FCA clarifies approach to compromise arrangements

FCA clarifies approach to compromise arrangements

The Financial Conduct Authority has confirmed how it will consider arrangements between firms and creditors used in compromise arrangements.

In its finalised document released yesterday (July 5), the regulator said it is aiming to reduce the number of proposed compromises it does not consider to be appropriate.

“We are seeing an increase in the number of regulated firms proposing compromises to deal with significant liabilities to consumers, in particular redress liabilities,” it said.

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

In the guidance, the FCA set out how it considers compromises and the factors it looks at when assessing them, as well as its role when a firm promises a compromise.

It also reminded firms they are obliged to notify the FCA immediately and provide relevant information at an early stage if they are considering proposing a compromise.

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, firms will be required to provide a minimum level of 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.

Firms will also be required to provide details of the proposed compromise.

This includes the structure, methodology and assumptions; effect on creditors such as rights being extinguished and the effect on 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.

Two respondents to the survey (out of a total of 11) again requested a ‘letter of non-objection’ from the FCA in relation to their proposal to manage their liabilities. 

But the city watchdog said it has not amended its position on this as it is focussing its resources on assessing the proposed compromise and any necessary supervision or enforcement action.