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Editor’s note: Advisers can help FCA identify phoenix firms

Unpredictable bills make running any business difficult. That has been no different for advice firms in recent years, which have seen their Financial Services Compensation Scheme levies creep up. Part of that pressure comes from repeat offenders folding under the pressure of complaints, and then doing exactly the same thing all over again.

Anecdotally, when I raise the issue of “phoenixing” with either regulators or politicos with knowledge of the advice market, the responses are similar: es, it is an issue, but maybe not the issue we need to be focused on.

While Money Marketing’s research shows that the problem may not be getting any worse, it doesn’t seem to be getting any better. I completely understand why. Imagine you’re working in the advice team at the FCA. You’re currently trying to figure out where misselling in the defined benefit transfer space will strike next, what to do about Mifid II, how to execute an upcoming repeat of the advice suitability study, not to mention assessing advisers’ value in light of competition reviews into the wider asset management and platform spaces.

The FCA’s uphill fight to end phoenixing

The Senior Managers and Certification Regime will soon be extended to advisers. GDPR has just hit. A new exam is about to start after the FCA probed how advisers keep their training up to date. I’ve not even mentioned Brexit, and you can see why the job of deciding who to let into the advice market and who to kick out is so difficult for the authorisations team at the regulator.

Do you strike off everyone who was at a particular firm, even when it was just one rogue who caused the FSCS claims? How do you even prove that is the case? Phoenixing is, unfortunately, one of those problems that just rumbles along under the surface, not quite raising its head enough to demand decisive, swift action while all the rest of that work needs doing. But, undeniably, it is significantly irritating enough to constantly be on the radar, and has been for many years.

If some of the sharks who disgracefully robbed steelworkers at Port Talbot of their DB pensions resurface, however, that is a different story. It makes phoenixing the issue again, because it looks mighty embarrassing for the FCA. Already criticised for not acting swiftly enough to protect consumers from sham “advisers”, it gives the impression the regulator couldn’t run a drinking session in a brewery when it comes to stopping repeat offenders.

But have patience. The kind of characters that run the most risk are also the ones most likely to lie to the regulator or find ways to cheat the system to get themselves back on the grid. The FCA should further resource the teams making sure that doesn’t happen, and advisers can help provide the kind of intelligence that will be vital to identifying the crooks who should never be allowed to practise again.

Justin Cash is editor of Money Marketing. Follow him on Twitter @Justin_Cash_1

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. For once I completely agree. When someone burns their company and just sets up again, I imagine that’s pretty easy to spot and prevent. But if you’re a complete weasel you’re probably not that blatant, so today’s exam question is:

    How do you prevent this scenario occurring?

    Mr Dodgy runs an advice firm. He knows he’s just rubber-stamping rubbish from unauthorised people and the wheels will come off sooner or later. So, when the first couple of victims start complaining, he sets up another company and applies for authorisation. The regulator – at this time – has got nothing adverse on Mr Dodgy or his existing business so there’s no grounds for refusing the authorisation.

    Fast-forward a few months. Tired of being fobbed off, dozens of victims have gone to FOS and are starting to get adjudications in their favour. Mr Dodgy’s half-yearly complaints return to the FCA has just gone from nought to 60 (literally). His PI insurers are scrambling to find a way of avoiding their contract.

    Faced with all this, Mr Dodgy puts his first firm into administration. But he’s still approved and he’s got his back-up firm to carry on business through, because his bail-out plan was in place before anyone except him could have realised there was going to be a problem.

    Commentators are invited to suggest ways of stopping this happening. Remember, you have to have evidence that will withstand a judicial review and/or a reference to the Upper Tribunal (a proper court) in order to ban Mr Dodgy.

    Consider how long gathering that evidence might take, bearing in mind the ruling in Westwood Independent Finanial Planners v FCA [FS/2011/0019]; here’s a quote from para 170:

    “We consider that, in general and certainly in this case, such matters cannot be determined on the documents alone. The testimony of the clients is essential in such cases if the Authority is to establish, on the balance of probabilities, that an adviser … failed to take reasonable care to ensure that its advice and recommendations were suitable for those clients. In the absence of such evidence in this case, we conclude that the Authority has not established that Westwood breached Principles 7 and 9 and the associated COB Rules in relation to those clients from whom we did not have witness statements or live testimony.”

    Sorry for the monster post, but it’s a tricky subject…

    • Surely the FSA should look at any other companies with which the applicant is involved and ask Why are you seeking to set up another? What type of business has your other firm been transacting? It doesn’t seem very difficult.

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