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The Economic Secretary to the Treasury (John Glen)
It is a pleasure to serve under your chairmanship this morning, Mr Howarth. I thank the hon. Member for Blaenau Gwent (Nick Smith) for securing this important debate. I know he has engaged extensively and constructively with the Financial Conduct Authority on these matters over the past year. I was pleased to meet him in February to discuss how we can avoid a repeat of the unfortunate circumstances that occurred in the British Steel pensions scheme case. I am aware of the extensive work he has undertaken with the hon. Member for Aberavon (Stephen Kinnock) and others from south Wales, and I know that the FCA has valued immensely that interaction to try to improve communications and other aspects raised in the debate this morning.
Many issues have been raised in the debate, and I will seek to respond to them all—particularly the importance of a well-functioning financial advice market. I have listened carefully to all those who have made observations about the aspects of that that are not functioning well.
I will refer to the lessons that have been learned specifically in the British Steel pensions case; the actions the FCA has taken to address unsuitable pensions transfer advice; the protections in place for consumers; and the issue of so-called phoenix firms—an outrageous situation where individuals seek to leave behind responsibility for a previous, failed enterprise, recreate a new enterprise and therefore absolve themselves of responsibility.
I am here as the Minister responsible for financial services. I note the questions that have been raised by the hon. Member for Birmingham, Erdington (Jack Dromey) concerning the status and other aspects of the pensions Bill. I was in front of the Work and Pensions Committee last week with my colleague, the Minister for Pensions, so I have some observations on that, but he has lead responsibility in that area, so I shall seek to secure a response from him.
As the Minister responsible for financial services, I am committed to ensuring that a well-functioning financial advice market exists to support people to make the right decisions for them and their families. In 2015, as has been mentioned, the Treasury and the FCA launched the financial advice market review, with the goal of improving the accessibility and affordability of financial advice. The Government and the FCA have now implemented all 28 recommendations from that review and will be reviewing the advice market again over 2019 to monitor progress and report back next year.
The Government have also made financial advice mandatory for people considering a defined-benefit pension transfer where the value of the pension is over £30,000. That threshold is purposely low, given the dire consequences of taking poor advice and making unwise decisions—as has been said in relation to a number of cases this morning. That is to ensure that people consider the fact that they may lose guaranteed income in retirement and are aware of all the options available before they make such a complex decision.
Turning to British Steel, although most financial advisers offer sound advice, unfortunately there are cases where the advice people receive is not right for them. The British Steel case was one such instance and resulted from a unique set of complex circumstances. A minority of advisers were responsible for giving unsuitable advice, which resulted in losses for scheme members. The restructure of the British Steel pension scheme occurred at a time when there was considerable concern over the future of Tata Steel, and members were understandably worried about whether they were about to lose their jobs and pensions. Several public bodies were involved in supporting scheme members to decide what to do with their British Steel pension, and it would be helpful to outline their different roles, because that will bring clarity to where the issues lie and how we can address them.
The Pensions Regulator is responsible for negotiating and agreeing arrangements where an employer is unable to continue to support a defined-benefit scheme, as was the case for Tata Steel and the British Steel pension scheme. That includes guidance and oversight of the trustees and scheme administrators. As such, the Pensions Regulator was also responsible for the options available to BSPS members, the communications sent by the trustees and the deadlines for decisions to be made.
The FCA is responsible for the regulation of the financial advice market. Financial advice firms must be authorised by the FCA before they are permitted to provide advice, including on pension transfers, and advisers are required to provide financial advice that is suitable for the individual’s personal circumstances.
The Pensions Advisory Service was an independent service offering free-to-consumer guidance on pension matters. As has been mentioned, it has recently been merged with Pension Wise and the Money Advice Service to create a new single financial guidance body, which is now known as the Money and Pensions Service. The hon. Member for Birmingham, Erdington asked from the Opposition Front Bench about the status of that body. The chief executive is now in place, and work is going on in this financial year to set up the processes for bringing those three entities together. There will be a series of announcements over the coming months about their intentions, but the body will operationalise in the course of the coming financial year.
As to the lessons learned from the experience in south Wales with the British Steel scheme, the independent Rookes review, which considered the communication exercise that supported members of British Steel to take decisions on their pension, reported in January. It noted that there are important lessons for organisations to learn to prevent such a case from happening again. There are, I think, 18 recommendations, and they include earlier intervention and intelligence sharing between the regulators and the Money and Pensions Service; improved support for members considering cash transfers out of defined-benefit schemes; improved guidance for trustees facing restructuring and other major changes; and improved message content clarity and channels.
