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Lighting a fire under phoenix companies

Whispering phoenix firm into the average IFA’s ear is a bit like chanting Roy Keane’s name at Liverpool Football Club’s AGM.

The very word phoenix tends to provoke an emotional reaction but while the FSA’s tough new measures to stamp out phoenixing will undoubtedly prove popular among many IFAs, others may wonder what has taken the regulator so long.

FSA managing director (retail markets) Clive Briault reminded IFAs at the recent Money Marketing Live conference in London that phoenixing happens when firms fold and re-est-ablish themselves under a different name without meeting their liabilities to customers from their previous enterprises.

IFAs’ main bone of contention is that they end up picking up the tab through increased levies to the Financial Services Com-psensation Scheme while the phoenix firm rises from the ashes and carries on scot-free.

Sesame commercial dir-ector Charles Bryant says the recent increase in FSCS fees has invoked further adviser anger.

He says: “The FSA has been under an immense amount of pressure to look at this, particularly after the recent increase in the FSCS levy.” He says it was inevitable that the regulator would have to take a firmer line on the phoe-nix problem.

New measures to stop phoenix firms include getting signed guarantees from directors to honour liabilities, ringfencing funds to be held by the departing firm to meet any further potential liabilities and refusing authorisation of the new business where directors fail to make “reasonable” arrangements for claims arising from their previous business.

Individuals will be only be referred to the FSA’s enforcement division if these safeguards fail to do their job and the individual has “actively disadvantaged” customers.

Beachcroft Wansbroughs managing director Richard Hobbes says he welcomes the measures but questions whether they will stop phoe-nix firms. He says the practice is still essentially legal and will continue to appeal to less scrupulous IFAs looking to get rid of awkward liabilities.

He says: “If I want to buy capacity, I do not have to buy a firm with its liabilities so entrepreneurs who want to grow their business will try to get their hands on as many advisers as they can. In the worst-case scenarios, this is where we see phoen-ixing operations although this is by no means the predominant model.”

The FSA has been quick to point out that when alleged phoenixing cases have occurred in the past, there is a limit to its power and jurisdiction.

Hobbes says this means that whatever changes are made in the handbook reg-arding phoenix firms, they will encounter resistance from aspects of more general company and insolvency law, which provide safeguards for directors of phoenix companies.

He says: “There is a boun- dary between the obligations of firms to customers outlined in the FSA handbook and the rights of directors as laid down in corporate law. It is difficult to get the balance between the two. No doubt, the FSA can tighten up on this but whether they can achieve the perfect fit is questionable.”

Pushing legalistic considerations to one side, Hobbes highlights a simple fact borne out by experience that putting up new obstacles will only encourage people to find a way around them. He says IFAs will still find a way to phoenix under the FSA’s new “hardline” regime.

Jamieson Financial Management principal Bruce Jamieson is pleased that the FSA appears to be tackling the issue of phoenixing but says he is incredulous that it was allowed to happen in the first place.

He says: “This is too little too late. The FSA has been reactive again rather than proactive. It is out-rageous that these failed firms were ever allowed to pick up the pieces and leave us with the liabilities.”

Hargreaves Lansdown head of research Mark Dampier says: “I would welcome anything that the FSA does to stop companies dumping their liabilities on us and carrying on trading but it is a shame that a plan was not thought out earlier. A lot of companies have got away with this.”

This leads to the question of how many phoenix firms are in the market. As some IFAs would have it, just about every big IFA or network has been guilty of phoenixing at some point.

Berkeley Berry Birch found itself at the sharp end of phoenixing allegations for its dealings with insolvent subsidiary Berry Birch & Noble Financial Serv- ices, as have Whitechurch Securities and defunct IFA RJ Temple.

Bryant suspects that phoenixing is fairly widespread. He says: “I suspect this happens far more often than people think. Clearly, there have been a number of big cases.”

The FSA has refused to hint at the scale of the problem by revealing how many firms it is investigating but did confirm it had thwarted 12 attempts in the past year.

One could argue that this hardly represents a number to get worried about but, equally, the very fact that the FSA juggernaught has been moved to take “decisive” action against phoenix firms would indicate that we are not talking about several isolated incidents.


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