Some firms try to avoid liabilities while still benefiting from the assets of the business. Learn how to identify and report polluting behaviour.
Financial firms may need to compensate customers when they provide poor advice, products, or services. To do this quickly and effectively, firms need to plan ahead, revisit and monitor the consumer outcomes and make adequate financial provisions for potential and actual liabilities.
Some firms do this effectively, applying the value in their business to remediate poor advice, products or services. But we are increasingly seeing firms trying to avoid potential or actual liabilities whilst still benefiting from the assets of the business. We call this ‘polluting behaviour’.
Polluting behaviours
We see a broad range of polluting behaviours in the market. We have identified 6 main examples.
Basic phoenixing
Basic phoenixing occurs when an authorised firm shuts down and a new firm emerges in its place, taking the previous firm’s assets with it. The previous firm ceases trading or is dissolved, often entering insolvency (liquidation, administration, or administrative receivership), leaving behind its unresolved consumer liabilities.
Lifeboating
Lifeboating is when a firm connected in some way to an existing authorised firm is used as a method of preserving assets. Lifeboats can be set up from scratch or acquired and may include appointed representative arrangements. A common use of lifeboats is where an existing authorised firm moves its customers over to a group company (the lifeboat) without any commitment to take on its liabilities. The polluting behaviour crystallises when the firm retaining the liabilities eventually dissolves, leaving unresolved customer liabilities.
Fronting
Fronting is a process whereby one or more individuals with a clean regulatory history are put forward as the controllers or managers of a firm in an authorisation application, when in reality these individuals are a ‘front’ for the real controllers or managers. The attempt to conceal usually centres on the poor regulatory record of an individual, which can include a record of closing firms and leaving liabilities behind.
Sale at an undervalue
This occurs when a firm sells its assets, usually its client bank, at below-market value. The sale then impacts the ability of the firm to cover its potential or actual liabilities. In some instances, we also see individuals moving from the firm with liabilities to the firm to which the assets have been sold. This means not only have the assets been preserved and liabilities abandoned but the same individuals can continue to benefit from the ongoing commission payments the client bank generates.
Restructuring
Restructuring refers to changing the corporate structure of the group to isolate liabilities and protect assets. This may include the insertion of a holding company, selling or transferring the client bank, or overpaying dividends.
Proceeds of sale not applied to redress
This behaviour describes when a firm has funds available from the sale of an asset or assets and has potential or actual redress liabilities, but the funds are not used to address those liabilities.
A firm which causes the market to pay for its mistakes through the Financial Services Compensation Scheme (FSCS) levy or shifts that loss onto the customers isn't playing fair and damages the reputation of the market.
We want polluters to pay for the liabilities that they create so customers and market participants can feel confident about doing business with authorised firms. And we want firms to compete for business on a level playing field, so those firms that do put good consumer outcomes and market integrity at the heart of their business do not lose out.
This supports our Consumer Duty[1] commitment to put consumer needs first.
Our expectations for firms
Firms must not seek to avoid potential or actual redress liabilities.
We expect firms to ensure they and the appointed representatives they oversee adequately plan and provision for potential and actual redress liabilities, including holding adequate financial resources to meet them.
We expect firms to notify us immediately when they become aware or have information that reasonably suggests any of the following may have happened (or could happen in the future):
- A firm does not have adequate resources to provide potential redress.
- A firm intends to sell or transfer its client bank, and the sale could have an impact on the firm’s risk profile, value or resources.
- A firm has potential redress liabilities and wants to offer consumers less redress than they might be due.
Firms considering selling their business or client bank must act to deliver good outcomes. Read more about our expectations of firms selling client banks[2].
We also provide information for firms before they apply to cancel their authorisation[3]. We expect firms to identify and meet any potential liabilities before we will cancel their authorisation. Actions we may take include use of past business reviews and deed polls to ensure liabilities to consumers are identified and met.
Where firms are unable to meet their liabilities and accountable individuals seek to restructure or move to another firm leaving the liabilities behind, we will seriously question their fitness and propriety to hold a role that requires FCA approval.
To better understand the type of polluting behaviours we come across, the good and poor practices we see and what to expect from the FCA if you are in this situation, read our update for firms[4].
How you can help
We encourage regulated firms, financial advisers, compliance firms and other financial advice organisations to:
- Speak out and report to us[5] any firm or individual suspected of providing poor advice, products or services, or attempting to phoenix to avoid their liabilities to consumers.
- Be open and transparent with us when we request regulatory references.
- Contact us immediately if you have had an award made against you by the Financial Ombudsman Service and are worried you will not be able to provide the redress, so that we can look at ways to support you.
- Ensure you are carrying out thorough due diligence and compliance checks on all advisers you recruit to ensure no poor advice has been given previously.
- Ensure all advice is compliant and ensure you make consumers fully aware of the type of investment they are making. Read more about assessing suitability and the advice process[6].
