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Why can’t the FCA stop rogue firms rising from the ashes?

Ahead of the launch of a new taskforce against phoenixing, Money Marketing looks at the difficulties the regulator is up against

After years of frustration from advisers over how rogues in the industry can run away from their liabilities, some hope could be on the horizon.

The individual efforts of the FCA, Financial Ombudsman Service and the Financial Services Compensation Scheme to tackle so-called “phoenix” firms will be brought together under a proposed new taskforce. The working group of key bodies announced it was collaborating to tackle the ongoing issue of phoenixing earlier this month.

Phoenixing is the term given to the legal practice of winding down a firm with complaints against it, or letting it fail. Firms, or their directors, then return from the ashes to practise under another brand, leaving tax authorities, clients and, ultimately, their peers out of pocket.

The FCA, FOS and FSCS will be joined in the taskforce by the Insolvency Service and Scotland’s Accountant in Bankruptcy.

Yet hurdles remain over how the agencies can really put an end to poor practice.

Money Marketing takes a look at some of the key considerations for the taskforce, and whether better information sharing could make a dent in the problem of phoenixing.

Pooling resources

The FCA says the bodies within the taskforce will work closely to share data and intelligence on individuals and firms. FSCS claims, FOS complaints and even director qualifications may provide effective information for detecting instances of phoenixing.

The FSCS might be picking up the tab, but the FCA ultimately holds the job of ensuring only suitable individuals are given regulatory permissions to conduct business.

The regulator currently works with the FSCS under a memorandum of understanding, which Money Marketing has heard is reviewed annually.

The FCA also has a deal in place with the Insolvency Service. This sees them share information on directors of companies that have already closed down and where
they may be the subject of an investigation for breaching standards.

Law firm TLT partner and former FCA associate Michael Ruck says the bodies have sufficient data between them to catch further phoenixing.

This data could include classified information on FSCS claims, complaints records, unpaid FOS awards, director disqualifications and files on previous regulatory history, he says, noting: “The FCA should then be able to take action to either refuse applications for new authorisations for new firms, or seek to take intrusive supervisory action against people who have already been authorised.”

A key consideration for the taskforce will be a deliberation on individual liability and whether that should be enforced in favour of firm-level liability.

While this could place unnecessarily harsh boundaries on advisers who were not responsible for what caused their firm’s downfall and have reappeared in the industry for sound reasons, consultant Malcolm Kerr says clients have to be front of mind.

He adds: “The single most important thing is that clients are protected. If there is some collateral damage for people attempting to phoenix, then so be it.

“If you are leaving people without protection, you are not treating customers fairly.”

Expert view

There needs to be room for mistakes

People need to get away from the mindset that phoenixing is bad, when it isn’t. There are times when phoenixing should absolutely be allowed and we have to just put our hands up and write the cheque to the FSCS. There’s a reason we have limited liability, and that is because companies fail and if we stop giving them chances, we are knocking out all entrepreneurs.

You can get a lot of situations where IFAs have done things irresponsibly when they were perfectly insured, such as recommending unregulated investment schemes. Then years later, when the problems bubble up, professional indemnity insurers will say they aren’t willing to insure them and that leaves a mark on their books. A lot of people end up with holes in their insurance coverage and records because of the claims approach of PI insurers.

You then have the problem that there are reasons businesses fail, and some are utterly accidental.

In one case I worked on, an adviser of a firm had, 10 years earlier and before the current chief executive joined the company, given some advice that was arguably wrong and might have caused a liability of about £500,000. If the business were to fail, it would be nothing to do with that chief executive.

Then there’s a situation where an adviser may just give one piece of bad advice. It’s not a reflection on their all-round integrity; it could be a catastrophic accident. In the same way clients can get taken in, advisers can get taken in by other people who then destroy their business. It can and does happen, and there are plenty of examples of that happening to good people.

Regulators’ responses to this haven’t offered very much and I don’t understand why they don’t – when faced with a clear example of phoenixing – spot it. Neither do they put anything stricter in place for those on the second time around the block. The FCA once spotted a phoenixing attempt by a client of mine and after a simple business review, it let him go on through, and I’m not sure it should have.

