Summary
The motivation for the consultation is the recent increase in the number of regulated firms proposing compromises to deal with significant liabilities to consumers, in particular redress liabilities (e.g. where redress is owed to consumers after misconduct such as poor investment advice), including the Provident SPV Limited Scheme and the Amigo Loans Scheme, and the FCA’s aim is to reduce the number of compromises which it does not consider to be appropriate.
In the guidance the FCA stated that they “would be concerned if a regulated firm proposes a compromise where customers are offered less than their full redress and the firm continues trading, where such redress liabilities were caused by serious and/or deliberate misconduct by the firm".
The clear message from the FCA is that they expect regulated firms to provide the “best proposal” that they can make for their customers, particularly where there are redress liabilities, and failure to do so may result in the FCA objecting to the compromise in court or taking enforcement action for misconduct by the firm or its senior management. The “best proposal” in such cases will, according to the FCA, include the firm providing the maximum amount of funding for the compromise so that consumers receive the greatest proportion of what is owed to them.
The most significant points to note from the guidance are:
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There is an obligation on regulated firms to notify “immediately” if they are considering a compromise and to provide information “early”; exactly what constitutes “early” will be judged on a case-by-case basis and the FCA has deliberately chosen not to be more specific on timing.
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There will be a heavy administrative burden on regulated firms proposing compromises due to the detailed information that the FCA requires to make its assessment, whether or not there are redress liabilities involved.
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The guidance will make future Schemes and RPs for regulated companies looking to compromise customer liabilities far more difficult, with the FCA clearly intending to take an active role in any Scheme or RP going forward.
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The judgement of Trower J in the Amigo Loans case backs up the FCA’s assertion that the court will place significant emphasis on the FCA’s view.
Regulatory Background
Regulated firms (being firms authorised under FSMA and firms authorised or registered under the Payments Services Regulations 2017 or the Electronic Money Regulations 2011) have to comply with various FCA rules, including the requirement that firms treat customers fairly. If firms do not comply the FCA has statutory powers to take regulatory action. The FCA also has a statutory power to challenge voluntary arrangements and the partnership equivalent under section 356 FSMA. While the FCA has no formal power to challenge a Scheme or RP, as seen in the recent Amigo Loans case referred to below, the court will generally be interested in the FCA’s view as regulator.
The FCA’s statutory objectives of protecting consumers and the integrity of the markets are the basis of the FCA’s interest in such compromises. Compromises which unfairly benefit a firm and its other stakeholders at the expense of consumers are unacceptable to the FCA. The role of the FCA is not to negotiate or design the details of any compromise, but to assess it and consider whether, in all the relevant circumstances, the FCA’s participation in the court process or regulatory action would be appropriate.
Where the liabilities to be compromised are redress liabilities, the FCA will be concerned if a firm proposes a compromise under which customers are offered less that their full redress and the firm intends to continue trading, particularly if the redress liabilities were caused by a serious and/or deliberate misconduct by the firm.
Overview of the Guidance
Where a regulated firm is considering a compromise, the guidance sets out the process for engagement with the FCA:
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Firms must notify the FCA “immediately” and provide relevant information “early” to allow for the FCA’s assessment. The guidance suggests that “early” is as soon as the firm starts work preparing the compromise but it is unclear whether this means the start of negotiations with creditors or members, or the start of work on the Scheme, restructuring plan or voluntary arrangement.
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Firms are expected to have taken advice on the FCA guidelines (plus their statutory and regulatory duties) before starting work on the compromise.
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Firms have to provide the following information as a minimum to the FCA for the initial assessment:
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An explanation of the liabilities to be compromised (value and type), how they arose, who the directors were at the time and what action has been taken to mitigate the liabilities;
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Details of actions that the firm has taken or is taking to remedy the causes that led to the liabilities, including changes in business practices and management;
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Details of the proposed creditor class(es), how they’ve been determined, why certain creditors are not affected by the compromise (if that’s the case) and how creditors will be treated;
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Details of the proposed return to compromised creditors, which extends to high level details as to how the return has been estimated and clarification as to any other expected type of return to creditors such as balance write-downs;
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Details of the intended trading activity of the firm both pre and post compromise including business model, projections and material assumptions.
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There is a long list of other information that has to be provided as soon as it is available if not provided as part of the initial information pack. This includes: the structure of the compromise; the methodology and assumptions for calculating the value of the liabilities to be compromised, the return to creditors, and any key factors that might affect those figures; how the compromise will be funded including whether there will be a contribution from sister companies or the parent company; any alternative options if the compromise does not come into effect; if insolvency is the likely alternative, the firm has to provide an EOS for creditors and shareholders; the practical effect of the proposed compromise on the economic value or beneficial interest belonging to directors, shareholders, secured creditors or other connected entities; a financial forecast for the longer of the next six months or the period over which the compromise is proposed to run, management accounts for the period since last formal to the date of notification, information on director pay, bonuses, contributions and profit shares, and any intercompany loan positions; and how the compromise affects amounts payable by the FSCS if the firm is declared in default.
