Guest article: FCA authorised insolvency opportunity for Insolvency Practitioners
Other articles (Insolvency Practitioner, October 2020):
Our thanks to Peter O’Donnell, Director at New South Law (Solicitors) Ltd, for this contribution to Insolvency Practitioner.
Please note that this article does not necessarily reflect the views of the IPA.
Financial advisers are authorised to give investment advice to members of the public because it is considered that the importance, complexity and risks involved are too great for the public to make such decisions themselves. This creates an inequality of understanding and experience, which requires the adviser to consider his client before himself or herself – known as a fiduciary duty.
As referred to in my previous article for the IPA, there have been instances where financial advisors have deliberately misled clients to invest money in a scam. When complaints against advisors who have acted in this manner are upheld by Financial Ombudsman Service (FOS) and professional indemnity insurance is withdrawn, the company in which the adviser worked loses its authorisation and is forced to declare insolvency. Importantly, at this point FCA oversight ends, and the company is then under the sole purview of the Insolvency Practitioner.
If the company is liquidated, creditors become a priority, and an assessment of potential misconduct to determine misfeasance for recoveries should also be a priority.
Under FCA practice, financial advisors are not held personally accountable. Accountability is instead placed on the company for which the advisor worked. The reason for this is because if fraudulent behaviour is involved, recourse through the non-contentious routes of the FOS and Financial Services Compensation Scheme (FSCS) would be impossible, and victims would only have legal recourse – a challenge most would be incapable of.
This also means that insolvent directors of financial advice companies are protected from action, maintain their regulatory status, and get away with what could be criminal behaviour.
Conversely, the FCA acted this year against non-regulated directors who misled clients into investing £92m of their pensions in scams. The directors were treated as perpetrating criminal acts and face the full impact of the law, with multi-million-pound fines and prison sentences. You can read more about this here. The FCA regulated directors of the FCA authorised companies that facilitated the pension transfers had no action taken against them and continue to operate.
In another example, the Insolvency Service took action against the director of Blakemore Wealth Management when it became known that he had advised clients to transfer over £7m of their pensions in high-risk and unregulated investments, including £2m in an offshore company in which the director had a personal interest. In this case, no action was taken by the Insolvency Practitioner or the FCA. The director remains authorised to work in the financial services industry, although has been banned as a company director for eight years.
It is possible for a dishonest director to use the CVL process as a ploy, in which only sufficient funds are made available that preclude investigations. With this and the aforementioned examples in mind, I would recommend to Insolvency Practitioners that they consider opportunity investment mis-selling by regulated companies as grounds for misfeasance. This could lead to recoveries for creditors and significant financial retribution against perpetrators.