Regulation  

Phoenixing is trashing the industry’s reputation 

Sally Hickey

Sally Hickey

Phoenixing in the financial advice industry has been going on for many years, but despite the efforts of the FCA to address it, and the damage it does to the advice industry's reputation, it is still very much alive.

The official definition of phoenixing is the practice of closing a firm and that firm re-appearing under a new guise to avoid liabilities arising from the old firm. 

Essentially, company directors tend to lose a load of clients’ money, and then get away scot-free, leaving the clients with either crystallising huge losses, or unable to recover any of their funds. 

You may wonder why we don’t write more about companies doing this.

The main reason is that phoenixing is very hard to prove and if we were to be taken to court and sued for libel, the costs would be the same as a reporter’s annual salary.

Where is the FCA in this situation? In practice, there is very little the regulator can do about a company that has phoenixed.

The FCA has identified 22 cases of suspected phoenixing during the authorisation process in the 2021-22 financial year, resulting in 17 firms withdrawing their applications for authorisation and the remainder approved but with mitigation measures put in place.

This is in comparison to 412 phoenixing cases the Financial Services Compensation Scheme referred to the FCA to in 2021.

That is a big gap, and within that gap will be people who have lost their savings, their pensions – all money people cannot afford to lose.

So what can be done?

A spokesperson for the FCA said the regulator has a broad programme of work under way to tackle this harm, and it will "not hesitate to take action" if it sees phoenixing.

For Neil Liversidge, managing director at West Riding Personal Financial Solutions, the goals should be widened.

Ask the government to change the law on fraud to enable the prosecution of those promoting these schemes if they knew, or reasonably should have known that the schemes had no chance of success, he says.

Furthermore, powers should be given to the regulator or government to enable them to claw back dividends and pension payments of those involved in the firms, and new firms that have previously phoenixed should pay a higher FSCS levy.

Personal financial liability for the individuals involved would also help deter recklessness.

For Alasdair Walker, chartered financial planner at Handford Aitkenhead & Walker, the focus should be on the fiduciary duty of the adviser, rather than the regulation of product sales, which is what the FCA focuses on.

“You become what you measure, if all [the FCA] is doing is measuring product sales, then firms are regulated based on product sales.”

Walker mentions the recently released consumer duty, which should improve the industry if it does really focus minds on the consumer outcome.

If the industry is responsible for justifying the end result experienced by a client, rather than the input given, we might be somewhere on our way, he adds.