RegulationAug 22 2018

Why firms should avoid the flight of the phoenix

  • To understand what is driving some firms to phoenix.
  • To ascertain whether there is a right or wrong way to close and start again.
  • To understand the implications this can have for the firm, the consumer and the industry.
  • To understand what is driving some firms to phoenix.
  • To ascertain whether there is a right or wrong way to close and start again.
  • To understand the implications this can have for the firm, the consumer and the industry.
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Why firms should avoid the flight of the phoenix

But he says: "This course of action is no good for a sole trader or a private partnership, as your line of defence by phoenixing is sketchy. The Fos can still decide the adviser is liable and can still chase you."

Winding up a firm, of course, is not illegal.

Keith Richards, chief executive of the Personal Finance Society comments: "A genuine failure of a business is one thing." Sometimes, a business proposition just does not work out at a certain time or in a certain location.

However, while simply shutting up shop to open up again elsewhere as a means of overcoming a potential PI problem may be possible, there are huge ethical problems with this, problems the City watchdog is keen to stamp out.

Mr Richards adds: "Deliberately winding up a company to clear past liability which then falls on others is another matter altogether.

Even if you have closed down a business correctly and for the right reasons, it is not unusual for a person to go to the FSCS with a complaint. Derek Bradley

"Any directors found to purposefully wind-up a firm to pass their responsibilities onto others, and so reduce the level of financial protection for their clients, may find that the outcome is the end of their advice career."

But as Mr Richards points out: "Although possible, it is very dangerous territory for anyone trying to use a potential loophole to dump their own liability on the rest of the profession.

"It is not the right answer and nor does it demonstrate the right ethical behaviours or compliance with the spirit of regulation. Two wrongs don’t make a right."

Is there a right or wrong way to phoenix?

This is a tricky question. As mentioned above, sometimes firms go under for a variety of reasons. Businesses do fail. According to the Federation of Small Businesses, one in seven entrepreneurs were expected to make an exit, through sale or closure, in the first quarter this year.

Figures to the end of 2017 saw a 4.2 per cent rise in company insolvencies in 2017 to 17,243 and a rise in quarterly insolvencies for the fourth quarter of 2017 to 4,382.

Mike Cherry, national chairman of the FSB, says: "Our research shows a record number of small business owners looking for an exit."   

Suppose a business model no longer works - perhaps those outsourcing firms who came in to deal with bundles of regulatory paperwork in the 1990s, or whose business was to sell fax machines to IFAs, could not compete with the technological advances of recent years, so they went under.

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