Your IndustryOct 24 2018

Network failures blamed for 'widescale phoenixing'

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Network failures blamed for 'widescale phoenixing'

Large networks, national advisory firms or consolidators which end up folding create unintentional phoenixing of their member firms, the chief executive of the Personal Finance Society has claimed.

Keith Richards said cases such as Honister, which failed in 2012, showed small IFAs could be forced to 'phoenix' through no fault of their own.

He therefore warned the regulator should not set "arbitrary rules" against phoenixing that would catch cases with "genuine reasons" for being forced into a phoenixing position.

The Financial Conduct Authority has stated it is cracking down on deliberate phoenixing, whereby a director may close down a business to escape known liabilities or to avoid paying certain regulatory or other fees, and then start up again a few months later in a similar location with a similar trading name.

However, Mr Richards said: "There are of course genuine reasons why some firms have failed, through either a financial or regulatory reason and that makes the issue for the FCA more complex and it will be less easy to set arbitrary rules."

He pointed to Honister, the "last big network which placed significant advice liability into the Financial Services Compensation Scheme" as an example for creating a "genuine" phoenixing problem.

The failure of the network, as Financial Adviser reported at the time, was caused by a failure to secure affordable professional indemnity cover for past liabilities. 

At the time, Honister's chief executive Coleman Moher and the administrators, Grant Thornton, issued a statement saying: "Over the past few years, PI insurance costs have increased to unsustainable levels, driven mainly by large claims relating to historic business and, to a lesser extent, wider industry issues".

But Honister's demise also forced the temporary closure of many of its more than 900 self-employed financial advisers, many of whom had come via old networks such as Burns Anderson and Sage Financial Services, and represented 328 financial advice firms across the UK.

Some firms involved in DB pension transfers could find themselves being ‘self-insurers’ at renewal, so all advisers need to be alert to the risk of PII being an annually renewable insurance. Keith Richards

Mr Richards said: "Folding the firm into administration was the only feasible option for the owners but it placed significant liability into the FSCS pot.

"The hundreds of IFA firms impacted by this single action caused phoenixing on an industrial scale as most had to apply for re-authorisation via other networks, nationals or apply for direct authorisation.

"There was of course no intent to deliberately phoenix by any of these firms and indeed the appointed representatives were indeed the first victims of the principal firm's failure – but all of their past liability up to that point in time now sits with everyone to fund via the FSCS."

Mr Richards also warned the issue of phoenixing could escalate in the coming months with, the regulatory pressures coming to bear on firms doing defined benefit transfer advice, and the ever-increasing costs of PI insurance attached to DB transfers.

He said: "Some firms involved in DB pension transfers could find themselves being ‘self-insurers’ at renewal, so all advisers need to be alert to the risk of PII being an annually renewable insurance, not unlimited for time and memorial as regulated advice is."

According to the FCA, its concerns around deliberate phoenixing comes down to advisers causing consumer or peer detriment.

On its website, it points to its three main concerns: 

  • Poor advice that causes consumers to invest in unsuitable high-risk products that lead to financial loss.
  • Financial advice firms’ non-payment of redress awarded by the Financial Ombudsman Service, which might also include the need for consumers to make a claim to the Financial Services Compensation Scheme.
  • Financial firms or individual advisers re-entering the financial advice sector having previously avoided liabilities to consumers.

A spokeswoman for the FCA said: "It is unacceptable for regulated firms and individuals to seek to avoid liabilities to consumers that have arisen as a result of the poor advice they have given. We have a broad programme of work under way to tackle the harm it causes to consumers."

Find out more

How is the FCA working with the industry, government bodies and other regulatory organisations to prevent phoenixing? Read this month's Money Management feature 'Ashes to Ashes: how to stop phoenixing' on FTAdviser

simoney.kyriakou@ft.com