FCA Warns Financial Advisers on Insolvency Deals

The Financial Conduct Authority (FCA) has issued a warning to financial firms that try to limit their liabilities.

There has long been a history of financial firms that get inti difficulty with negligence complaints and compensation liabilities but then use the laws of insolvency to mitigate liabilities.

Some financial firms literally ‘milk the cow’ by stripping assets funds out of the business and then go into liquidation, thereby dumping their compensation liabilities on insurers and the Financial Services Compensation Scheme.

In other cases, once a firm is in liquidation, insolvency law allows insolvency practitioners and directors to negotiate settlement terms or compromises with creditors at a lower level given lower assets in the business.

The FCA is keen to close off these loopholes where directors have benefitted financially by drawing out assets from the business before moving into liquidation.  There has been a steady growth in firms doing this and the FCA wants to clamp down.

In a warning to financial firm directors, the FCA has warned if any deals are not in the best interests of the client including maximising funds available to pay any compensation to clients then it will use its regulatory powers to:

• Object in court to any wind-up
• Use regulatory powers of enforcement action on firms and senior managers for mis-conduct meaning personal assets may be seized.

Comment

To avoid the above complications, the FCA will require financial firms and their senior managers to supplied detailed reports on:

• Financial liabilities and what actions were taken the try and prevent the collapse.
• Compromises and how the figures were reached.
• Proof that all solutions are in the client’s best interests.
• Proof that all options have been explored.
• Trading intentions between now and closure.

We suggest all the above are sensible moves by the FCA.