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Phoenixing – Risks, Rules and the FCA

Posted by Serina Gill on 12-Jun-2018 11:31:00

fca_logo-956993-editedRisk managers should watch out for new rules set to prevent the practice of ‘phoenixing’ whereby financial services firms deliberately go bust, leaving the Financial Services Compensation Scheme (FSCS) to pick up the tab and then resurface under a new guise. This nefarious practice has caught the attention of MPs - and they are demanding action.

For example, MP Frank Field, chair of the Work and Pensions Select Committee, has highlighted the case of collapsed IFA, Active Wealth, which had its assets and client bank purchased by another advice firm, run by a former adviser. Active Wealth had been hugely criticised for its part in convincing members of the British Steel Pension Scheme to transfer their pension funds. The advice was unsuitable, resulting in the members losing out on retirement benefits and the adviser pocketing large amounts of commission.

FCA in the firing line

Mr Field said the British Steel workers had been “shamelessly bamboozled” by financial advisers into transferring their pensions and let down by regulators. Meanwhile, MP Robert Jenrick, Exchequer secretary to the Treasury, has also urged the FCA to take action to stop phoenixing as it is undermining trust within financial services. He was responding in a debate requested by MP Kevin Hollinrake, who said two of his constituents had lost money after being advised by Scott Robinson, an adviser at TBO Investments.

This firm became insolvent and Mr Robinson then opened a new firm, Mount Sterling Wealth, taking clients with him. It transpired that Mr Robinson was providing advice without holding professional indemnity insurance.

Mr Jenrick said: “We will work with the FCA to ensure appropriate rules are put in place. I intend to ensure action is taken in this area. Phoenixing in these circumstances is wrong. It leaves consumers and taxpayers out of pocket and the reputation of the industry tarnished.” Mr Hollinrake also said that advisers should be required to seek ongoing re-approval.

This is an important point, and it should be noted that many financial advisers are also angry about phoenixing. This is because advisers pay hefty levies to the FSCS and they are infuriated to see the money used to pay the creditors of growing numbers of insolvent advisory firms. The view is that the winding up is being used to prevent probes into wrongdoing. However, if the adviser escapes official censure, then there may be nothing to stop them setting up again.

The FCA, however, does appear to be taking the issue seriously. According to its chief executive, Andrew Bailey, “Phoenixing is something we are looking at. This is not because there are no rules or engagement on this front as there certainly are, but we are conscious that this issue has arisen and we are actively working on what we think could be done, which might either be within our existing body of rules or it might require the introduction of new ones. You will be hearing more from us on this, because it is a live issue.”

Powers already exist

Notably, the FCA does have weapons in its armoury that could reduce phoenixing. The regulator can strike off individuals if they are not considered fit and proper to work in the industry. It can also apply a lesser known tool, called asset limitation orders, which mean the firm is subject to restrictions that stop them from selling assets without permission from the regulator. These are not used widely, last year some eight firms were subject to the requirement, but the current mood could result in an increase.

It is clearly wrong that firms which fail to meet sufficiently high standards should shirk their responsibilities when it comes to meeting their liabilities. There also needs to be a brighter regulatory spotlight on individuals, to ensure that any chequered histories are taken into account, with action taken to ban more individuals.

The FCA is under pressure to be seen as a tough and effective regulator, but so far this year, the rise of phoenix companies is proving a difficult nut to crack.

This is why its new rules must be sufficiently rigorous if they are to bring reassurance to customers and other regulated firms alike.

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