FCA’s Proposed British Steel Pensions Consumer Redress Scheme: What Are the Coverage Implications for IFAs?
On 31 March 2022, the Financial Conduct Authority (“FCA”) published its consultation paper on a proposed consumer redress scheme for British Steel Pension Scheme (“BSPS”) transfers.
If the FCA’s proposed redress scheme goes ahead, it will be only the second time the FCA has used its powers under section 404 of the Financial Services and Markets Act 2000 (“FSMA”) to launch such a scheme. The first, many readers will recall, was the Arch Cru consumer redress scheme for large numbers of consumers who had received unsuitable advice to invest their funds into an Unregulated Collective Investment Scheme (or “UCIS”) known as Arch Cru.
The Arch Cru redress scheme created a variety of professional indemnity coverage issues for those independent financial advisors (“IFAs”) who had given advice to invest in Arch Cru. This article mentions a couple of those, but focuses specifically on the question of “block notifications” and the Court’s evolving approach to them.
Background to the Proposed Scheme
When the BSPS was restructured in 2017, its members faced the decision of either staying in the BSPS (which was expected to enter the Pension Protection Fund resulting in reduced benefits) or transferring their pension to a new successor scheme set up by Tata Steel (which was offering similar benefits to the BSPS, but with lower future increases). Alternatively, some 44,000 members had the third option of transferring their funds out of the defined benefit pension scheme altogether (1). Around 7,700 members chose to exit the scheme (2) and 95% of these members received advice to inform their decisions from IFAs (3).
The FCA has since undertaken a review of the financial advice given to BSPS members. It reviewed 365 files from a sample of 89 firms who advised BSPS members between 1 March 2017 and 31 March 2018. Having done so, the FCA has concluded that:
- only 41% of recommendations were suitable;
- in 14% of cases, the suitability of recommendations was unclear due to a material information gap;
- in 46% of cases, the advice received by BSPS members was unsuitable; and
- of the firms reviewed by the FCA, just over 57% (51 in 89) had given at least one piece of unsuitable advice.
The BSPS Redress Scheme
Given what the FCA describes in its consultation as “much higher levels of poor advice compared with that we have seen in higher-risk firms in non-BSPS pension transfer cases”, and the “unique circumstances that the BSPS displayed, including employer distrust, limited information on alternative options, tight timescales to make a decision, and limited support”, the FCA has now launched a consultation for a proposed scheme to compensate BSPS members who received unsuitable advice to transfer their funds out of the scheme.(4)
The consultation is open until 30 June 2022, following which the FCA aims to finalise its plans for the scheme by Autumn 2022, and publish its final plans by the end of 2022.
If the scheme goes ahead, it is expected to be in place by early 2023, with consumers starting to receive compensation from late 2023 onwards. IFAs who gave pension transfer advice to BSPS members between 26 May 2016 and 29 March 2018 will be required to review their advice to determine whether it was unsuitable and whether they must pay compensation.
In the meantime, the FCA has written to IFAs telling them not to dispose of or diminish the value of their assets and funds, except in the ordinary course of business, to ensure that, if the scheme is implemented as proposed, they can meet the costs of carrying out the required review and compensating customers for any unsuitable advice that may have been given.
Coverage: What does this mean for IFAs?
News of a redress scheme on the horizon, and the prospect of claims resulting from the scheme when it comes into force in 2023, will bring with it various insurance-related concerns for IFAs.
Many IFAs will already have received claims arising from advice given to BSPS members and notified these claims to their professional indemnity insurers under historic policies. Some will also, in reliance on a “deeming clause” in their policies, have already notified their insurers of “circumstances” relating to advice given to BSPS members which may lead to future claims.(5)
If no valid notification has yet been made, the ability of an IFA to validly notify its current insurers of potential future claims arising from the redress scheme (prompted by the FCA’s proposals) may now be less straightforward. That might, for example, be because:
- an insurer considers the IFA was aware of the notified circumstances prior to inception of the current policy,(6) thus triggering a “prior circumstances” exclusion in it, or a dispute around disclosure given prior to its inception (in which case disputes may arise with insurers as to the validity of such arguments); or
- the current policy (as we understand to be common) contains specific exclusions for claims arising from advice provided to BSPS members, or advice to exit defined benefit pension schemes more generally (again, in which case disputes may arise with insurers as to the scope of such exclusions, and whether claims brought by BSPS members trigger their express terms).
Where the position is unclear, IFAs will likely need to seek advice from their insurance brokers and, if needs be, solicitors on the above issues (and any other applicable coverage issues that might arise).
As for the IFAs who have already made a notification of circumstances to their historic PI policies given the way in which the risk of claims from BSPS members has evolved over the past few years, the question will be whether the scope of the notification is sufficient to pull back any future claims arising from the proposed BSPS redress scheme to the policy to which the notification was made. We consider that issue below.
