February 28, 2022

Financial Conduct Authority (FCA) Guidance Consultation on Compromises for Regulated Firms – protection of consumers


Regulated firms using company or insolvency law procedures to manage their liabilities could face action by the FCA if their proposals unfairly benefit them at the expense of their customers. The FCA has put forward draft guidance setting out the new role which it would have when a regulated firm proposes a compromise, what information it expects to be provided and the key factors which the FCA will consider.  Click here to read the Guidance Consultation GC22/1: FCA’s approach to compromises for regulated firms.  The Guidance Consultation is open until 1 March 2022.

The proposed FCA guidance centres around three types of compromise: schemes of arrangement, restructuring plans and voluntary arrangements. These can be used to compromise liabilities to consumers. The FCA, through its new guidance, is looking to deal with the impact such compromises can have on consumer redress. Sarah Pritchard, Executive Director of Markets at the FCA 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”.

Currently, the FCA’s role in a regulated firm’s compromise arrangement is to decide whether to formally object to the compromise during the sanction court proceedings stage. Under the proposals however, when a regulated firm proposes a compromise, the FCA will need to be notified immediately of any proposed compromise and be given all relevant information to assess it. FCA has told firms it expects to be notified as soon as a firm is ‘considering proposing a compromise’. The draft proposal sets out the list of information that the FCA expects to receive when a firm is considering a compromise which includes, amongst other things, details of the proposed compromise, financial information and the effect the proposed compromise will have on customers. Although it is expected that firms will provide this information voluntarily, the FCA could potentially use its statutory powers to obligate firms to provide such information.

Some firms have requested a ‘letter of non-objection’ for any compromise they intend to propose, however FCA confirmed that it will instead consider each compromise on a case by case basis against its statutory objectives and consider compatibility with its rules and principles of business, in particular consumer protection and market integrity. There are certain factors that will draw particular attention from the FCA – any underlying misconduct leading to the compromise, any provision for procedural fairness in the compromise, remuneration levels, phoenixing or if the firm intends to continue trading. The overarching consideration is of course to treat customers fairly – looking at the outcome customers would receive compared to other stakeholders, the FCA is expecting firms to provide as much funding as possible to satisfy customers’ liabilities. Following their assessment, the FCA will communicate any concerns to the firm, the court if appropriate and consider taking regulatory action. Under the new proposals, the FCA will have wide ranging powers from the ability to object in Court (either in a convening or sanction hearing) and block (i.e. by imposing OIREQs), take regulatory action against the firm, take regulatory action against another Group entity, or take action against senior individuals within those firms. For instance, the draft guidance suggests that the FCA could potentially:

  • take action for past conduct that caused the liabilities;
  • require a firm to take specific action (e.g. appoint new management who will not implement the compromise);
  • vary the firm’s regulatory scope to restrict business;
  • impose additional requirements.

The draft guidance also suggests that even where a compromise has been sanctioned, the FCA may use its regulatory powers to prevent a firm implementing that sanctioned compromise. Practically speaking, how this will work where the customer redress claims would have been reduced as a matter of law once a compromise has been sanctioned, remains to be seen.

The guidance will not apply retrospectively where a firm has issued a practice statement letter (in schemes of arrangement and restructuring plans) or proposal (in voluntary arrangements) before the guidance comes into effect, but such compromises will be considered on a case by case basis and the principles in the guidance may be relevant.

The proposed guidance makes it very clear that the FCA intends to take an increasingly interventionist approach in its aim to ensure customers are treated fairly. It is also very clear that the outcome of FCA’s consultation is likely to have a significant impact on the feasibility of such compromise arrangements going forward.

The FCA is understandably concerned to ensure that compromise arrangements are not misused against customers relative to other stakeholders, but the guidance will have a significant impact on the way in which compromise arrangements are currently used and the procedures that are followed where consumer liabilities are involved, as well as permitting the FCA’s assessment of a compromise to be broader than that of the Court. The FCA’s ability to pursue other group entities may pierce the corporate veil. From a directors’ duties perspective, the directors will owe duties to the company in the usual way, yet they may face regulatory action if they do not specifically prioritise consumer interests.

In practice, the outcome of whether a compromise satisfies the regulatory objectives of the FCA may depend on a judgment as to whether insolvency is the real alternative to the compromise being proposed and, in the usual way, on the level of support from the firm’s other stakeholders.

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