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The Phoenixing debate: When do directors deserve a fresh start?

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Over the last week or so the issue of “phoenixing” has once again reared its head. It has been reported that Willow Financial Management has been placed into administration due to Arch cru liabilities and that the directors of Willow have purchased the clients and income stream from the firm and will continue to advise those clients.

I found some of the coverage of this situation and comment on the FCA’s and FSCS’s position potentially confusing. So after some brief checking on the FCA register, I decided to write this article to clarify the overall position and put forward some of my own views.

Genuine phoenixing – a firm disappearing overnight, leaving behind its liabilities then reappearing to advise the same clients and with the same directors – is almost universally considered to be bad for the industry and its reputation. The FCA is generally pretty hot on stopping it from happening – it is in those situations that I would expect the FCA to ask the new firm to give an undertaking for the old firm’s liabilities.

Under the FCA’s ’fit and proper’ rules, if you have been a director of a company which has not been able to meet its liabilities and regulatory obligations, it is very unlikely that the FCA will allow you to be approved as a director, member, partner or sole trader in another directly-authorised firm. What the FCA will not do, however, is prevent the former directors from continuing to practice elsewhere as advisers only, provided that the directors have not been guilty of some form of misconduct or have otherwise displayed a lack of integrity and are competent to advise.

If the former directors were guilty of such misconduct or deemed to lack the necessary competence, then the FCA may well not approve them in any controlled function role, including adviser, and could go further by prohibiting them from carrying out any role in relation to a regulated activity if it thought this was justified.

Leaving aside any legal argument, this appears to me to be an entirely balanced, fair and reasonable approach – perhaps not terms usually associated with the FCA. If it were otherwise, then any error made by a financial adviser which resulted in their business becoming insolvent would automatically mean that the adviser concerned would have their livelihood taken away from them – permanently. This doesn’t happen in any other area of business, why should it apply to advisers? And wouldn’t it result in a huge disincentive to new entrants and the death of entrepreneurship in the IFA sector?

IFAs often complain, justifiably, that they were singled out for poor treatment when the 15-year longstop was removed in 2001 but it remains in place in virtually every other business sector. It is therefore ironic that some appear to advocate that an even harsher approach should apply to directors of firms who have become insolvent. Do we really want to give the FCA even more draconian powers against individuals that it can apply arbitrarily? Furthermore, it is possible that an outright ban on practising as an adviser, based solely on the fact that your firm had become insolvent – in the absence of misconduct, would be susceptible to legal challenge.

A touch of humility may be in order here. Put yourself in the position of a director of an insolvent firm and consider the number of successful businesspeople who experienced failure before being successful. Your firm has just failed, you probably feel that you have let your clients, your staff and your family down. You still have to make a living and you may have a family to support.

It would be a harsh regime indeed that punished this person still further if it has not been found that there was anything deliberate or disingenuous in their actions. Everyone can make mistakes and be guilty of poor judgment – that should not automatically result in a life sentence.

The FCA has adopted this sensible approach at least since the pensions review – about as far back as I can remember – when a lot of firms failed due to their pension review liabilities. I can remember keeping on my ’know how’ file a copy of a letter from the regulator explaining this approach, and referring to it on many occasions to reassure an adviser that they would still be able to earn a living even if their firm suffered an insolvency event.

In the Willow case, it was also reported that the directors had purchased the clients from the firm in administration. When a firm is in administration, the administrator has a duty to get the best deal for the creditors. When an IFA firm becomes insolvent, this will often mean selling the clients to the directors – they know the clients and so the clients are likely to be worth more to them than to anyone else.

Furthermore, if you agree that a director should be allowed to continue to advise elsewhere, it is unlikely that anyone else would want to pay for the clients, knowing that the clients’ loyalties are likely to lie with the director or other person who used to advise them. So selling to the directors puts more money in the pot for creditors and means less liability lands with the Financial Services Compensation Scheme. And let’s face it, if a former director has really screwed over their clients, those clients are unlikely to stay with them regardless of whether the director has bought the ’rights’ to the clients or not.

For the record, the FCA register indicates that all of the three former directors of Willow are now advisers only with other firms – they are not appointed representatives or directors of authorised firms. They may be directors of non-regulated firms – I haven’t checked – but the details on the FCA register are consistent with the approach described above, which is a fair one.

Alan Hughes is a partner at Foot Anstey

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. A well written and balanced article, Alan. What I guess we want to see in the IFA community is some evidence that those previously part of liquidated firms, in any capacity, have been suitably vetted by the FCA and their professional bodies before being approved with a new firm. This would give us reassurance that individuals responsible for delivering poor advice or ‘liability dumping’ did not continue to play any part in this profession, potentially creating more problems and expense for all of us in the future.

  2. I think making good past liabilities would be an intolerable degradation of limited liability. I would however want to see some sort of enhanced levy to the FSCS to offset the burden placed on it and ultimately the advisory community.

  3. A very fair and balanced article. Thank you to Alan Hughes.

    Can you write one for those advisers who recommended Keydata as part of a balanced portfolio (not 50% or something stupid like that)?

    I know an adviser who is having to jump through hoops after investing about £1k out of a £500k portfolio in Arch, no client complaint and yet he’s still having to go through this rigmarole and Capita have now walked away from the problem following their backroom deal with the FSA!

  4. E L Wisty (an only twin) 4th November 2013 at 10:49 am

    I echo the above sentiments that this is a fair, and informative, article. Thank you, Alan.

    I do think that it is important to distinguish between equity-holding directors and non-equity directors. Clearly, it is totally unacceptable and abusive for a director with a financial interests in a company to dump the liabilities and seek rebirth through phoenixing.

    However, I think that it is different if non-shareholding directors/managers act to save their jobs and assist their clients by creating a new business and reaching a legal settlement with the administrator.

    What is wholly unacceptable is where non-shareholding directors deliberately plot to crash an existing business, in order to dump liabilities, and then establish a new business against the interests of their former shareholders. This is little more than theft and, as it shows that they are not fit and proper, the FCA should expect, and act upon receipt of, a Form D from the former shareholders notifying them of directorial breaches of contract and duty of fidelity.

  5. Fair article. It seems wrong that a person should be punished for life because they recommended a product that was authorised and regulated by the FSA and then subsequently re-assessed with the benefit of 20/20 hindsight. It’s Capita that should be paying for the FSCS not IFA’s.

    (PS No, I don’t have any Arch Cru or Keydata liabilities – I just think the way IFA’s have been treated stinks)

  6. It is clear we live in a society where wealth is seen as more important than health.

    A medical practitioner can be struck off by the GMC but it is rarely for life and yet we often see advisers being struck off for life.

    Is this right and fair?

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