FCA issues guidance on its approach to compromises

FCA has seen an increase in the number of regulated firms proposing compromises to deal with significant liabilities to consumers, in particular redress liabilities.

FCA has issued guidance to clarify how it will approach compromises with regulated firms, in line with its statutory objectives to protect consumers and the integrity of markets. FCA aims to ensure that firms understand what information the FCA needs and the factors which the FCA will consider when deciding if and what actions to take. FCA hopes that the guidance will prevent firms from proposing compromises which are unacceptable to the FCA. The guidance will apply to firms who are dual regulated by FCA and PRA, from a conduct regulation perspective.

The proposed guidance focusses on three types of compromise: schemes of arrangement, restructuring plans and voluntary arrangements.

FCA’s key considerations include the treatment of customers and the outcomes they receive, customers’ information needs and managing conflicts of interest. If the proposed compromise is not compatible with FCA’s statutory objectives, rules or Principles, FCA is likely to have significant concerns with it, which may lead to an objection in court.

When assessing a compromise proposed by a firm, FCA will take into account all of the information provided by the firm and consider a number of factors including but not limited to:

  1. Whether the proposed compromise provides the best outcome possible for customers taking into account:
    • how customers rights are affected (eg rights of set-off);
    • how compromise funds will be distributed and whether the proposed compromise provides a fair allocation of benefits and losses between all stakeholders of the firm;
    • whether a better deal was available to customers;
    • whether the firm proposes to undertake a fair process for creditors affected by the proposed compromise;
    • the transparency or comprehensiveness of the information that the firm proposes to provide to customers;
    • whether customers have access to guidance/advice on the compromise (including alternative options to the compromise); and
    • whether customers have had an opportunity to liaise with the firm on the proposed compromise.
  1. The nature and scale of any misconduct that led to the liabilities subject to the proposed compromise;
  2. The number of, and impact on, any customers with characteristics of vulnerability;
  3. Whether the liabilities to be compromised involve redress, client assets or safeguarded funds;
  4. The effect of the proposed compromise on eligible customers’ FSCS compensation rights;
  5. How much is being put into the compromise fund by the firm (or wider group if applicable);
  6. How the firm will deal with claims and appeals; and
  7. What the firm intends to do following the compromise (eg continue to trade or wind-down).

Harshil Patel