The Pensions Regulator, the Financial Conduct Authority and the Money and Pensions Service have publicly committed to addressing the review’s remaining recommendations. They have agreed a joint protocol to work together to ensure that consumers are appropriately protected. It includes ensuring that support and communications are in place for members of defined-benefit pension schemes, ahead of any restructures and consultations—something manifestly different from what happened in the regrettable case that we are considering. Another aim of the protocol is that there should be better co-ordination of the involvement of different public bodies through early intervention, expedited approval processes and improved information sharing. The bodies have also developed branded written materials for trustees, to ensure that there are better communications with pension scheme members, including letters to alert them to the risks of transferring out of DB pension schemes, and the giving of practical information.
I will now talk about action on unsuitable pensions transfer advice, because the British Steel case has also raised many questions about quality.
Stephen Kinnock
The Minister has set out some of the structural and institutional issues and the lessons to be learned, but does he agree that when 8,000 members transfer out there is clearly a problem that needs to be addressed at source? Flagging up risks is all very well, but this is a case of shutting the door after the horse has bolted. We need a system that prevents such mass migration out, because once those kinds of numbers are involved it is highly likely that people will be going against actuarial advice that is in their best interests.
John Glen
I have listened carefully to the hon. Gentleman’s interventions, and he is right to say that 6.6% of the 122,000 individuals who had those pensions did transfer out, and that, in general, the default option would not be to transfer out of a DB scheme. There is work going on to develop pathways. I am not clear, given that it is not my direct area of responsibility, about the status of that work. I think, however, that there is a challenge, in the context of the policy on freedoms that is now well under way, about how to reconcile that freedom with making the decisions in question. Perhaps I might pivot over to consider the DC schemes. I think what is happening is that many people decide to take the 25% tax-free lump sum and then do not necessarily make appropriate, or the best, decisions on the remainder of that pot of money. Work is being done on that, but with respect to the specificity of the default option, I cannot give the hon. Gentleman a definitive response now.
I think we are moving to a point where there will be default pathways that people will need to be advised on when they take advice. I think that is probably a sensible compromise that deals with the fact that, in some instances, not coming out of the DB scheme would not be the right thing to do. The hon. Gentleman will agree about that, although he is also perfectly correct to say that, generally, not coming out would be the right thing to do. There is work to be done, but I think progress is being made, and I acknowledge the sensible point he has raised.
Nick Smith
I want to focus on what the Minister calls the 6%—perhaps nearly 8,000 people—who may have been badly advised in this case. What is he going to do to get the FCA to up its game, contact those people and help them, in case they have been badly advised?
John Glen
Following our meeting, I undertook to speak to Andrew Bailey, the chief executive. We are due to meet every few months, and our next meeting is imminent. I will speak to him about that. A number of live investigations are under way; I do not have investigative power myself, but I will take a close interest in those investigations. Individual companies—I will not name them—are being actively investigated now, and I expect the FCA to make announcements and recommendations consequent to those investigations imminently. I am not privy to the detail, but I am taking a close interest and will be speaking to the chief executive, because I realise that time is pressing on. This morning we have heard vivid accounts of individuals and families ruined by these decisions, and I take the matter seriously.
To get back to my script, the FCA leads on financial advice and has considerable power to act against firms and individuals who provide negligent advice. To be clear: the FCA can impose a financial penalty on a firm, require the firm to pay redress to its customers, restrict the firm’s permissions, or prohibit individuals from operating in financial services. The FCA can bring criminal prosecutions. I hear the enthusiasm for that action being taken, and I think the FCA hears it too, but it works closely with other organisations to support criminal prosecutions. Both the Government and the FCA are targeting their attention on the effective regulation of financial services and wider work to tackle scams, including the recent implementation of a ban on pensions cold calling.
Jack Dromey
That is helpful, but in the case of British Steel, I think it would send absolutely the right message to the workers concerned if the Minister said today that a sense of urgency is needed on the part of the FCA and the South Wales police about investigating potential criminal wrongdoing and taking action. The workers back at the plant would welcome that.
John Glen
I am happy to respond to that intervention by saying that it is absolutely imperative that the FCA works with all bodies to hold those individuals to account and to take the appropriate action in the light of the evidence presented to it. This is urgent; the individuals who have suffered this experience expect that of the FCA, and I believe the FCA is keenly aware of that.
The hon. Member for Blaenau Gwent talked about the regional presence of the FCA. It has more than 3,000 employees and runs an annual programme of regional supervisory workshops under its “Live and local” banner, in which it educates firms and gathers intelligence from across the country. That has included recent workshops on DB pension transfers. Although the FCA does not have a series of regional offices, there is a clear expectation on the part of the Government and the FCA itself that it will go out into communities across the country, to ensure it has a presence among the 35,000 IFAs that operate.
