Entrepreneurs often fail. Lord Sugar, Sir Richard Branson and Henry Ford all suffered serious blows in the early days before going on to become famous names in their own right.
So, too, in financial services, a firm may go under due to lack of profits or inexperienced directors, and a few years later those directors may set up shop again, with more experience, better processes and a clear business model.
There are, of course, rules around how to do this, which have been laid out by the Insolvency Service (see Box 1).
But there is another form of rising from the ashes that is quite different to that of a legitimate entrepreneurial story: the phoenixing adviser.
Such firms and individuals have been known to deliberately fold one company to avoid creditors, complaints and liabilities, only to set up shop again doing the same work under a similar name, and sometimes operating out of the same address.
Yet it is not illegal to do so. Derek Bradley, founder of online forum Panacea Adviser, notes that company law permits any limited liability company to close down when in hardship, only to forge a new firm with an almost identical name doing exactly the same thing.
Mr Bradley says: “[The issue is] they often keep the clients, but fail in many cases to look after clients from their previous entity who may have a complaint requiring resolution. So the question here should be in relation to the law. Should any directors of businesses that fail and leave customers in a bad place be allowed to trade again, ever?”
What’s the harm?
There are other issues that also warrant closer investigation. Aside from ensuring that all relevant debts and obligations are paid, the FCA has three main concerns when it comes to advisers causing consumer or peer detriment and then seeking rebirth under a new guise. These are:
- 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 says: “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.”
What is being done?
To that end, the FCA and the Insolvency Service signed an agreement in May this year that aims to curtail the number of phoenixing companies in the UK.
The deal is not intended to prevent entrepreneurs from starting again after a business failure – otherwise the principles of a free market would be severely undermined – but rather to spot those company directors who deliberately close up and then start up again to the disadvantage of consumers.
Following this agreement, the FCA has said it is using “big data” analytics to spot when a firm might be a phoenix, enabling it to take action before any further consumer detriment is caused.
It is also cracking down earlier on firms that do not pay their levies on time, strengthening the regulator’s authorisations gateway and supervision for firms that provide advice on high-risk and complex investments, and – most notably as far as the question of phoenixing is concerned – making it harder for re-entry into the advice sector.