It took Lena Patel six months to get authorised by the Financial Conduct Authority (FCA) when she decided to become directly authorised as director of Leicester-based ISJ Independent Financial Planning.
‘It’s not as if I had lots of different companies beforehand to check,’ she said. ‘I came from bank assurance, so my history was pretty clean, with no other limited companies.’
So it came as some surprise to Patel to hear about firms that have ‘phoenixed’. This is when directors of an advice firm close their existing business to set up a new regulated entity, often with the same office premises, staff or trading name.
Phoenixing is not illegal. It is a widely used administration tactic that allows company directors to escape personally footing the bill for a failed firm’s liabilities. Advisers can start up again having acquired the assets and clients from their old firm.
Although phoenixing is legal, it is controversial in the advice world. When a firm collapses, successful claims against it are paid by the Financial Services Compensation Scheme (FSCS), a lifeboat fund that is paid for by a levy imposed on all advisers.
In January the FSCS revealed that, for the fourth year in a row, life and pensions advisers will pay the maximum possible levy. For the 2018/19 financial year the lifeboat expects to pay out £87 million in claims. This exceeds the £75 million cap that has been set for a shortened nine-month financial year by £12 million. In each of the previous three years, which covered an entire 12 months, pension advisers were asked to pay a collective £100 million towards the FSCS.
Many advisers feel this means they end up paying for poor advice they have not given. Meanwhile the directors of firms that have given advice that gives rise to claims are able to set up again without reprimand from the regulator.
‘I don’t understand why we should have to pay for someone else’s issues, and this is going to get worse with the current situation around final salary pensions,’ Patel (pictured above) said.
The Problem persists
New Model Adviser® looked at all of the firms that fell into default in 2017 (default is a status declared by the FSCS when a firm with claims against it goes out of business and cannot pay redress).
We found out of 158 individuals listed as CF1 directors, or CF4 partners where the firm was a limited liability partnership, 55 have been authorised at another firm or launched a new advice firm.
This equates to 35%, roughly similar to when we looked the previous year and found 36% of directors at firms declared in default had appeared somewhere else. This is lower than the 55% New Model Adviser® found between September 2014 and May 2015.
The numbers have clearly been going down, in part due to work by the FCA such as asset limitation orders, as reported by New Model Adviser® last year. (An asset limitation order is imposed by the FCA and stops regulated firms moving assets to other businesses without the regulator’s consent).
But the figure is still too high for many advisers. Indeed, history has proved just one or two firms can create millions of pounds worth of claims and bring the profession into disrepute.
Liquidation and communication
Problems were recently brought to light when New Model Adviser® revealed the firm at the centre of the British Steel pension transfer saga, Active Wealth (UK), was in fact a reincarnation (if not a full-blown phoenix) of an advice firm with a similar name, Active Investment Services (AIS).
When New Model Adviser® asked lawyers of Active Wealth director Darren Reynolds for a comment on the story, the reply stated: ‘The FCA will have had access to all of the relevant information when Active Wealth was applying for authorisation.’
Therein lies a significant part of the problem: even if the FCA had ‘access’ did it also read the material? And if it did, why was Reynolds waved through?
Reynolds was listed as holding CF10 compliance and CF30 customer functions for AIS on the FCA register. He was not identified as a director or shareholder. However, the report from liquidator Roderick Butcher of Butcher Woods stated a bid was received and accepted from ‘an associated company by way of common director and shareholder for the goodwill of the company to include future renewal income’.
When a firm is put into voluntary liquidation, as in the case of AIS, the liquidators must file reports to the insolvency service, a government agency connected to the Department for Business, Energy and Industrial Strategy. One possibility in instances like this could be a requirement for those reports to also be shared with the FCA, where the firm is FCA regulated. Certainly, there is a case for greater FCA involvement in transactions involving liquidated regulated firms, which could take the form of direct visibility of the liquidator’s report.
Vince Harvey, director of Compliance Cubed, agreed. ‘It would make logical sense under general whistleblowing procedure that insolvency practitioners and the FCA should be able to talk to each other. Even if it is just so the FCA can say: “Here is a flag – there are some questions we need you to answer”.’
Andy Sutherland (pictured above), managing director of compliance consultancy TCC, said the FCA should work with liquidators when authorising firms.
‘It is legitimate for firms to liquidate, and we have seen a move from the FCA to become more joined up, to have a link between enforcement and authorisation. The net result is not quite where it could be,’ he said.
‘More can be done to consider the conduct and culture of firms to ensure that only those with a legitimate purpose are allowed to set up again and work with the general public.
‘The conduct and behaviour of firms in the lead-up to their liquidation needs to be given greater consideration at the point of authorisation.’
New Model Adviser® contacted Butcher Woods but did not receive a response, while Leonard Curtis, another firm that has dealt with a number of liquidations of advice firms, declined to comment.
The lack of a link between liquidators and the regulator highlights advisers’ most common irritation with phoenix firms.
‘Most information is readily available now, so why is there not a link to the FCA?’ Patel said. ‘It’s frustrating because it shouldn’t be that easy. The whole point of us being regulated individuals should be that the FCA has a process in place that stops that from happening.’
Saran Allott-Davey (pictured below), managing director of Newport-based Heron House Financial Management, also called for the FCA to use the information it has to stop phoenix firms being set up, particularly when it comes to information on complaints.
‘Every individual has their own registration number. But it seems to me that people can be as bad as they like and unless they commit outright fraud they never seem to be removed from the register,’ she said. ‘[Removing them] would seem to me to be an incredibly simple way to stop [phoenixing] from happening.’
When presented with New Model Adviser®’s most recent findings, a spokeswoman for the FCA said the regulator was aware of phoenixing as a tool deployed by some individuals trying to ‘avoid their current or future responsibilities’.
She added: ‘We place a great deal of emphasis on individual accountability, ensuring senior management understand they are personally responsible for their actions – and that we hold them to account when things go wrong.
‘We have a range of tools within our authorisation processes, as well as our ongoing supervision activity, to identify firms or individuals who try to avoid these responsibilities and we will take necessary action. We regularly review our procedures to ensure they remain appropriate and effective.’
There are signs the regulator could soon have extra powers, or feel more pressure to stop firms phoenixing.
Work and pensions select committee chairman Frank Field (pictured left), an influential figure in pensions policy, publicly lambasted the FCA over the British Steel saga. This was after it emerged the regulator had been tracking Active Wealth for 14 months before the firm stopped advising on pension transfers.
When New Model Adviser® spoke to Field, he said the regulator should take a harder line.
‘We clearly need to actually ban individuals and not just ban firms,’ he said. ‘It depends on how serious the actions are. But [the regulator] should not shy away from lifetime bans if what they have been up to warrants that.’
Our investigations have repeatedly revealed the gap between the FCA and liquidators clears the way for advisers to leave failed firms behind and become reauthorised. Much of what appears in black and white in a liquidator’s report would raise questions from the regulator. Currently these facts are being discovered too late.