Financial Conduct Authority  

FCA warns firms which seek to limit their liabilities

FCA warns firms which seek to limit their liabilities

The Financial Conduct Authority has warned firms using company or insolvency law to limit their liabilities that they could face regulatory action if their proposals unfairly benefitted them at the expense of their customers.

The regulator is consulting on guidance which sets out how it considers compromises and the factors considered when assessing them; and the FCA’s role when a firm proposes a compromise.

A compromise is an agreement between a company and its creditors which allows the company to settle its liabilities.

The FCA said it was seeing an increase in the number of firms developing proposals, such as scheme of arrangements, to deal with significant liabilities to consumers, in particular redress liabilities. 

In proposed guidance published today (January 25), the FCA made it clear to firms seeking to limit their liabilities that they should provide the best possible outcome for customers, which would include providing the maximum amount of funding possible to meet compensation claims by customers. 

The regulator warned that failure to do so could result in the FCA objecting to the firm’s proposals in court. 

The FCA said it was also prepared to use its regulatory powers, including enforcement actions for misconduct by firms or their senior managers, when appropriate.  

Sarah Pritchard, executive director of markets at the FCA, said:  “Under existing company and insolvency law, firms have options to limit their liabilities. When making use of these, they still have a responsibility to treat their customers fairly. 

“We will take action against firms that don’t meet this obligation. The guidance we are consulting on should help firms understand our expectations and ultimately help firms to avoid proposing compromises that are unacceptable to us because they fail to provide the best possible outcome for consumers.”    

The guidance

The FCA told firms it expected to be informed as soon as a firm was considering a scheme of arrangement or other compromise to manage its liabilities.  

With this guidance, the FCA said it aimed to help firms understand what information they would need to pass to the FCA and how the regulator approached compromises in line with statutory objectives.

The proposed guidance focused on three types of compromise: schemes of arrangement, restructuring plans and voluntary arrangements.

To make an initial assessment of whether the FCA was likely to consider the proposed compromise, a firm would be required to provide the following minimum information as part of its initial notification.

This would include:

  • An explanation as to how the liabilities subject to the compromise arose, including time period, directors and senior management in place at that time, and any steps taken to mitigate the liabilities
  • Type of liabilities to be compromised and their value
  • Actions that the firm has taken or is taking to remedy the cause
  • Creditor cohorts or classes to which the compromise will apply and how they have been determined
  • Anticipated pence in the pound return to creditors or creditor cohorts or classes subject to the compromise with high level details as to how this has been estimated 
  • Intended trading activity in advance of the compromise coming into effect, while the compromise is in effect, and after the compromise has come to an end, including business model, projections and material assumptions

In addition, to enable a full assessment of the proposed compromise, the FCA said firms should provide information at an early stage and in any event as soon as it is available.

The information the FCA said it would need will include: substance of the proposed compromise such as the structure, methodology and assumptions; practical effect of the proposed compromise on relevant creditors such as rights being extinguished and the effect of the compromise on any compensation which may be available from the Financial Services Compensation Scheme; and financial information such as forecasts for the next six months as well as bonuses and remuneration.