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The FCA’s uphill fight to end phoenixing

phoenixingAdvisers are calling on the FCA to step up the pressure on so-called “phoenix” firms as new Money Marketing research suggests the practice is still commonplace in the advice market, and appears to have been employed by some firms that have been sanctioned over defined benefit transfers.

Phoenixing is the term given to the practice – which can be done legally – of winding down a firm that has complaints against it at the Financial Ombudsman Service or Financial Services Compensation Scheme, or letting it fail, but then continuing to practise as an adviser under another brand.

Firms that fall into the FSCS are only declared in default by the lifeboat fund when they have a proven case against them for something like unsuitable advice, where it is judged that the claimant would win a civil case against them, as opposed to those which fold in order to retire or merge, for example.

The bill for compensation for failed firms falls on the FSCS – and therefore all advisers – to meet after it is proved that investors have a valid claim against the firm, and that firm would not be able to pay it.

Money Marketing understands that the FSCS is currently conducting research for an internal paper on the issue of phoenixing. The briefing may not be published externally for some time, but will help inform any action the FSCS could take in stopping directors at firms that collapse dodging their liabilities, and how to stop them getting back into the industry and potentially doing the same again.

But will the FSCS’s work, as well as a host of developments at the FCA, finally be enough to make sure sharp operators are not allowed back into the advice market?

Steps in the right direction

The FSCS may pick up the tab for repeated failures, but it is the job of the FCA to ensure that only appropriate individuals are given the regulatory permissions to conduct business.

FCA supervisory teams may already have some firms on their radar, as may the FSCS. The two organisations work together under a memorandum of understanding to share information which is reviewed annually.

FCA chief: Phoenixing is ‘unacceptable’

A similar deal struck between the FCA and Insolvency Service in May will see the pair share more information, so each can notify the other with background information on directors at companies that have closed down, when they may be the subject of an investigation, disqualifications or likely in breach of any minimum standards.

The Senior Managers and Certification Regime has also been touted by the FCA as a way to trace poor practice back to the individuals that deserve to be called up for it, making it harder for them to phoenix.

Advice market veterans such as SimplyBiz’s Ken Davy agree that, when each individual director has their responsibilities mapped out and assessed, it will be easier for the profession to weed out the particularly bad individuals within a firm for targeted action or suspension, stopping those actually responsible for poor practice from phoenixing.

This may be a more precise approach to sort those who are moving firm in order to avoid responsibility, and those who have simply started up elsewhere because their previous venture was not commercially viable, or they wanted to branch out into a different specialism.

Ken Davy: Senior Managers Regime will put an end to reckless advisers

The FCA is currently formalising whistleblowing procedures to try to make it easier and safer for staff to come forward with information about colleagues so they could be prevented from practising in the future.

However, compliance experts still report some firms deliberately applying for authorisation as soon as they are aware of problems emerging at their firm, because it is harder for the FCA to take away permissions once they have approved someone than to approve them in the first place without firm evidence of misconduct at the point of application.

There are also fears that as professional indemnity cover for higher-risk areas, such as transfers, becomes tighter, more advisers may try to mask their histories by setting up under a different company or in a different part of the market.

As far back as 2009, FSA staff said they were on the lookout for firms who had taken a look at their exposure to potential payment protection insurance complaints and try to leave these behind by phoenixing.

Adviser view

Yvonne Goodwin 
Managing director, Yvonne Goodwin Wealth Management

I suppose it’s immoral, but not illegal, which is the sad thing about it. It should be. Then again, they would stand up and say they need to earn a living, and this individual might not have been actively involved in whatever caused the previous business to go bust. Legally, how can you not get into bother? But I couldn’t do it. I couldn’t sleep at night.

The big problem is the trust between the clients and the advisers.

Sizing up the issue

According to FSCS data, 91 firms in total have been declared in default and therefore open to compensation claims between the start of the year and the end of July.

There appear to be at least 35 advice firms as part of the list, with many more companies involved in investment-related activity alongside a number of Sipp providers.

Money Marketing research shows that of the 91 firms, 46 still have directors listed as active on the FCA Register. Of those, 28 have at least half of their former directors listed as still active. As a proportion of the overall number of directors, more than 40 per cent appear to still be active.

Four firms have no former regulated individuals listed. One firm’s register entry could not be found.

