The FCA has published updated guidance on its ‘polluter pays’ framework. Through this the regulator wants to prevent firms from engaging in behaviours that seek to avoid the redress and remediation liabilities they owe consumers when things go wrong.
The FCA, and its predecessor, have long been concerned with phoenixing, but this latest update shows how the focus is expanding to a wider set of troubling behaviours. It serves as a clear reminder to firms that consumer needs must be put first and that avoiding liabilities is not acceptable.
The new guidance outlines six main examples of ‘polluting behaviour’ that the regulator is aware either removes or reduces the ability for liabilities to be met:
Basic Phoenixing
A firm shuts down and is replaced by a new firm that takes its assets, but leaves behind its unresolved liabilities.
Lifeboating
Assets are moved to a connected company without any commitment to transfer its liabilities.
Fronting
Individuals with clean regulatory histories are presented to the FCA but, in reality, are a ‘front’ for the true controllers who may have poor regulatory records, including a history of polluting behaviours.
Sale at an undervalue
A firm sells its assets, often a client bank, at below market value which impacts its ability to cover actual or potential liabilities. Staff may also be moved to the entity purchasing.
Restructuring
A firm changes its corporate structure to isolate liabilities and protect assets. This may include inserting a holding company, transferring the client bank, or overpaying dividends.
Proceeds of sale not applied to redress
Following an asset sale, a firm has funds available but those funds are not used to address potential or actual redress liabilities.
What to expect next?
We anticipate there will be increased FCA engagement on this topic when related events arise, such as when firms submit applications for senior manager candidates, change in control, change of legal status, and cancellation of permissions.
Equally, to encourage proactive planning, the regulator may ask for confirmation of approach when they interact with firms in areas such as Risk Management, Wind Down Planning and Consumer Duty.
Firms planning on taking action that could share characteristics with polluting behaviours, such as winding down or changing group structure, should be prepared to satisfy the FCA. Identification of potential redress liabilities, and assessing the likely risk of them arising, is an important first step. This will inform the level and method of ring-fencing resources that can be put towards meeting liabilities. With an emphasis on proactive removal of consumer harm and proper wind-down planning, failure to do so won't be acceptable.
When left unsatisfied, the FCA highlights it may use additional tools, such as encouraging firms to seek a voluntary requirement (VREQ) to get permission from the FCA before disposing of any assets.
The FCA’s message is clear – they won't tolerate the impact of polluting behaviours on consumers, or on the rest of the market that shoulders the burden of increased levies when the Financial Services Compensation Scheme (FSCS) is required to provide redress in place of the firm.
Adempi provides specialist advice and practical support to FCA-regulated firms. If you’d like to speak to one of our experts about your wind down planning, risk management framework, consumer duty monitoring or anything else, you can reach us at contact@adempi.co.uk or on 0203 925 4761.
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