Imagine a financial advice firm goes out of business. The managing director had provided inadequate advice to consumers and is barred from acting as a director. Consumers seeking to claim compensation from the firm are represented by a Claims Management Company (CMC). 'Nothing wrong with this', you might think. But what if the CMC had been set up by the managing director's wife, following the firm's winding up, and is bringing claims hinging on the detriment suffered from the poor advice given?
This is an example of 'claims management phoenixing'. The practice involves individuals connected with wound-up financial services firms re-emerging in connection with CMCs seeking to benefit from a firm's poor conduct by carrying on claims management activities against it. This potentially allows those individuals to benefit from their firm's misbehaviour, or in some cases their own.
An FCA consultation paper proposes eradicating the practice by banning CMCs from managing Financial Services Compensation Scheme (FSCS) claims where they have a relevant connection to the claim.
In taking such steps the FCA intends to ensure firms pay due regard to the interests of customers, treat customers fairly and are not incentivised to treat them poorly. It wants to increase consumer confidence that both financial services firms and CMCs have due regard to their interests and will not be seeking to profit from misconduct. The action is also intended to level the playing field amongst CMCs, and prevent those benefitting from phoenixing being advantaged.
The new proposals will affect current and former financial services firms who carry on FSCS-protected activities and CMC firms carrying on FCA-regulated claims management activity for claims concerning FSCS-protected financial services and products.
This is the latest intervention from the FCA since they took over the regulation of CMCs in April 2019, following on from 'Dear CEO' letters on financial promotions and acting for customers, and the importance of carrying out due diligence to ensure the validity of claims, as well as proposals to introduce a price cap on the fees CMCs charge in relation to claims for financial products and services.
As former FCA executive director of supervision Megan Butler warned advisers contemplating phoenixing in a 2020 speech, 'be aware that we will be on to you and we will use all the regulatory tools available to us to stamp it out'. It's clear to see that the publication of this consultation paper is the latest tool being used by the FCA to stamp out the fire, and leave the phoenixes with nowhere to rise.