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Once it has all of the information, the FCA will consider whether the compromise is compatible with the FCA’s statutory objectives, rules or Principles, in particular whether it treats customers fairly and meets the principles of customer information needs and managing conflicts of interest. If it doesn’t, the FCA is “likely to have significant concerns with it which may lead to an objection in court”.
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The FCA will also consider, among other things:
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Whether the firm has put forward the “best proposal” for customers. This will involve the FCA looking at what the customers will get as compared with other stakeholders, how other rights such as set-off are affected, whether there is a fair allocation of benefits and losses between all stakeholders of the firm, and whether the process is “fair” to the customer (e.g. by giving customers access to guidance and advice on the compromise);
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the nature and scale of any misconduct;
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the number and impact on customers;
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whether liabilities compromised are redress, client assets or safeguarded funds; and
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how much is being put into the compromise fund by the firm.
The FCA will then consider whether to challenge any voluntary arrangements (which it will decide in accordance with section 13.10 of the FCA enforcement guide) or whether take part in the court process for a Scheme or an RP. The guidance sets out some of the factors that the FCA will consider when deciding whether to object in court, including whether the proposal fairly balances the interests of all creditors, the average amount of liability being compromised and whether the firm has provided adequate information on the compromise to allow the FCA to assess it. The FCA suggests that it will make representations at the convening hearing and/or the sanction hearing if it feels it appropriate, and that the court will be inclined to take its views into account.
In its assessment, the FCA will decide whether it is appropriate to take regulatory action against the firm or its senior management and will use its “regulatory tools if it is appropriate to do so”. Any misconduct and the behaviour of senior management will be taken into account. Particularly if the liabilities are redress liabilities arising from serious or deliberate misconduct, the FCA may use its powers to prevent the firm from pursuing the compromise. The guidance emphasises that even where creditors and the court sanction a Scheme or RP, it will evaluate the firm and its management and may take regulatory action where it is necessary to protect consumers and the markets. This could include, for example, imposing requirements on the firm to take specific actions (such as appointing new management), varying the firm's regulatory permissions to restrict business or imposing additional prudential requirements if appropriate.
Amigo Loans: a case in point
In 2021, the FCA opposed the scheme of arrangement proposed to compromise redress liabilities owing by Amigo Loans and others and the judge (Mr Justice Miles) refused to sanction the Scheme for a number of reasons. A new Scheme was proposed and sanctioned in May 2022, where Trower J explained that the court would have regard to objections of the FCA to a Scheme (and therefore presumably an RP as well). Trower J noted that:
“It is clear from Miles J’s judgment that his decision was informed by the FCA’s attitude to the previous scheme, and he agreed with a number of the submissions it had made as to its deficiencies and the processes that had been adopted for obtaining its approval and seeking its sanction. This is in marked contrast to the position of the FCA on the present application. The FCA does not oppose the sanction of the Schemes, it has not appeared by counsel and has said that it would not be in furtherance of its statutory objectives to do so.
It has explained in correspondence that it has continued to engage with Amigo as its new proposals have developed and it is clear that its level of involvement has been such that it would have drawn any concerns that it may continue to have to the court’s attention. It has not done so, and while it is self-evident that the question of sanction is for the court and not the FCA, the FCA’s attitude was a material factor in my assessment of some of the considerations I have taken into account in deciding whether I ought to grant the relief sought.”
Other points of interest
As a separate note, the FCA also confirms that it is unlikely to issue “letters of non-objection” going forward. Instead, resources will be focussed on assessing the proposed compromise to ensure that firms are meeting their regulatory obligations, including to treat customers fairly, on any connected supervisory or enforcement action, and on communicating concerns to the firm and, where appropriate, the court.
The FCA also noted that “phoenixing”, the practice of closing a firm and that firm reappearing under a new guise to avoid liabilities of the old firm, was an unacceptable practice, and that if it found individuals deliberately avoiding their responsibilities and not complying with previous redress awards they could take steps against such individuals.
Conclusion
It is clear that this new guidance significantly increases the administrative burden for regulated firms proposing a compromise. As well as notifying the FCA “immediately”, regulated firms will have to grapple with the large volume of information to be provided to the FCA at an early stage in the process, which means significant upfront costs even when initial negotiations with key stakeholders in any scheme, RP or voluntary arrangements may not yet be very advanced. It is likely that regulated firms will therefore need significant additional support and robust advice as to how any compromise may play out to give them the confidence to navigate these hurdles. Companies with redress liabilities will need to ensure very careful consideration prior to the launch of any compromise given the greater risk of FCA regulatory action if they fail to do so, particularly in light of the compelling message from the latest Amigo Loans judgement regarding the weight that the court will give to the views of the FCA.
Authored by Charlotte Lamb, James Maltby and Margaret Kemp.
