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24 February 2022

The FCA has warned firms attempting to limit their liabilities that they will still be expected to provide the best possible outcomes for consumers. This includes covering compensation claims.

There has been a worrying rise in the implementation of schemes of arrangement, or other compromise, to manage liability, which has prompted the regulator to publish guidance, setting out its expectations of firms.

Failure to provide the maximum amount of funding possible to meet consumer compensation claims could result in the FCA objecting to compromise proposals in court and taking enforcement action for misconduct against senior managers.

How has this issue come about?

We have learned, through a recent FCA consultation, that some advisory firms have requested a ‘letter of non-objection’ from the regulator in relation to proposals they have put forward to manage liability, such as a scheme of arrangements.

This type of compromise is an agreement between a company and its creditors that allows debts to be settled. The FCA said it was seeing an increasing number of firms developing such proposals, to deal with their accountability to consumers, particularly redress liabilities.

We can see it might be tempting to put such an arrangement in place to cover the cost of compensation arising from a defined benefit pension transfer complaint or something similar.

The FCA’s guidance

The FCA has confirmed it is unlikely to ever issue a letter of non-objection. It will instead assess each proposal on its individual merits, to ensure firms are meeting their regulatory obligations. Any concerns will be communicated and if necessary, further action considered.

A Guidance Consultation, GC22/1: FCA’s approach to compromises for regulated firms, is open for feedback until March 1, before the guidance is finalised. It focuses on three types of compromise – schemes of arrangement, restructuring plans and voluntary arrangements.

To assess whether the FCA is likely to consider a proposed compromise acceptable, you would need to provide the following information, as a minimum, as part of any initial notification:

  • An explanation of how the liabilities subject to the compromise arose, including the time period, directors and senior management in place and any steps taken to mitigate the liabilities
  • The type of liabilities to be compromised and their value
  • Actions the firm has taken to remedy the cause
  • Creditor cohorts or classes to which the compromise will apply and how they have been determined
  • The anticipated pence in the pound return for creditors subject to the compromise, with high level details about how this has been estimated
  • Intended trading activity in advance of the compromise coming into effect, while it is in operation and after it has come to an end, including your business model, projections and material assumptions.

How will the compromise be assessed?

To enable a full assessment of the compromise, the FCA has said firms should provide information as soon as it is available. This should include:

  • Substance of the proposed compromise, such as structure, methodology and assumptions
  • Its practical effect on relevant creditors, for example, the rights being extinguished
  • The effect of the compromise on any compensation that may be available from the FSCS
  • Financial information including forecasts for the next six months, bonuses and renumeration

The FCA has said the costs of the proposed guidance are expected to be minimal, as it simply aims to clarify expectations on the compromises proposed by regulated firms and therefore, there would be no new material requirements.

What do the proposals mean for your compliance?

First and foremost, we would encourage you to submit feedback on the FCA consultation. It is important to raise any concerns and share your views.

If the proposed guidance becomes binding, we will be asking to see specific documentation relating to compromises in our clients’ systems and controls, along with board papers, etc. when completing compliance health checks and due diligence reviews. If such instruments are found, the issue will be raised and follow up guidance issued regarding non-compliance.

Ultimately, it is important to reassess your approach to meeting financial liabilities and look for legitimate ways to cover customer redress costs that don’t involve compromises.

For advice about the legitimacy of limiting your liabilities, contact B-Compliant on (0161) 521 8641 or email: info@b-compliant.co.uk

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