Adam Samuels is an independent compliance consultant

Interrogating the information

The collaboration efforts between regulators in the advice industry have long faced severe scrutiny, with many believing supervision is jeopardised by each body prioritising its own remit.

In a report in March 2018, Complaints Commissioner Antony Townsend called on the FCA and FOS to reassess where they should share information, so that customers are not caught in the middle.

FCA director of authorisations Sarah Rapson says of the taskforce: “We have a shared responsibility to protect consumers and by working closely together, we can prevent firms and individuals from deliberately avoiding their liabilities.”

Of the FSCS’s involvement, chief corporate officer Alex Kuczynski adds: “The taskforce is a great opportunity for us to share knowledge and insights. The group will support better outcomes for consumers and levy payers who have to step in to fund FSCS compensation.”

The Insolvency Service says it will contribute information and data on suspected misconduct from its own research.

A spokesman says: “This also includes information on directors deliberately seeking to avoid their liabilities to consumers, or with a history of closing down firms and transferring the business.

“The Insolvency Service does not have a formal agreement with any other working partners in this group, but will now consider sharing information if there is a valid legal gateway and the provisions of data legislation are met.”

Plotting a path

Ruck says the taskforce could hone in on circumstances where larger advice businesses leave liabilities, including potential FOS complaints against them, and then acquire other books of business.

He says: “Much of this new approach being taken is driven by the current political environment and events such as those relating to the British Steel Pension Scheme, where it has been identified that a collapsed IFA, which previously advised the steelworkers, was a reincarnation of another firm previously subject to pension transfer complaints.

“It should be noted that while phoenixing is not illegal and is used by directors and owners to set up new firms to carry on a similar business in circumstances where a previous firm failed without any misconduct by the individuals, it can be a tool of directors seeking to act dishonestly.”

Another consideration for larger firms is how advice staff are implicated if just one rogue adviser has a past phoenixing record.

Pooling the bodies’ information should improve the chances of proving when this has occurred, Ruck says, adding: “The focus of this new taskforce is those instances where company directors are seeking to intentionally escape footing the bill for the liabilities of a firm which failed due to the misconduct of the directors. The FCA should be able to identify, from data which it already holds, circumstances where the same individuals are seeking authorisation for new firms, even if a new firm is subject to a different FCA Register number.”

The taskforce will also have to consider situations in which products fail but advisers are not responsible.

Keydata founder Stewart Ford spoke to Money Marketing last year after losing an appeal against a £79m fine and ban from the FCA. The Luxembourg-registered life bonds Keydata promoted were incorrectly labelled as qualifying for tax-free Isa treatment when they did not, incurring significant tax liability on the firm, which led to its eventual shutdown a decade ago.

Stewart maintains Keydata was not given sufficient information about the product, and many advisers claim that in cases such as this and Arch Cru, they were not told the full truth about the products before recommending them to clients.

Adviser view

Philip Castle
Managing director, Escape Financial Ltd

If you are running a business that received a complaint relating to the defective work of an adviser that left the firm before you joined it, that is not your fault, even if your company is legally responsible for it.

The FCA is also within its rights to refuse to grant permissions to a firm that poses a threat to its objectives as they are outlined in the Financial Services and Markets Act, and the registration of any individual who it considers not fit and proper for their role.

The taskforce needs to look at whether a firm should be blocked from phoenixing while complaints are outstanding with the FOS.

If it is not blocked and you treat it as innocent until proven guilty, and it authorises the new firm, it needs to consider if the firm should be reassessed once FOS decisions are reached.

Building new capabilities

Once the taskforce has consolidated information, it will be vital to look at whether it can then truly monitor individuals with multiple FCA Register entries and Companies House accounts.

The FCA Register has long been criticised for the lack of information it offers publicly, relative to what some clients and advisers would expect it to hold.

This has led many to question whether it is likely any regulatory agency would be aware of a phoenixing adviser setting up shell companies ahead of time to fold a business into.

A review commissioned by The Pensions Regulator and published in January criticised the Register as unhelpful in this respect.