Notifications to claims-made policies of the existence of systemic or endemic issues with the potential to lead to numerous (but as yet unarticulated) claims are known as “block” or “blanket” notifications.
For obvious reasons, professional indemnity insurers were, historically, reluctant to accept this kind of broad notification as valid, given that such a notification (if it were accepted) might result in unpredictable and unquantifiable losses.
However, the landscape surrounding block notifications began to change in the late 1990s following the Court of Appeal decision in J. Rothschild Assurance Plc v Collyear (7). In that case, the claimant life assurance and pension provider sought to notify its professional indemnity insurers of its obligation to compensate investors to whom it had mis-sold pensions as a result of an FSA (as it then was) industry wide review of pensions mis-selling. Its insurers argued that the notification was not valid because its scope was too broad and because no claims had yet been asserted by the affected investors at the time of the notification. However, the Court held in this case that the claimant’s written notice to insurers describing the review and the circumstances that might give rise to a claim by each of its clients was a valid notification of a circumstance, even though no such claims had yet been brought.
However, although Rothschild paved the way for the success of “block notifications” in the future, the ability of a notified circumstance to encapsulate future claims is not boundless. There must be a sufficient causal connection between the circumstances notified to a professional indemnity insurer and any subsequent losses or claims that might arise. The 2008 case of Kajima UK Engineering v Underwriter Insurance Co Ltd (8) concerned the scope of a notification made by the claimant design and build contractor to its professional indemnity insurers in respect of the development of a block of flats in Leeds. The insured in that case became aware of issues with the installation of pre-constructed accommodation pods that were moving and causing the distortion of adjoining roofing, balconies and walkways. Having notified this issue to their professional indemnity insurers, the contractor then became aware of further, separate, defects and damage which it did not notify. Mr Justice Akenhead found that this further damage could not be said to arise out of the notified circumstances, given that, although they arose from the same project, they were unrelated to the issues which had originally been notified. If, during the policy, other defects had been identified, those should have been notified to insurers as separate circumstances capable of giving rise to claims.
It is not, however, necessary to identify all potential claimants or claims which could arise from the circumstances notified. In the 2013 case of McManus v European Risk Insurance Company (9) (a decision that was upheld by the Court of Appeal on appeal in 2014), the Court held that a block notification made by partners in a firm of solicitors to their professional indemnity insurers of possible claims against them, by way of a letter entitled “blanket notification of circumstances which may give rise to claims” was valid. Although the notification referred only to 32 files where the potential for claims had been identified, it noted that there were 5,000 files which might be affected by the issues identified by the insured.
In the above case, the insured could point to 5,000 files which might pose a problem. However, it is also possible for policyholders to notify a circumstance when the exact cause, scale or consequence of the issue identified is not known. This is often called a “hornet’s nest” or “can of worms” notification. The law in relation to such notifications was recently revisited in the 2019 case of Euro Pools v RSA,(10) where the Court of Appeal held that a claimant’s notification to their insurers in 2007 of a serious problem with swimming pools it had installed was valid, despite the fact that at the time of the notification the claimant was not aware of the cause of the problem, nor of the consequences which may result.
Risk to Brokers
Block notifications are now so commonly recognised and accepted by insurers that brokers must take care to advise their clients to make them if appropriate. In the 2016 case of Ocean Finance v Oval Insurance Broking Limited (11), the High Court held that there had been sufficient information for the claimant to notify insurers of a circumstance in relation systematic and widespread failures in the sales process of payment protection insurance (“PPI”) policies in 2009. No such notification was made. As such, the Court found that both the producing and placing brokers of the claimant PPI companies were jointly liable for failing to advise their clients to make a block notification at that time.
As ever with the question of policy coverage, the validity and scope of a block notification is largely dependent on the language of the notification, the nature of the claim and the wording of the policy.
As to the wording of block notifications, though some professional indemnity policies may require block notifications to include (for example) full details of the advice given and the identity of all potential claimants for any subsequent claim to be deemed made when the circumstance was notified, some IFAs may well be able to rely on a prior notification that did not contain this level of detail, but confirmed a systematic issue (or concerns from the FCA about a systematic issue) with advice provided to BSPS members.
It remains to be seen whether the FCA’s redress scheme will be implemented, and if so, the effect it will have on future claims. But for now, IFAs should turn their attention to the question of coverage for potential claims if they do arise. IFAs are likely to find comfort in resolving that question now, rather than doing so in the midst of a consumer redress scheme.
One thing is for certain: if there is any doubt as to the scope of an IFA’s block notification, debates between insurers of different policy years as to whether claims resulting from the redress scheme attach back to a block notification can be expected.
*The above should not be taken as legal advice or relied upon as such. If you have a legal issue on which you require advice, do get in touch with us.