42.Opportunistic IFAs deployed inventive tactics in trying to attract customers for supposedly impartial advice. Steelworkers were “factory-gated” by financial advice promoters at the workplace or at promotional seminars arranged nearby. Promoters characterised as “vultures” were also seen “hanging around” outside the BSPS’s roadshow events for scheme members. The PPF expressed concern at “instances where advisors have seemingly touted for business through the media looking to encourage transfers”. The British Steel Pension Members Group provided an example of a Google search for “British Steel pension” for which the top results were advertisements for firms promoting advice on transfer options. Some IFAs worked in concert with “introducers”, who recruited clients and encouraged them to get a CETV quotation in return for a share of the initial advice fee. Celtic Wealth, which worked closely with the regulated Active Wealth, told us it provided sausage and chips lunches at meetings with steelworkers. In January 2017, the FCA warned that introducers could exert “an inappropriate influence” on regulated advice. The FCA could not, however, take action against them unless they strayed into providing financial advice.
43.We heard that much of the advice offered was heavily geared towards pushing transfers. Henry Tapper told us that some advisers exploited the state of mind of individuals:
A lot of people were simply wanting out without any kind of rational decision-making going on, and a lot of advisers were allowing that kind of emotional approach to prevail without any friction whatsoever, so they were not pushing back and asking people to consider the long-term implications of what they were doing.
44.IFAs also encouraged members to invest their transferred pension pot in risky or expensive funds. Active Wealth placed clients who requested a low-risk investment in an algorithmic trading fund, which Eugen Neagu told us was “unlikely to be suitable for anyone, apart from very, very experienced retail clients”. Mr Neagu described the explanations accompanying investment recommendations as “bamboozling at best, taking into consideration that the report was addressed to a steelworker with low investment experience”. Al Rush, an IFA who offered free counselling to BSPS members, told us that it was easy to create a case to transfer which “has a veneer of respectability, but which can consign a duped scheme member to a lifetime of poor outcomes based on high charges, poor performance and unsuitable advice”. He said this was advice that might “pass a compliancy test, but which most certainly would not pass a sniff test”.
45.The structure of fees paid to unscrupulous introducers and IFAs incentivised poor advice. Introducers were paid a share of the initial advice fee. This encouraged them to persuade BSPS members to get CETV quotations “on a bulk basis”. In turn, DB transfer advisers tended to be paid on a contingent charge basis. Under this fee structure, the IFA was only paid (or is paid significantly more) if the client acted on a recommendation to proceed with a DB transfer. Fees charged to BSPS members who chose to transfer would, in effect, subsidise the free advice given to those who did not. We heard that contingent fees in respect of BSPS clients were typically around 2% of the transfer value—£8,000 on a CETV of £400,000—and could be as high as 4%. IFAs could also receive further fees for providing an ongoing advice service. This created an “inbuilt bias” towards promoting transfers. Henry Tapper claimed there was “little evidence” of some advisers recommending anything other than transfers.
46.Given the high value of many of the pension pots, an apparently small percentage charge could constitute a substantial sum. Mr Tapper said that BSPS members typically “did not understand the financial cost or the impact of IFA charges” and “did not generally get a schedule of services in price”.
47.The FCA’s policy on contingent fees is that they are “higher-risk than a time-cost charging model due to the need to sell products to generate revenue”, and that firms should “ensure they have adequate controls in place to manage this risk.” Megan Butler acknowledged that this charging mechanism “gives rise to an inherent conflict around the provision of advice”. The FCA’s role, she explained, was to make sure those firms “are overwhelmingly aware of that possibility for conflict and managing it really, really carefully”. The FCA’s June 2017 consultation on DB transfer advice contained no questions on the effect of contingent charging models on adviser behaviour. Eugen Neagu told us the FCA was “reluctant” to countenance a ban on contingent charging for DB transfers. Paul Lewis, a financial journalist, described this reluctance as “one of a long list of puzzles about its behaviour”.
48.BSPS members were often advised to transfer their funds into investment vehicles with high ongoing charges. Eugen Neagu estimated that one fund used by Active Wealth levied annual charges of over 2% of the investment value. This would put “a high strain on investment performance”. Henry Tapper said that “many of the investment solutions proposed were inappropriate for drawdown”, the product the client thought they were purchasing. To retrieve their money, however, they faced early exit penalties ranging from 5% to 10% of the fund.
49.By 18 January 2018, the FCA had conducted detailed reviews of 129 BSPS transfer cases from 21 firms about which they had concerns. They found that the advice given was suitable in just half of cases (51%), of unclear suitability in one sixth (16%) and clearly unsuitable in the remaining third (33%).
50.Dubious advisers exploited BSPS members for personal gain. They were supported in this cynical enterprise by unregulated and parasitical introducers, who were incentivised to induce as many steelworkers as possible to consider transfers. The advisers, using contingent pricing models, were then incentivised to push those transfers, often against the interests of the scheme members. While doing so, they shamelessly bamboozled those members into signing up to ongoing adviser fees and unsuitable funds characterised by high investment risk, high management charges and punitive exit fees.
51.Contingent charging gives rise to an inherent conflict of interest. The theoretically independent adviser is only paid if they advise a particular course of action. The FCA acknowledges this concern, but hopes that guidance and careful monitoring will ensure adequate consumer protection. This model has failed BSPS pensioners. The FCA’s own national research also gives cause for great concern. Another major misselling scandal is already erupting and requires urgent action. We recommend that the FCA ban contingent charging on defined benefit pension transfer advice. Genuinely independent expert advice, on what for many people could be their biggest financial decision, has a value irrespective of whether a transfer is the outcome.
113 Written evidence from Alistair Rush ()
114 , Sara Protheroe, chief customer officer at the PPF, writing for New Model Adviser, 30 November 2017
115 Written evidence from the Pension Protection Fund ()
116 Written evidence from British Steel Pension Members Group ()
117 Under the , introducers have a specific exemption from FCA regulatory action provided they restrict their activities to referring the client to an FCA-authorised provider of independent financial advice.
118 , 10 January 2018.
119 FCA (2 Aug 2016, updated 24 Jan 2017)
120 , 21 December 2017
121 (Henry Tapper)
122 , Financial Times, 1 December 2017; , BBC News, 5 December 2017; , Daily Mail, 5 December 2017
123 Written evidence from Eugen Neagu ()
124 Written evidence from Eugen Neagu ()
125 Written evidence from Alistair Rush ()
126 Written evidence from Alistair Rush ()
127 Celtic Wealth were paid £750 per transfer (amounting to half of Active Wealth’s initial advice fee). See
128 Written evidence from Henry Tapper ()
129 (Henry Tapper), written evidence from Alistair Rush ()
130 (Henry Tapper)
131 , Henry Tapper ‘Vision of the Pension Playpen’ blog, 9 November 2017
132 Written evidence from Henry Tapper ()
133 FCA (July 2013)
134 (Megan Butler)
135 FCA (21 June 2017) consultation paper
136 Written evidence from Eugen Neagu ()
137 , Paul Lewis, Money Marketing, 10 November 2017
138 Written evidence from Eugen Neagu ()
139 (Henry Tapper)
140 , 18 January 2018
9 February 2018