The PIA's recently issued CP35 on the pension review is one of those documents that you glance at once and then immediately file away in the “too difficult” drawer.
Could the regulator possibly have found a more complicated way of setting out what amounts to who has to pay what to whom and by when?
CP35 is the second consultative document issued on the matter of what the PIA so succinctly describes as Recalculating Loss and Redress for Phase Two Transfers – Serps Adjustment. I will try to exp-lain what this new document means for IFAs.
On December 17, 1999 (yes, 1999), the PIA issued a notice informing firms that they should suspend work on certain phase two cases bec-ause there was a problem with the regulatory guidance on Serps transfers.
Investors could be getting less than the due amount of redress. Revised guidance for calculating Serps then emerged. The PIA has ack-nowledged that the fault lay with its guidance, not with the firms which applied it.
The PIA then announced in March this year that it had decided that affected phase two cases processed before December 17, 1999 now needed to be reopened and the redress recalculated using the new formula.
We fought long and hard on the principle of revisiting closed cases but the PIA says it has taken legal advice and it is not acting “unlawfully”.
This is probably true but the PIA is doing nothing for the orderly completion of the review and it is adding another level of complexity to an already overcomplex process.
The review is an art, not a science and the PIA would have been far better advised to stick with the principle that once redress is accepted, a case is closed.
The regulator says around 24,100 cases across IFAs and product providers need to be reopened and the average amount of additional redress owed is about £3,250 (about £80m in total).
Of these, the PIA estimates that only around 2,800 fall to IFAs. So headline figures about £80m costs for IFAs are wrong.
Aifa has argued that IFAs should not be put out of business because of the regulator's error. So the PIA has proposed setting up a compensation scheme to calculate the loss and redress for firms affected and then pay the amounts owed to investors.
A levy would meet the costs of admin and redress payments made under the scheme. Rec-ognising the economic relationship between IFAs and product providers, the PIA originally proposed that life offices should cross-subsidise the levy for IFAs by 85 per cent across the board.
The idea was to spread the burden across the industry and protect small IFAs from going to the wall. Aifa supported this as being the “least worst” solution.
So, what is being proposed now? The life industry was not too happy about the cross-subsidy arrangement. This has now been restricted to take into account the effects of professional indemnity cover.
This means that IFAs will have their redress subsidised by 85 per cent only where their PI insurer would have met this cost if the revised guidance had been used in the first place.
In effect, the PIA is trying to turn the clock back and put firms and investors in the position they would have been in had the correct guidance been used before December 17, 1999.
It is proposed that IFAs and life offices that distributed through IFAs should be able to opt out of the scheme. But those which do will have to rework their own cases and pay 100 per cent of the redress owed as there will be no cross-subsidy available. Those firms which opt out can settle their cases by December 2002.
Those which remain within the scheme are required to provide the PIA with existing information on the relevant cases from their files. The PIA will then have to meet its own self-imposed deadline for completion.
We are not yet clear how many IFAs will have to meet the full costs of redress as each firm will have to make an assessment of the cases it has on its books. What is clear, though, is that this is an unwelcome burden on those who completed their cases quickly and in good faith and it has left many questioning their confidence in the regulator.