FCA can stop firms dumping liabilities, so why doesn’t it?

Donia O’Loughlin

Earlier this month, the spectre of another £1.5m being added to the Financial Services Compensation Scheme bill was raised when an adviser firm was placed in administration due to liabilities relating to redress claims over advice to invest in Arch Cru funds.

What stuck in the craw for most was that the directors of the firm had bought back the assets and ongoing revenues of the business and launched two new entities, whilst leaving the liabilities to be picked up by others.

Adding to the sense of injustice, the Financial Conduct Authority told me in the wake of the story that it can force individuals to take the liabilities with them when they ‘phoenix’ a firm in this way if they are deemed to be deliberately avoiding their responsibilities.

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Really? If that is the case why didn’t they use the power in this instance, and when would a firm be considered to be deliberately shirking its responsibilities?

Let’s take a step back.

In the case in question, the former directors of Willow IFA, which had forced into administration due to its £1.5bn Arch Cru liabilities and debts including a £23,000 tax bill, bought back the business, ongoing client remuneration and the company’s physical assets for £40,000, but not the liabilities.

The directors, Ian Morris, Peter Holden and Calum Cameron, launched two new FCA-registered firms, My Wealth Management Limited and Dynamic Wealth Limited. Each firm purchased 50 per cent of the assets listed.

Following this I asked the FCA, hypothetically of course, whether if the directors of a failed limited company set up an entirely new company the regulator can force the new entity to take on any liabilities of the existing business as a condition of authorisation?

The response came that while the regulator could not force a new limited company to take a particular course of action, if it was concerned that individuals were deliberately avoiding their responsibilities to their former clients it could indeed make authorisation contingent on action being taken to look after those clients.

Such actions could included a deed poll or similar agreement to force liabilities to clients to be transferred to the new company, it clarified.

Interestingly, the previous regulator did try to enforce just such a transfer on a firm using a standardised deed poll, but it was defeated in court as the terminology used in the construction of the deed poll was described as “susceptible to argument”.

The case was highlighted in a Complaints Commissioner ruling which stated that the Financial Services Authority was not responsible for a complainant’s losses of £243,000 following the regulator’s failure to effectively transfer liabilities to a ‘phoenixed’ company after a regulated firm fell into administration.

I took legal opinion from Robert Morfee, partner of Bristol-based law firm Clarke Wilmott, who told me that it is “quite possible” the FCA could disallow someone from starting a new business unless they agree to pick up the liabilities of the old one.