Beware of phoenix rising from FSCS ashes: Bamford

Beware of phoenix rising from FSCS ashes: Bamford

Approximately three-quarters of all financial firms declared in default by the FSCS between May and August this year were advice firms, the compensation scheme has said.

Of the 42 firms which the FSCS has declared in default, 32 were IFA firms while another four provide general insurance mediation.

The declaration of default means the FSCS is satisfied a firm is unable to pay claims for compensation made against it and it opens the way for customers of that firm to make a claim for compensation.

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Mark Oakes, head of communications at the FSCS, said: “The FSCS protects consumers around the UK when authorised financial services firms cease trading.

“It protects your deposits, investments, home finance and insurance, and it’s free for consumers to use.

“Our message to anyone who believes that they may be owed money as a result of their dealings with any such firm is please get in touch, as we may be able to help you.”

In the four months to May there were 40 IFA defaults, taking the total number revealed over the past five months to 82.

Nick Bamford, a financial adviser with Surrey-based Informed Choice, said the news raised the issue of firms that return to trading shortly after going into default, also known as ‘phoenixing’.

He said: “Phoenixing has been taking place for quite a long time and that can be particularly galling for advisers.”

He added that the whole FSCS funding model, including the huge levies, “is pretty much broken because there are fewer and fewer firms paying higher levies giving the consumers the protection they deserve.”

The FCA is due to start its triennial review into the FSCS and has said it will be publishing a discussion paper on the review later this year to seek views from stakeholders.

There will then be a consultation paper and final policy recommendations in 2016.

Regulator view

An FCA spokesman said: “The issue of ‘phoenixing’ has long been on our radar; we think it is unacceptable if directors of regulated firms attempt to shirk their responsibilities by setting up new firms.

“This calls into question whether someone has the fitness and propriety to operate in the financial services industry.

“We have a number of tools at our disposal but identifying phoenixing is not easy.

“When we have taken action against potential phoenixing, it is usually through robust challenge at the application stage where about 10 per cent of applications are withdrawn.”