It is possible that the register entry for some has not updated yet, and while any one individual may not have been to blame for their firm leaving compensation bills with the FSCS, or may have left before problems started, it does suggest that a significant number of directors and advisers at collapsed firms do end up with other jobs within finance and financial advice after the redress has been paid.

Adviser view

Jillian Thomas 
Managing director, Future Life Wealth Management

The cornerstone of the FCA is treating customers fairly. This isn’t treating customers fairly. It falls back on those that are doing the job fairly, paying for the others through fees and ombudsman enquiries.

We have a perception problem because of it. Alarm bells should ring for anyone with big commissions or offshore pension scheme investments. They should’ve been shown the door. The FCA should ask questions, but professional indemnity insurers should too. There has to be more of a way for the FCA to track what the IFA is doing.

The DB dilemma

Darren Reynolds, the director of Active Wealth, one of the advice firms grilled by the FCA and MPs over its role in transfers out of the British Steel Pension Scheme, is currently listed as active on the FCA Register. He has a number of other director roles according to his Companies House records, but because these appear to be in unregulated roles, the permissions do not show on the FCA’s Register record.

Reynolds may not have made it back through the FCA’s authorisation net, and is perfectly entitled to run other non-regulated and regulated companies after Active Wealth – other directors at firms that have been ordered to stop DB transfer advice have chequered employment histories or have set up shop elsewhere.

Shropshire-based Financial Page was declared in default by the FSCS last April after being told by the FCA to cease all pension transfers or switches into Sipps.

The FCA Register entry for director Andrew Page shows he was previously an adviser at Financial Limited, the network that collapsed after an FCA investigation into unsuitable advice. He also worked at DBS Financial Management, which was fined multiple times by different regulators before being subsumed into Sesame, as well as working at St James’s Place.

SJP was criticised in 2016 for taking on two advisers whose firm had previously collapsed with at least £500,000 paid out by the FSCS.

Other cases also indicate that advisers with previous FSCS liabilities don’t just phoenix by setting up a new firm on their own, but by joining larger advice brands.

Henderson Carter, a firm told by the FCA to cease pension transfers and break off ties with an introducer firm that Financial Page also used, was opened to FSCS claims around the same time as Financial Page.

FCA Register records show that of the eight individuals that have worked with Henderson Carter since it began in 2010, three are still listed as active.

One is now at Tilney Financial Planning, and was formerly at Green Planet Financial Services, which appears to be linked to a fund firm promoted by ex-England footballer Lee Sharpe that was wound down by the High Court after claims it was behind a property investment scam.

Another was previously also an adviser at Bates Investment Services, which collapsed in 2010.

The adviser, who is listed as a trainee at SJP early in their career, moved on to join Positive Solutions after the Bates collapse.

Positive Solutions was formerly owned by Aegon, but then sold to Intrinsic after a review of partners’ pension-switching business. Half of its regional offices closed.

ISJ Independent Financial Planning director Lena Patel says: “We should care about phoenixing; it’s reputational damage to the profession. We are struggling to get more and younger people to join us, and [phoenixing] is not something we need to have. It’s a burden on everyone else.

“If we can find this information quite readily, there needs to be more checks in place on the authorisations going through. I think the FCA is shying away from it a bit, telling firms it’s up to them.

“When you work in a small firm you know what’s going on, so either you are turning a blind eye or you get out.”

This article originally included references to Briggs Murray Financial Planning & Wealth Management and Henderson Carter. We would like to make it clear that after leaving Henderson Carter and prior to joining Briggs Murray Financial Planning & Wealth Management, the adviser worked for three companies, and did not directly take up a role with Briggs Murray upon leaving Henderson Carter. The adviser was employed at Henderson Carter for a period of one month and left in November 2013. We apologise if there was any unintended inferences made and for any confusion caused.

Expert View 

FCA is in a bind over how to stop phoenix firms

Everyone agrees someone should not be allowed to essentially dump liabilities on the FSCS and start all over again doing exactly the same thing.

But there is a flip side as well. If you are not guilty of any misconduct, should you be allowed to continue making a living?

Sometimes something happens when you are a director and a firm goes insolvent: the FCA may decide you are not competent to act as a director in the short term, but should we then be stopping them working as a regular adviser too?

I would guess most people come back as appointed representatives because it’s more difficult to get authorisation to run your own firm as a director, with worries you are not competent because your previous firm went bust.

Firms applying for a new adviser to get their CF30 permission can take a view they won’t put them forward if it would be controversial. If they have an adviser come to them with a history, they might not want to get on the FCA’s radar as having a controversial adviser.

