FSA vows to take action against 'phoenix IFAs'

Speaking at the PIMS event on the Oriana this morning, Michael Lord, head of investments at the FSA, told IFAs the City watchdog cannot take action to prevent firms from becoming insolvent but it will put pressure on firms’ directors to honour complaints liabilities or risk the prospect of being refused future authorisation as a firm or a director.

Moreover, Lord says the FSA will intervene to ensure directors have adequate [capital] provision to deal with complaints and pay any resulting claims when closing down an insolvent company and transferring assets to another group.

The FSA says will consider enforcement action in cases where it believes directors’ actions “are found to have disadvantaged customers” by moving assets and, in most cases, the directors from one legally registered company to another in order to avoid their complaints liabilities.

"Phoenix firms are not only failing to treat their customers fairly but are being very unfair on their fellow advisers, who are left to foot the bill," he says.

Lord points out the FSA has so far investigated 18 “potential phoenix firms” and already referred one case to enforcement where a firm, for simplicity’s sake named ABC1, is advised to close with liabilities of £1m but then sells their assets, the client bank and the renewal commissions to ABC2, a company which has lay dormant for some time.

There were several high profile cases raised last year where IFA firms are said to have closed one limited liability partnership or legal company - leaving the cost of consumer complaints to be picked up by the Financial Services Compensation Scheme - and transferred assets to a new legally registered firm with a similar name.

In future, the FSA says it will ask directors to sign undertakings which agree to honour the firm’s liabilities with respect consumer claims against past advice and encourage firms to 'ring fence' funds from the closing legal entity to cover any potential liabilities.

More importantly, the FSA says it will refuse an application for authorisation of new business, along with a combination of other options, if the directors “do not make reasonable arrangements for claims arising out of previous business”, but is unable to prevent people from walking away from the industry and their liabilities if a company becomes insolvent.

That said, Lord points out the FSA does not necessarily see the unwillingness to sign former liability undertakings as evidence of wrongdoing.

“Sometimes the change of entity undertaking may not be appropriate. If directors or partners don’t want to sign the undertaking, we don’t assume their reasons are invalid. It is purely that such cases may present additional consumer risk than needs further consideration before we can properly evaluate the [new] application [for authorisation],” says Lord.

He continues: “But make no mistake; where we find evidence of deliberate actions taken to avoid liabilities or refusal to cooperate with us, we will seek the strongest action available as we – and I am sure you – find this kind of behaviour wholly unacceptable.

In order to try and keep an eye on insolvency situations, the FSA will in the future work more closely with liquidators in assess the conduct of directors, which could in turn prompt action by the FSA or Department of Trade and Industry who does have the power to ban directors.

Several examples of different types of business have been investigated by the FSA, says Lord, including one business still under enforcement investigation which has been buying small firms, stripping out the assets – ie the client base and trail commission – and moving advisers to leave just the liabilities behind.

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