FCA to scrutinise firms using insolvency law to benefit themselves

UK finance watchdog will take ‘assertive action’ against businesses using insolvency law to benefit themselves at the expense of customers

  • More and more firms developing proposals to deal with liabilities to consumers
  • FCA warns firms should be seeking the best possible outcome for customers 

Businesses using company or insolvency law to manage their liabilities in a manner which unfairly benefits them at the expense of their customers have been warned they could face ‘assertive action’ by the Financial Conduct Authority.

The FCA said it planned to act amid a rise in the number of firms developing proposals, like Scheme of Arrangements, to deal with hefty liabilities to consumers, in particular redress liabilities.   

In proposed guidance published today, the FCA said companies seeking to limit their liabilities should provide the best possible outcome for customers, which will include providing the maximum amount of funding possible to meet compensation claims.

Action: The FCA said it planned to act amid a rise in the number of firms developing proposals, like Scheme of Arrangements, to deal with hefty liabilities to consumers

It added: ‘Failure to do so could result in the FCA objecting to the firm’s proposals in court. The FCA will also use its regulatory powers, including enforcement actions for misconduct by firms or their senior managers, when appropriate.

‘The FCA has told firms it expects to be informed as soon as a firm is considering a scheme of arrangement or other compromise to manage liability and set out the information it should receive.’

A Scheme of Arrangement is a process used by a company in financial difficulty to reach a bindings agreement with its creditors to pay back all, or part, of its debts over an agreed timeline.

Some firms have requested a ‘letter of non-objection’ from the FCA in relation to their proposal to manage their liabilities. 

Today’s guidance consultation confirms that the FCA would be unlikely to ever issue a letter of non-objection. 

The FCA will instead focus on assessing each proposal on a case-by-case basis to ensure firms are meeting their regulatory obligations, including treating their customers fairly. 

Following their assessment, the FCA will communicate any concerns to firms, and if necessary the courts, and consider any further regulatory action, it said.    

Sarah Pritchard, executive director of Markets at the FCA, said: ‘Under existing company and insolvency law, firms have options to limit their liabilities. 

‘When making use of these, they still have a responsibility to treat their customers fairly. We will take action against firms that don’t meet this obligation. 

‘The guidance we are consulting on should help firms understand our expectations and ultimately help firms to avoid proposing compromises that are unacceptable to us because they fail to provide the best possible outcome for consumers.’

This consultation is open until 1 March, and the FCA said it welcomes views from all interested parties before its guidance is finalised. It added: ‘Although this is guidance on the circumstances in which the FCA will exercise its existing rules, the FCA welcomes feedback before determining final guidance.’

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