The FCA has made moves to try to improve the Register, however, adding a search function last year.

The Gabriel reporting system and the mass of information it contains on advisers’ histories remains criticised in corners of the profession, with some saying it is underused in policing rogues and phoenix firms.

Ruck says: “Given the technology currently available and the extent of data available to the FCA via the Gabriel system, it should certainly be able to identify when advisers are seeking authorisation for new firms, even when they are under separate Register numbers.”

Financial Technology Research Centre director Ian McKenna says utilising more advanced technology could also make it easier for the bodies involved to extract data from their files.

He says: “Artificial intelligence is becoming more prominent in that area and that kind of technology allows large data sets to be scanned together, and can spot patterns with efficiency that the human eye cannot.”

Kerr concludes that the taskforce should not be afraid of cracking the whip out of fear for its reputation.

He says: “The FCA may tread very gingerly, but if people think they are being treated unfairly, they can always take it on.

“The FCA needs to spell out a new strategy that comes up with a solution that protects the customer and limits some of the damage.”

Without a longstop on FOS complaints, some legacy issues may remain for years, but if there is enough weight behind the taskforce, it could make some early wins.

Ruck says: “The final question is whether they each have the relevant resource to ensure the taskforce is effective, and whether the FCA is able to meet the relevant regulatory burdens in relation to refusal of authorisation applications, intrusive supervisory intervention, possible civil action, or even the use of enforcement powers.”



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There are 9 comments at the moment, we would love to hear your opinion too.

  1. One very simple way of combating this is mandatory novation !

    All of the advice / business liability that a adviser or firm writes MUST follow him/ them or if said adviser / firm retires suitable run off cover must be in place or individual PI must be obtained.

    Then and only then will you get a unbreakable audit trail, then any new company taking on said adviser or firm would need to consider the risk of the sales book before they employ or buy and the PI increase needed to cover this.

    Also the registration that the FCA has needs to be a hell of a lot better

    As for those that simply turn off the lights and walk away …my understanding the senior persons regime kicks in ….and unlike the present, needs to be ENFORCED….

    And finally …EQUITABLE FUND THE FSCS, and ditch the need for PI that will always try not to pay out !

  2. “Why can’t the FCA stop rogue firms rising from the ashes?”

    Because none of them actually cares beyond their own career path and no one is accountable when anything goes wrong.

  3. Julian Stevens 16th May 2019 at 12:09 pm

    Why can’t the FCA stop rogue firms doing pretty much ANYTHING until way after the sherbert’s hit the fan?

    Well, it could actually, were it not so arrogant as to ignore continually the Statutory Code of Practice For Regulators (original 2007 edition, that is).

  4. Philip Castle 16th May 2019 at 6:59 pm

    Nice photo of me from about a decade ago sitting above a ski slope in Austria thanks!
    Only thing is the comments (if I did make them) must be from sometime ago and someone has tidied up my spelling and typing for me! Thanks for that.

  5. Philip Castle 16th May 2019 at 7:00 pm

    Actually having re-read it, I think I probably did write that, just can’t remember when!…. plus the spelling and typing must have been corrected 🙂

  6. Let us be quite open and Frank here. The FSCS doe “not pick up the tab”, the FSCS passes its fees and costs to providers and their agents – the commission hungry product floggers and the fee based advisers – who pass these back to the client in their Fees and Charges. This is just another great insurance company swindle – The Consumer Pays in so many other ways – under the Government and their legislation. This the result of the Pyramid Selling Game.

  7. Julian Stevens 22nd May 2019 at 4:00 pm

    Can anyone recall the last time anyone other than the regulator itself praised it for having done a really good job? Try as I might….

    • I did. The FCA’s incorporation of the two MiFID directives into COBS is stunningly good. There is someone in the FCA who can really turn European drafting into UK rulebook provisions, accurately and clearly.

      • There are also times when the FCA is surprisingly supportive when firms get into trouble through no fault of their own and tell the regulator promptly. It usually helps if the firm has agreed to review its processes to limit the risk of a repetition.

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