FG22/4 – FCA approach to compromise arrangements

The FCA has issued final guidance (FG22/4) for regulated firms entering into, or considering entering into compromise arrangements with creditors and/or shareholders.

 

When economic conditions are challenging, inevitably some firms are unable to survive and may need to enter into compromise arrangements with some or all of their creditors and/or shareholders. This involves creating a legally binding agreement to vary the rights of creditors and/or shareholders, including re-structuring of debts, when reaching full and final settlement of liabilities.

The FCA has an interest in compromises proposed by regulated firms because of its statutory objectives, particularly protecting consumers and the integrity of markets and views compromises that unfairly benefit a firm and its other stakeholders at the expense of consumers as unacceptable, hence the new guidance (not applied retrospectively), which focuses on schemes of arrangement (Schemes), restructuring plans (RPs) and voluntary arrangements (VAs).

All arrangements are court approved following a vote by creditors and/or shareholders – Schemes and RPs under the Companies Act 2006 and VAs under the Insolvency Act 1986.

Where firms fail to comply with FCA rules (Threshold Conditions and Principles for Businesses) then the regulator can exercise its statutory powers and take regulatory action (against the firm and potentially, those holding Senior Manager Functions), including challenging VAs. FCA’s role is not to negotiate the terms of the compromise, but to assess a compromise and based on the facts and circumstances of each proposal, consider whether to participate in the court process and/or decide whether regulatory action would be appropriate.

Of particular concern to FCA is where redress is due to consumers – guidance in relation to redress was provided in FG20/1 (Our framework: assessing adequate financial resources) – and where a regulated firm proposes a compromise where customers are offered less than their full redress (and the firm continues trading), especially where the liabilities were caused by serious and/or deliberate misconduct by the firm. FCA expects firms proposing a compromise to ensure that it is the best proposal that the firm can make, including the firm providing the maximum amount of funding for the compromise so that consumers receive the greatest proportion of what is owed to them.

Where a firm is considering a compromise, the regulator expects to be informed immediately and to be provided with relevant information at an early stage. Failure to do so would be regarded as a significant breach of Principle 11 and the notification rules outlined in SUP 15. FCA also expects firms, prior to proposing a compromise, to have sought appropriate advice to fully understand their obligations and to have sufficient resources to manage the compromise as well as business as usual activities.

As a minimum, the firm should provide FCA with the following within its initial notification:

  • An explanation as to how the liabilities subject to the compromise arose, including the relevant period(s) of time, directors and senior management in place at that time, and any steps taken to mitigate the liabilities.
  • The type of liabilities to be compromised and their value, including whether they relate to complaints made to the firm/the FOS.
  • Actions that the firm has taken or is taking to remedy the cause(s), including any changes in business practices and/or management.
  • Creditor cohorts or classes (and estimated number of creditors within each cohort or class) to which the compromise will apply, how they have been determined, as well as an explanation of why any creditor cohorts or classes have not been affected by the compromise and how they will be treated.
  • Anticipated pence in the pound return with high level details as to how this has been estimated and clarification as to any other expected type of return to creditors, or details of other ways in which it is proposed to allocate any losses (e.g. proposals that creditors receive a stake in the equity of the business).
  • Intended trading activity, before, during and after the compromise.
  • Structure of the proposed compromise, including whose liabilities are to be compromised, methodology and assumptions for calculating gross liabilities and the anticipated contribution to the compromise by the firm.

Plus…

  • Substance of the proposed compromise, including a breakdown of the anticipated costs.
  • The practical effect of the compromise on relevant creditors.
  • Financial information, including forecasts for the minimum of the next six months or the period over which the compromise is proposed to run, whichever is longer, management accounts since last accounts were produced, whether partners or directors were paid bonuses beyond their base salary.
  • ‘Any other relevant information’.

Where complaints have been referred to the FOS the firm would be expected to deal with them in accordance with complaints handling requirements as defined within DISP and consider how the proposed compromise might impact any future claims to the FSCS, should the firm be declared in default.

Only when all this data is provided will FCA consider the proposals for the compromise and thereafter consider what, if any, regulatory action will be taken.

Phoenixing

This has long been a contentious subject for firms. Within FG22/4 FCA states that:

We consider this unacceptable practice. Where we find such individuals have deliberately avoided their responsibilities and not complied with previous redress awards made against their firms, we will question the fitness and propriety of these individuals and take necessary steps against them so that they do not cause further harm to consumers.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

Clearly the FCA is cognisant of prevailing economic conditions being difficult and that the likelihood of firms failing may increase. As a consequence, we see this as a warning shot across the bows of firms who may try to avoid their obligations.

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About the Author

Paul has in-depth experience across a wide spectrum, having headed up compliance, T&C, monitoring, oversight and MLRO functions previously. He was also an IFA for some time so can see things from more than one angle.

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