Such firms would need to notify the FCA that they will be making use of the exemption, and outline how the group assesses and holds capital for the risks posed.
How will firms be expected to identify cases that may give rise to redress?
Potential redress liabilities will fall into two categories:
- Unresolved redress liabilities: Where the firm has received but not resolved a complaint. This includes complaints under review by the Financial Ombudsman Service.
- Prospective redress liabilities: Where the firm has identified recurring or systemic problems, or foreseeable harm that could give rise to an obligation to provide redress.
In practice, identifying unresolved redress liabilities should be relatively straightforward as firms will have records about any complaints already received.
Identifying situations that may result in prospective redress liabilities may be more challenging.
The FCA considers that firms should already be aware of cases of potential harm as part of their compliance with the consumer duty.
However, given that this process will be largely self-regulated, there may be inconsistencies in the way that firms identify and quantify their exposure to risk.
Why are the FCA’s proposals a particular concern for firms that have advised on pension transfer?
There are several aspects of the proposals that will be particularly onerous for firms that have given pension transfer advice:
1. Redress arising from pension transfer advice can be significant.
Indeed, the FCA notes in its consultation document that between 2012 and 2022, 83 per cent of firms' FSCS costs arose from advice on self-invested personal pensions or pension transfers.
This means that firms that have provided this sort of advice are likely to identify higher levels of potential redress liabilities and are thus more likely to be impacted by asset retention rules.
2. Establishing a suitable estimate for potential redress associated with a pension transfer is difficult.
This is particularly true of redress relating to a defined benefit transfer, which is highly sensitive to the circumstances of the case and depends on multiple factors, such as the date the transfer was effected, the occupational scheme that the consumer transferred out of, and the investment strategy adopted for the transfer proceeds.
Firms may find they need specialist actuarial support to assess their exposure to potential future redress payments, and this could be costly.
3. A particular challenge of DB transfer redress is that it depends on market conditions as at the first day of the quarter, and can vary materially from one quarter to the next.
The First Actuarial redress index, shown below, tracks movements in average redress on pension transfers that took place after 2015, and shows how variable redress can be.
It is worth noting that redress for earlier transfers, such as those paid in the 1990s and 2000s, tends to be much higher, although the broad pattern of falling redress over the past few years will also be mirrored in those cases.
Because redress has to be recalculated before a final settlement is made, even if it is estimated accurately as at a given date, it will not necessarily reflect the amount that a firm ultimately has to pay out.
