RegulationSep 14 2021

FSCS uncovers 400 adviser phoenixes at CMC firms

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FSCS uncovers 400 adviser phoenixes at CMC firms
Caroline Rainbird, chief executive at the FSCS - Credit: Carmen Reichman

The Financial Services Compensation Scheme has alerted the regulator to 412 phoenixing cases, where advisers who worked at firms that defaulted had joined a claims management company to bring claims against their previous firm. 

The FSCS told FTAdviser so far in 2021 it has identified 145 such advisers, in addition to 267 that it had flagged previously to the Financial Conduct Authority.

It said there were further cases it was currently working through.

This comes as earlier this year, the FCA announced proposals to ban CMCs from managing FSCS claims where they have a relevant connection to the claim

Speaking to FTAdviser, FSCS chief executive Caroline Rainbird said: “We report on a daily basis areas of concern to the FCA and [the regulator] has been able to take an increasing amount of action against individual firms so they can't come into the market or they can't get the authorities that they need to act as their claims management company having failed as a IFA.” 

In 2020, the FSCS also identified 150 individuals who worked at defaulted advice firms and re-emerged within active regulated IFAs. 

The lifeboat scheme had also shared this data with the FCA.

Rainbird said: “We are a compensation scheme, we can't unilaterally do anything to change things, but what we can do is use our insights and use the data that we have, and to an extent, provide a bit of an independent view on where we're seeing harm being created. 

“We have the ability to use the insights that we've got to show where things could be done differently and we're certainly doing that with the FCA.

"We also work across the regulatory families, particularly with the ombudsman service, but also with the Money and Pensions Service and other bodies and government as well to provide our insights.”

She added FSCS was starting to look at other areas of what it calls “regulatory shopping”, where firms are looking at different environments - “maybe slightly less onerous environments than the FCA”, to get authority to effectively act as a claims management company and phoenix up through there. 

We have the ability to use the insights that we've got to show where things could be done differently and we're certainly doing that with the FCA.Caroline Rainbird

The FSCS has also highlighted examples of this with the FCA and other parties including HM Treasury. 

Rainbird said: “The vast majority of IFAs are decent, honest people who unfortunately have to pay for the consequences of those other IFAs who don't have the same level of behaviour, and have failed and left a trail of people out of pocket.

“It's growing unfortunately, there's still lots happening each and every day but actually the experience we're getting, the insights and working together using each other's data consistently, is giving the evidence and the momentum needed to take action.”

Compensation review

The growing cost of compensation has been causing major problems for advisers for years.

In July, the FCA announced that it will undertake a review of the scope and coverage of the FSCS, stating that it would be reviewing the compensation policy framework to ensure it is appropriate, proportionate and takes into account changes in the market, as well as its regulatory approach.

Rainbird believes regulation itself won't make the problem go away so there are a number of things the FSCS is working on, with the industry trying to understand what they can do and working closely with the regulator on its call for input.

Besides, she said, there was a lag of compensation payments because a lot of the claims, and in particular those around bad advice, went back five to 10 years. 

“There is this tale of compensation that comes through that any action that we take in the short or medium term may not have a fundamental impact on the levy, today, tomorrow,” she said.

“That doesn't mean to say that we shouldn't do it, but it's also about managing expectations that there isn't a silver bullet and there isn't an instant solution to bring the levy down.”

There's also something about the consumer taking responsibility for understanding what they're getting involved in, asking the right questions.Caroline Rainbird

Instead, Rainbird said the easiest way to bring the levy down was to ensure bad outcomes don't happen in the first place. 

She said the industry and regulators needed to do what they can collectively to help mass market consumers to ensure that they have access and limit themselves to appropriate products. 

“There's also something about the consumer taking responsibility for understanding what they're getting involved in, asking the right questions,” she said.

“In some cases, asking is this product FCA regulated, is it covered by FSCS compensation, and also the basic question of if it looks too good to be true, it probably is. That probably means it's something that they should not get involved in.

“It's very clear that everybody's got a role to play in addressing some of the challenges that that sit there because it's clear some recent failures show that consumers have not always understood what it is that they've invested in, and even some of the basics around what is and what is not a regulated product, and what the consequences are.

"That doesn't mean to say a non regulated product is bad, but you need to go read and understand what those implications are, and assess whether the risks that you're taking are appropriate for your own needs.”

sonia.rach@ft.com

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