The UK’s markets watchdog warned it will come down hard on struggling firms that leave customers out of pocket when they resort to legal procedures to manage their liabilities.
The Financial Conduct Authority has seen an increase in the number of firms developing plans that deploy company or insolvency law, such as schemes of arrangement, to manage how much they owe in claims to their clients, the regulator said in a statement on Tuesday.
The FCA said it would take action against companies if their proposals unfairly benefit them at the expense of clients. Firms using such strategies must seek the best possible outcome for customers and make sure they set aside as much funding as possible to meet compensation costs.
When making use of legal options to limit their liabilities, firms “still have a responsibility to treat their customers fairly,” Sarah Pritchard, executive director of markets at the FCA, said in the statement. “We will take action against firms that don’t meet this obligation.”
More than 4,500 companies started insolvency proceedings in the last quarter of the year, 53% more than the previous year when the country was under lockdown, according to the latest data from the UK Insolvency Service.
Over the last year, the FCA has objected to a number of scheme of arrangements, arguing that customers are being treated unfairly to the benefit of the company and other creditors.
Court Rejection
In November, Amigo Holdings Ltd., a subprime lender, had to prepare a new scheme of arrangement, after the first was opposed by the regulator and then rejected by a court. Amigo’s new scheme will see equity holders lose control of the company after an equity raise and will see more money made available for customers.
The FCA also raised concerns over a scheme of arrangement by Provident Financial Plc, which was approved by a court in August. A scheme of arrangement is an agreement between a company and its creditors often used to restructure debt. Amigo and Provident used the procedure to reduce total compensation owed to customers.
Under guidance published today, the watchdog says it it expects to be informed as soon as a firm is contemplating a scheme of arrangement. The FCA will welcome feedback on the guidance until the consultation process closes on March 1.
The FCA said some firms have asked for confirmation in writing that it won’t oppose their liability management efforts. “Today’s guidance consultation confirms that the FCA would be unlikely to ever issue a letter of non-objection,” the regulator said.
Topics Liability
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