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Is the FCA’s approach to phoenix firms on the right track?

Alan Hughes

The issue of phoenixing has attracted coverage in recent months, with ex-FCA technical specialist Rory Percival commenting it was “a nuclear option not allowing somebody to start up a new firm”. I would agree with that view. The more difficult question is in what circumstances that nuclear option is appropriate.

Searching the FCA website for phoenixing throws up just one result: the final notice published on 2 June concerning an application for authorisation by Independent Family Advisers Limited, which was refused.

Reading that final notice is interesting and indicates how carefully the regulator considers whether a new firm potentially phoenixing should be authorised.

IFAL was set up by the directors of another authorised firm, Strabens Hall Limited. SHL advised 59 clients to invest in Connaught products, which resulted in large losses. PI insurers disputed coverage on the basis of material non-disclosure and eight clients complained to the Financial Ombudsman Service, with six exceeding the Financial Services Compensation Scheme limit.

IFAL originally proposed paying £10,000 for SHL’s fixed assets but nothing for the goodwill/client bank, notwithstanding that all clients would be asked to transfer to IFAL, which would trade as Strabens Hall. IFAL also offered a qualified commitment to continue to fund ongoing litigation with PI insurers on policy coverage. A valuation of £600,000 was subsequently obtained on a “going concern” basis, assuming the directors’ continued participation. However, the directors pointed out to the FCA they had no covenants preventing them from soliciting clients away from SHL upon their departure.

IFAL eventually agreed that, following the appointment of an insolvency practitioner to SHL, IFAL would purchase the clients for “fair value” as determined at that time and increase its level of commitment to funding the dispute with PI insurers.

The regulator’s rationale

The FCA refused IFAL’s application on the grounds it considered it was trying to achieve authorisation at the lowest possible cost, notwithstanding the fact IFAL stated SHL was a very profitable business (complaints aside). IFAL said it was not trying to avoid SHL’s obligations to consumers, stating its willingness to continue to fund its dispute with PI insurers as evidence of this.

But the FCA said IFAL and its directors had made the application on the basis of limited commitments and recognition of its regulatory obligations, and any concessions and further commitments had to be dragged out of it.

The final notice shows that, in this case at least, the FCA undertook a thorough analysis of the issues around phoenixing before reaching a decision. The facts of each case are different but if IFAL had proposed to pay the “going concern” value of £600,000 for the clients at the outset, it could have made a significant difference.

If IFAL had proposed to pay the full value and the FCA agreed to authorise it, would that have been a reasonable result? Many IFAs would say no – but in that situation the PI insurer litigation could have been funded to its conclusion (an estimate of £100,000 was given to do that), with a further £500,000 available to apply towards any creditors. It is arguable the fact of the complaints and the fact SHL was not able to meet the cost of those complaints if uninsured should not in itself automatically determine the directors as not fit and proper to be directors of another firm and/or advisers.

It may do, but that is an assessment the FCA should make based on the facts of each case using its rules, guidance and principles. In this case, the client bank was unlikely to be worth £600,000 to anyone else apart from IFAL. So if IFAL had agreed to pay that amount (and assuming the absence of any misconduct on the part of the directors) it may have represented the best possible result for all parties, including those funding the FSCS.

What is the alternative? In the absence of misconduct on the part of the individuals concerned, the FCA should not seek to remove the benefits of limited liability by imposing liability on those individuals, while recognising the regulatory system does impose additional duties to those of standard company law.

If this final notice is indicative of the approach used by the FCA, it appears to be on the right track in phoenixing cases. As an aside, SHL continues to be authorised and neither of the directors named in the notice are currently approved through any other firm.

Alan Hughes is partner at Foot Anstey LLP 



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Maybe the FCA need to examine their own actions over the Connaught scandal before putting small IFA’s out of business????

    I fully support any actions to prevent “Phoenixing” but Connaught is a unique set of circumstances and as I am sure will become public knowledge before too much longer the FSA/FCA are far from blameless in this matter.

  2. John Rawicz-Szczerbo 24th January 2017 at 7:47 pm

    Suggest you carefully read the Complaints Commissionaires letter to George Patellis regarding his Whistleblowing on the Connaught fraud. It is here: One Choice phrase stays in the mind: In March 2010, the FSA’s Financial Promotions team referred the Connaught promotion to the Unauthorised Business Division with the note: “perhaps we can stop some detriment before it happens.” The rest, as they say, is a frantic scramble of collusion between the FCA and the FOS to find the IFA’s 100% liable ‘Whatever the circumstances’ for their own failings as a regulator. Three regulated firms involved and £100 million stolen under their noses and they do nothing against the actual criminals. I have no doubt there is a lot more to come out in the public domain.

  3. In the same way that one swallow does not a summer make, just one isolated example of the FCA having refused a firm authorisation on the grounds that its principals were obviously and cynically trying to phoenix, whilst leaving behind their liabilities for the rest of us, hardly constitutes firm evidence that it [the FCA] now has any kind of grip on the problem.

  4. Ah, yes, Phoenix, nuff said

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