The Financial Conduct Authority will take action against firms using company or insolvency law to deal with liabilities in a way that conflicts with consumer interest.
In response to an increase in the number of businesses pushing proposals, such as Scheme of Arrangements, to manage their liabilities to customers, the Financial Conduct Authority announced that they will pursue assertive action against firms found to have used company or insolvency law to deal with liabilities in a way that conflicts with the interest of their consumers. In proposed guidance published on the 25th of January, the watchdog upheld that companies looking to handle their liabilities must put their customers first, meeting their compensation claims by providing the maximum amount of funding possible. The FCA warned that they will object to any proposals in court from firms that ignore this requirement, further stating that they will employ enforcement action with their regulatory powers when necessary.
What guidance must be followed to avoid assertive action?
The FCA outlined that firms must inform them as soon as they are considering a Scheme of Arrangement or any other type of agreement to deal with their liabilities. The information conveyed to the FCA as part of the initial notification should include:
- An explanation of the origin of the liabilities in question, including the directors and senior management in place at the time they arose, as well as what steps have already been taken to mitigate these liabilities.
- The type and value of the liabilities in question.
- The nature of the proposal, regarding its structure, methodology and assumptions.
- A list of the creditors to whom the compromise will apply and the means by which they were determined, as well as how they will be affected.
- An estimation of how much money will be returned to creditors, including details on how this was calculated.
- The trading activity that the business will undergo before, during and after the compromise, with details such as business models, forecasts and material assumptions.
What will the FCA do following a notification?
The FCA will assess the information provided in order to decide whether or not the proposal can be approved. Should there be any concerns, the regulator will voice these to the companies and creditors involved, and even the courts if necessary.
Whilst some businesses have requested a ‘letter of non-objection’ from the FCA, the body has stated that they will be unlikely to ever issue such a letter, instead focussing on assessing each proposed agreement on a case-by-case basis to ensure that these proposals aren’t unfairly favouring the firm over the consumers that the liabilities concern. On this topic, the Executive Director of Markets at the FCA, Sarah Pritchard, has 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.”
If you would like to learn more about these FCA guidelines or managing your company’s liabilities in general, contact Voscap at 020 7769 6831 or email email@example.com to speak to one of our insolvency specialists.