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‘Prevent and protect’: How the FSCS is trying to stop phoenixing

The Financial Services Compensation Scheme has said it is committed to stopping so-called “phoenix” firms dumping liabilities on the lifeboat fund through a strategy it is calling “prevention as well as protection”.

Earlier this year, the FSCS conducted research as part of an internal policy paper on the issue of phoenxing, where financial advisers elect to dissolve their firms and start under a different brand when they become aware of impending complaints.

This can be done multiple times to reinvent the firm on numerous successive occasions, leaving the scheme with increasing liabilities.

As opposed to a solvent firm, which would have to pay out itself for complaints against it through the Financial Ombudsman Service, a firm in liquidation has redress against it paid through the FSCS’ pooled fund which all advisers contribute to.

In a summary of its position provided to Money Marketing, the FSCS says it will gather more data on firms that collapse, passing this on to watchdogs like the FCA to avoid problems resurfacing.

It says: “[We shall] develop the FSCS’ own capacity to collect, collate and pass on actionable intelligence as a result of compensation and recoveries work.

“We shall alert the regulators to directors and advisers responsible for mis-selling and, in particular, help the regulators to prevent these individuals re-inventing themselves elsewhere in the regulated financial services market or the regulated claims management market.”

Money Marketing research from earlier this year estimates that, of the 91 firms declared in dafault by the FSCS between the start of 2018 and the end of July, 46 still had directors listed as active on the FCA Register, and that, overall, more than 40 per cent of directors from the collapsed firms still appeared to be active.

The FCA’s uphill fight to end phoenixing

The FSCS note reads: “[We] must be able to step in when financial services firms fail, but the lessons from failure can also prevent repetition or future detriment. FSCS shares with the regulators, the Financial Ombudsman Service, the new Single Financial Guidance Body and the industry the obligation to work collectively to identify and implement the interventions which will prevent future detriment to consumers.

“Failures are a necessary part of functioning markets, but failure arising from mis-selling and poor conduct is avoidable.”

FSCS chief executive Mark Neale says: “We must reduce the risk that incompetent or plain bad advisers re-invent themselves and impose new losses on new consumers.”


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

  1. “In a summary of the policy paper provided to Money Marketing, the FSCS says it will gather more data on firms that collapse, passing this on to watchdogs like the FCA to avoid problems resurfacing.”

    Oh good, problem solved then.

    The FCA couldn’t care less. It’s not their money.

    The FSCS is right on one thing – closing a business down, walking away from the liabilities and starting another one is part of how markets work. However, most markets don’t have businesses which can leave liabilities massively in excess of the money that passes through them, and a compensation scheme which dumps the liability of failed businesses on the rest of the industry.

    (In most industries, if someone contracts with me for services to the value of £5,000, the most they can lose from my bankruptcy is £5,000. Not £500,000 in stolen pension funds.)

    Time to stop handwringing about phoenixing and start prosecuting for fraud. Remember that all the money that has been lost for the past decade was in a bull market. The real scandals haven’t happened yet. A hard rain is coming.

  2. This is hardly rocket science. Anyone starting a new regulated firm has to obtain regulatory approval and participants have to be judged ‘fit and proper’. Isn’t there a blacklist of names that have dumped onto the FSCS? If there isn’t there jolly well should be.

    • @Harry Katz – the problem is often that the complaints and liabilities don’t fully materialise until after those responsible are already authorised in a new entity.

      When I asked the FCA how a particular individual could be on the register (CF30) when they have been responsible for millions of pounds in FSCS payouts, I recall the response as “they were deemed fit and proper at the time of their application”.

      And that’s the challenge for FSCS/FOS/FCA – how to cope with those that are planning well in advance of the complaints.

      It’s quite possible to string things out at FOS for a couple of years – long enough to move on and for the complaint to fall on FSCS.

      With the amount of money paid in PI policy premiums that never meet any liabilities and the countless millions paid in FSCS funding by firms that are doing the right thing, I can’t help wondering if there isn’t a better, more joined up way of dealing with this issue.

      I’m not convinced the current proposals are the right way forward, especially with a prospective FOS limit of £350,000 and the fact PI insurance must meet potential FSCS claims. The most likely outcome is that PI insurance becomes prohibitively expensive for the majority of smaller firms and that would not be a market working properly.

  3. I still don’t see why the FSCS considers this issue to fall within the scope of its remit.

    The FCA knows when a firm goes under and it knows when the principals of that failed firm apply for fresh authorisation under a different trading name. What useful purpose is likely to be served by the FSCS telling the FCA what it already knows?

    • Having done work on behalf of the FSCS in the past I know that the FSCS actually gets to see the paperwork in relation to potential claims i.e. Reason why letters and the such like.

      From the information that they receive they can work out whether the adviser who gave the advice (to use a technical term) is a rogue or not. If they decide that the adviser is a rogue they can request that the FCA investigate them and decide whether disciplinary action should be taken against them.

      • Regulatory action is taken against firms not individuals and if a firm has gone under, with its liabilities then falling on the rest of us by way of the FSCS, it’s beyond sanction. The plate to which the FCA should then step up is to block reauthorisation of the individuals responsible. But, on this, the FCA appears to be oddly timid.

        • Regulatory action can and is taken against individuals for their wrongdoing. It may not happen as much as we would like but the FCA have the authority to do so if there is sufficient evidence to back up any such action.

          The FSCS come into the equation because they actually see the evidence of the wrongdoing. They ask all claimants to forward copies of any documentation they have in their possession relating to their claim. This will often include reason why letters and other incriminating information. The FSCS could forward this to the FCA to investigate the individual concerned if they are still regulated. If a pattern of bad behaviour is discerned with evidence to back it up disciplinary action can be taken by the FCA. Ultimately leading to removal of the individual from the FCA register meaning that they are no longer authorised to transact business.

  4. I hope, once the FCA starts regulating the ambulance chasers in just over three months, it will put a stop to advisers phoenixing so that they can make claims against themselves to the FSCS.

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