The FCA has drawn a blank on providing an estimate of the level of so-called “phoenixing” by financial advice firms.
Phoenixing is the term used to describe the practice where directors of advice firms with impending complaints wind the firm down, so do not pay out on the claims, which then have to be handled by the Financial Services Compensation Scheme to which all advisers contribute.
The directors can then resurface under a different company or brand and continue to trade, causing upward pressure on advisers’ regulatory levies.
Announcing a new strategy earlier this year on how it authorises firms, the FCA said that it was looking at ways to strengthen the quality and timeliness of data it gathers on individuals, making particular note of the financial advice sector.
It also set up a case officer training scheme to help staff spot advisers that phoenix based on the better data it will collect.
Money Marketing lodged a Freedom of Information Act request with the regulator for more details on that work.
The FCA said it could not separate out how much it spent on the phoenixing training programme specifically, since it falls under “business as usual” costs.
The regulator also said it did not have an estimate of the scale of financial adviser phoenixing.
The FOIA response reads: “We do believe that the incidence of financial adviser phoenixing is relatively low; however, when it does occur it can cause significant harm to consumers.
“We have made it clear that it is unacceptable for directors to deliberately avoid their liabilities to customers, in particular those resulting from awards made against them by the Financial Ombudsman Service, by closing down companies and starting new ones.
“The avoidance of any type of liabilities to consumers is unacceptable and we have a range of tools to help us identify, and act against, firms or individuals who try to avoid their responsibility to their customers.
“It is also important to note that most UK companies that fail don’t do so because of any wrongdoing on the part of the directors, and companies can be dissolved or face financial difficulties for a range of reasons.
“In UK law companies are entitled to dissolve and set up as new companies to carry on a similar business if the individuals involved are not personally bankrupt or disqualified from acting in the management of a limited company.”
Last year, Money Marketing reviewed records from the FSCS, FCA Register and Companies House.
While companies can liquidate for a host of reasons, our research suggested that of the 91 firms that were declared in default by the FSCS and therefore open to compensation claims between the start of 2018 and the end of July, 46 still had directors listed as active on the FCA Register.
Of those, 28 had at least half of their former directors listed as still active. Overall, more than 40 per cent of directors at the firms open to FSCS claims appeared to still be active.
Money Marketing understands the FSCS conducted research on phoenxing as part of an internal briefing to its own staff last year.
According to the FCA’s response to our FOIA request, it has not conducted a formal data collection exercise within financial advice firms specifically related to phoenixing in the last five years.
The FCA writes: “We do, however, review the existing data provided by firms and collected as part of our ongoing supervision of firms in order to detect potential incidents of phoenixing and take appropriate action.”
Money Marketing also asked the regulator for details of any internal briefings, papers or research on the ways the FCA is looking at to strengthen the quality and/or timeliness of data gathered, as well as details of any work with the industry to gather intelligence, for example data requests, roundtables, meetings, or research collaboration.
The FCA said it did not hold a central record of this information, so to respond to the questions would exceed the time limits of the FOIA.
The FCA’s “questions to ask your financial adviser” about phoenixing
- Have you been a director of a firm which has gone into liquidation?
- Is the advice you are giving me covered by your professional indemnity insurance?
- Is your recommended product covered by the FSCS?
The FCA’s to-do list to research your financial adviser
- Check on the Financial Services Register whether the firm or individual you are dealing with is regulated by the FCA. If you deal with a firm (or individual) that is not regulated you may not be covered by the FOS or the FSCS.
- Consult the FCA Warning List to check if the firm is known to be operating without FCA authorisation and for any FCA enforcement decisions/actions against the firm or adviser.
- Check the FOS website for the firm’s record of complaints to help inform your decision on whether you wish to receive investment advice from the firm.