The regulator is also undertaking further work on the pensions transfer advice market. The FCA is analysing responses to a recent data request from firms that undertake pensions transfer advice and is planning a programme of work, which is likely to include further engagement with stakeholders, targeted education for firms involved in providing pension transfer advice, and assessment of those firms significantly involved in the provision of DB transfer advice. The FCA has already announced a requirement for all pension transfer specialists to obtain the same qualifications as fully regulated investment advisers, alongside their existing qualifications, by October 2020. In relation to the BSPS, the FCA intervened to stop 11 firms from providing pensions transfer advice, and several firms are still under investigation.
It is important to ensure that consumers are protected from poor-quality and unsuitable advice, and there are proper mechanisms for redress when they receive poor advice. The first port of call for consumers to seek compensation is to approach the firm itself. If they cannot resolve the issue, consumers can take their complaint to the Financial Ombudsman Service. The FOS is a free, independent service that provides an alternative to the courts. The maximum award it can recommend was increased at the beginning of this month from £150,000 to £350,000 per individual. If firms go into liquidation and cannot provide compensation to individuals, a second tier of protection is open through the financial services compensation scheme. The FSCS is mainly funded by an annual levy on the financial services industry. Since its founding, the FSCS has helped millions of people and paid billions of pounds in compensation.
It is important to note that in the British Steel case, only a very small minority of former steelworkers who have taken their claims through the FOS and the FSCS have not been fully compensated. That group were all clients of one firm, and the Government’s decision to make financial advice mandatory for those seeking to transfer their DB pension has therefore guaranteed a crucial layer of consumer protection to those individuals.
“Phoenixing”—firms or individuals seeking to avoid liabilities arising from poor investment advice by re-emerging as a different legal entity—can leave consumers and taxpayers out of pocket and tarnish the reputation of the industry. The FCA has a range of tools to identify and act against firms or individuals who try to avoid responsibility in that way. Those seeking to liquidate firms must provide information about outstanding complaints, and the assets of collapsed firms cannot be sold on or passed back to former directors without the prior consent of the regulator. The FCA has already used those powers to prevent several individuals and businesses from avoiding their liabilities, and other cases are under investigation. This has caused some individuals to withdraw their applications, knowing full well that they will not get through. Although I acknowledge that this will not give absolute comfort to those who have suffered, I believe that we now have in place a regime that will prevent the practice in future.
Stephen Kinnock
On the issue of compensation, phoenixing and rogue financial advisers’ ability to just shut up shop and walk away, surely there is also a question of insurance. In our recent meeting with the FCA, which I found absolutely extraordinary, it was made clear to us that there appears to be no mandatory level of insurance that financial advisers must take out so that they can be held to account and insurance pay-outs can be made. My understanding is that, as soon as these advisers see the writing on the wall and know that people will come after them for compensation, they shut down, and there is no backstop—perhaps safety net is a better term—so that people who have been ripped off can go after them through an insurance process. Does not that extraordinary situation require a policy and legislative shift so that the FCA has a chance of doing its job in this area?
John Glen
I have been trying to find the note that one of my officials kindly sent me on the quantum of insurance. My understanding is that FCA-authorised and regulated firms must have insurance in place; if they do not, the FCA has it in its armoury to de-authorise. I listened carefully to the hon. Gentleman, and his point seemed to be on the amount of that insurance. I am happy to take that matter away and consider it. On the practice of phoenixing, I am given to understand that the FCA has done a significant amount of work in that area. It launched a programme of work in April 2018 to strengthen authorisations, and I have given some of the details. I do not want to waffle further on this point, but I will give consideration to the amount and level of insurance required. The hon. Gentleman has discussed the matter with the FCA; I will do so as well and write to him. If it is not fit for purpose, it is not fit.
I thank the hon. Member for Blaenau Gwent for bringing to the House this debate on a very important topic. I was pleased to hear that he is committed to supporting the communications work with the FCA to raise awareness among former BSPS members of their rights to complain and to seek justice. The Government, regulators and other organisations are strongly committed to monitoring the market for financial advice and defined-benefit pension schemes, and to taking decisive action to ensure that these events cannot be repeated. I recognise that Ministers often say that at this point, but I have listened sincerely and carefully to the points that have been raised.
A lot can be done as a consequence of the excellent work of the hon. Gentleman and his colleagues, and through my interaction with the FCA. I accept that there have been some differences of opinion in the Chamber this morning regarding the amount that can be done by regulatory intervention and legislative action. However, I will do all I can to ensure that we exhaust reasonable opportunities for the FCA to tighten up in all these areas. The example given by the hon. Member for Birmingham, Erdington of an individual who inadvertently, unwittingly and tragically led his 20 colleagues to make certain decisions, and the multiplier effect of those, was heartbreaking, and one that the Government need to respond to. I thank Members for the opportunity to respond to this morning’s debate.