnitude of redress
The second issue is what impact the revised guidance may have on the magnitude of redress.
Views vary hugely among the different interested stakeholders on the way redress should be calculated.
On the one side there are claims managers – for example, Clarke Willmott – that have been arguing for changes to the redress assumptions, which would increase compensation payments, and on the other side there are IFAs and professional indemnity insurers, who will not want to see redress payments being pushed up.
In the past we have seen redress become more and more generous to the consumer each time it is reviewed.
