FCA proposes controversial guidance which cuts across UK compromise procedures

The FCA's proposed guidance GC22/1 on compromises by regulated firms focuses on achieving maximum consumer redress.

But it does this by cutting across UK compromise procedures, and it attempts to pierce the corporate veil by threatening regulatory action using the full suite of its enforcement and supervisory intervention powers against firms, senior individuals and other firms within the same Group.

You can read all about the proposals and their implications in our detailed note.

Want the key points?  Here they are:

• Several English restructuring and insolvency law processes enable a distressed firm to deal with its liabilities - the scheme of arrangement, the restructuring plan and the CVA ("UK compromise procedures").  This can include liabilities to consumers.  The FCA is concerned about the impact of compromises on consumer redress.
• When a regulated firm proposes a compromise, the FCA now proposes to assess the compromise against the FCA's statutory objectives, in particular consumer protection and market integrity.  
• The FCA proposes that it might block proposed compromises (for example by imposing OIREQs) and that there might be disciplinary consequences for firms and individuals.
• Certain factors may draw particular FCA attention: if the firm intends to continue trading; if the firm's Group won't contribute to redress payments; the nature of the underlying misconduct; remuneration levels; phoenixing; impact on vulnerable customers; and provision in the compromise for procedural fairness.
• Directors may face conflicts between their duties to the firm and its shareholders, and the FCA's threat of regulatory action against directors personally.
• Problematically, the FCA says it would consider the proposed compromise and its circumstances when in future assessing SMF applicants' fitness and propriety and regulated firms' satisfaction of Threshold Conditions.  These regulatory decisions would post-date the compromise, so relevant stakeholders will have little chance during the compromise procedure to overturn them and obtain greater flexibility to compromise.

You can submit comments on the proposed guidance until 1 March 2022.

Edit, 6 July 2022: The FCA has issued final guidance implementing its proposals with only minor adjustments.