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Network failures blamed for 'widescale phoenixing'

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.

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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.

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.