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Guest article: IPs of FCA authorised companies in voluntary liquidation face more new and difficult challenges

Our thanks to Peter O’Donnell, Director at New South Law for this contribution to Insolvency Practitioner. Please note that guest articles do not necessarily represent the views of the IPA.

Last year, we published a guest article on the challenges insolvency practitioners face when appointed to regulated companies. In December 2020, the FCA published a consultation paper forecasting radical new changes in the way they want insolvency practitioners to operate. And if not adopted, insolvency practitioners will be denied or removed from those appointments.

New actions required include the following:

  1. Ability to sell client records to Claims Management Companies (CMCs) and law firms, as long as such doesn’t facilitate phoenixing.
  2. Treat clients advised by the company as creditors because of advice that potentially led to losses, even though they don’t meet the accepted definition of creditors.
  3. Help all clients understand that they may have grounds for complaining and how to do so.
  4. Have sufficient knowledge of financial services regulations and guidance to be able to apply such to their investigation of company operations.
  5. Report separately to the FCA on director behaviour.

Why make these changes?

The goal of the FCA is to ensure honest and fair markets for individuals, businesses and the economy as a whole. In April 2020, the FCA included more specific objectives to meet challenges of Coronavirus, including:

  • Protect the most vulnerable
  • Tackle scams
  • Ensure fair treatment for consumers and small businesses
  • Mitigate firm failures
  • Understand how directors use CVLs and MVLs to hide misfeasance and phoenix their operations

It is believed that this is in reaction to the very high-profile company collapses publicised over the past few years, including London Capital & Finance, Woodford Equity Income Fund, Dolphin Trust, Blackmore Bonds etc. The personal apology by the then head of the FCA and now Bank of England, Andrew Bailey, may have been thought to come too late by some. “As CEO of the FCA between 2016 and 2020, I apologise to LC&F bondholders,”. He said he undertook reforms during his time at the Financial Conduct Authority. “I am sorry those changes did not come in time for LC&F bondholders.”

Following this, the FCA reviewed how firms have been regulated and recently introduced a guidance consultation paper published on 23rd February 2021. It describes that there are over 21 million people who can be described as “vulnerable”, nearly half the adult population. A vulnerable customer is someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care.

In other words, almost everyone is vulnerable to unscrupulous investment advice when the regulated company involved deliberately misleads them.

We believe the new requirements for insolvency practitioners is part of a three-pronged approach to director misfeasance. The first part is better regulations. The second is implementing those regulations more effectively. The third is having an independent and qualified insolvency practitioner “clean up” the messes created by failure to implement the first two.

Insolvency practitioners who do not adhere to the new requirement will be excluded from being appointed. Even those who appear to have the experience and resources to adopt the new practices are advised by the FCA to enlist the services of specialists in financial services regulations and compliance.

The FCA reported that in 2020 there were approximately 220 separate insolvency practitioners appointed to voluntary insolvencies of regulated companies. Many of these were sole practitioners widely dispersed across the country. The new requirements will probably reduce that by up to 65%, and only 70 to 80 will be approved.