Guest article: Companies in voluntary liquidation authorised by the FCA can pose difficult and complex challenges for Insolvency Practitioners 

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.

In the UK, if a financial advisor were to recommend a client to invest money in a company or other entity which turned out to be a scam, the advisor has protection from legal action. This therefore could allow for a fraudulent advisor to make a deceptive recommendation for the gain of themselves and others. If this were to happen, complaints can easily be made to the Financial Ombudsman Service (FOS), a no risk, no cost mediator whose decisions are final, to recover losses.

As many will know, scams can generally involve large commissions being paid to advisors and the entity attracting investors. Parallel to this, financial advisors who act in this fraudulent manner can force their company into voluntary insolvency because they lose their professional indemnity insurance. Insurers view multiple complaints being upheld by the FOS as much more than professional negligence. Markedly, those advisors are not held accountable by the FCA and maintain their regulatory status; those who were not regulated that introduced clients to invest can face criminal charges for providing regulated advice (see FCA v Avacade).

At this stage, complaints are transferred from the FOS to the Financial Services Compensation Scheme (FSCS), and the amount of compensation drops from a maximum of £350k to £85k. The client that has been scammed then joins the rest of the unsecured creditors unless he/she complains to the FSCS and, if upheld and paid compensation, is replaced by the FSCS.

If Directors of FCA authorised companies recommending highly unsuitable investments to members of the public, to invest cash and especially pensions, know that the outcome will be a disaster for clients, massive profits for them and the ability to retain their regulatory status, how can Insolvency Practitioners detect and address this? What things should they watch out for?

The standard report that Insolvency Practitioners must provide to the Secretary of State does not include anything specific about financial advisors’ mis-selling scams to members of the public. It is generally accepted that the FCA would look into and act upon this. However, once a regulated company goes into administration, it loses its authorisation and the FCA has no jurisdiction over it. It becomes the sole responsibility of the Insolvency Practitioner. Questions that can be asked of Directors include the following:

  • What complaints, if any, have been made against your company with the FOS?
  • Have any of those complaints been upheld and been paid out by your professional indemnity insurer?
  • Has your professional indemnity insurance been withdrawn or were you given notice it will not be renewed?
  • Did the company or its agents pay you any commission for recommending their products? If so, please could you provide copies of the agreement.
  • Were any high-risk investments recommended, and if so, what was the reason for that?
  • Do you plan to transfer clients to another regulated entity that you have an involvement with?

In FHR European Ventures v Cedar Capital Partners 2014, Lord Neuberger upheld the claim that where a secret commission was paid to an agent (adviser) by the seller (investment company), such commissions must be treated as being held in trust if the agent (adviser) becomes insolvent. This means that the client creditor has priority over unsecured creditors. In most Independent Financial Adviser insolvencies, that will make the FSCS the largest creditor and a secured one.

This means that the FSCS will probably become the largest single creditor with a vested interest in information about secret commissions and their status as creditors. However, as the Directors have removed funds and there are insufficient funds to distribute, investigation into possible Director misfeasance should be considered. Some specialist law firms can provide this on a contingent fee basis with purchasers of litigation claims.

FCA authorised companies know that profiting by selling worthless investments to vulnerable clients can only be stopped by changes in regulation or by well-informed Insolvency Practitioners. This article has been written to help the latter.