If you are going for an adviser position, it’s all around competence and integrity. If you apply for permissions but aren’t applying for anything that involves DB transfers, the FCA can’t really say no if there’s no issues with competence or integrity. It’s difficult to refuse approval if it was on a specific DB problem if the adviser says they don’t want to do any of that.

The Senior Managers and Certification Regime will require advisers to be approved by the firm. The duty is then on them to say if the adviser is a fit and proper person.

Alan Hughes is financial services sector lead at law firm Foot Anstey

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Surely, the first question the FCA should ask any individual/s seeking reauthorisation in the wake of their old firm having been wound down (or with the intention that it will shortly be wound down) is Why?

  2. Actually it’s not that hard at all, well at least at a director level.

    If all companies are/were required to have a compliance officer role and that role was required to report directly to the board of the company.

    If the firm is found guilty of misconduct (e.g the likes of Active wealth), then the compliance officer should have been aware of it, if they weren’t they were incompetant. Because quite simply put no advice company should ever be allowing any DB advice without it being subject to a mandatory 100% file check.

    By making them responsible for reporting directly to the board, then all directors would be aware of the issues.

    So if the company goes under due to malpractice etc, then it is proven that the compliance officer and directors are incompetent and not fit to hold office.

    The directors could try to argue that the compliance officer hid it from them, or was incompetent and therefore they didn;t know, but given that they are responsible for assessing the fitness of the compliance officer for that role, they then failed.

    As such in those scenario’s, the FCA could readily have a rule that says those directors and compliance officer are then banned from holding any supervisory/responsible role within a regulated environment.

    Whilst that might not entirely stop an adviser from moving from firm to firm, it would stop phoenixing in it’s tracks, with the only possible exception being that the new company might have other directors listed, with the person responsible for the phoenix hiding behind some faux status.

    However even that could readily be prevented by having even harsher personal penalties applying to any director that deliberately deceives the regulator or hides the true ownership of any advisory company, with the person behind the pheonix, then being banned for life from holding ANY regulated role, or from working in any non regulatory role within the industry.

  3. The F-packs phoenix solution for themselves has simply been to change name and keep the same company number as the FSA had before it. But then they and their staff think they’ve got something like crown immunity which went out decades ago for HM forces, so logically HM forces to gain crown immunity again should stage a coup and take over the FCA so they can wage war without any come back. (bit like the US presidents claims)
    Put yourselves outside the rule of law and does that make you an outlaw who has neither the protection of the law nor the sanctions associated with it?
    Rights and responsibilities should go hand in hand.
    Tone from the Top should mean that if the F=pack continue to say advsiers ddon’t need a longstop, they should all waive their own rights and any firm they ever work for again (i.e, the banks who’ve just had their re-instated on PPI).
    Whats good for the farmer, should be good for the goose and gander.

  4. Above all of this is the regulatory requirement to be ‘fit and proper’.

    If a regulated person can get struck off for dodging TFL fares, then surely there’s sufficient ‘teeth’ to tackle any unsavoury business practices?

  5. It is clearly wrong to Phoenix having knowingly miss advised, fraud or intentionally written high risk business with the intent to. That said, we live in a world were the goal posts move continually, like sand the rules, outcomes, regulation move constantly. Some companies fail due to these reasons and it would be wrong to target them.

    The issue is PI Insurance which is not fit for purpose. There are not enough advisers to make the market viable. You have low numbers of advisers facing ever increasing compensation pay outs, with no consistency from the FCA, FOS and Government. If a company cannot afford to pay they close, like any other business. The real issue being the PI Insurer is covering all the business written for that years premium, in our companies case some nineteen years.

    You then have retiring business owners who cannot find a buyer for the company as a whole, due to the liability. The buyers want the funds under management and clients, but not the liability.

    The which hunt would be better served if every adviser insured their own business through life. In this way where ever they went so would the liability for their advice. If they have continual claims upheld, they could be identified quickly. More to the point the better advisers could receive reward, just like car insurance and no claims.

    Another issue is unregulated investments being covered if advised by advisers. This alone cost millions.

  6. What about fit and proper? The people involved in these failed firms should automatically be banned from being authorised and also from being a director.

    I don’t see what’s so difficult.

  7. I’m not going to re-post it here, but see my comment under the Editor’s Note on phoenixing.

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