The FCA is increasingly seeing firms attempt to avoid potential or actual liabilities whilst still benefitting from the assets of the business, which it calls “polluting behaviour”. It has published new webpages on how firms should tackle polluting behaviour and meet redress liabilities, and how to identify and report polluting behaviour.
Under Principal 4 and the threshold conditions, the FCA expects firms to have adequate financial resources to be able to provide redress. It has seen so-called polluter behaviours cause considerable harm to consumers and markets, and stresses that while there will be some occasions where firms are genuinely unable to meet their liabilities, they should not seek to leave their liabilities behind. Firms should also be able to provide robust and evidenced reasoning for their decisions.
The FCA provides the following examples of polluting behaviours:
- Basic phoenixing – when an authorised firm shuts down and a new firm emerges in its place with the previous firm’s assets;
- Lifeboating – when a firm connected to an existing authorised firm is used as a method of preserving assets. “Lifeboats” can be set up from scratch, acquired and may include appointed representative arrangements;
- Fronting – where individuals with a clean regulatory history are given as firm controllers or managers in an authorisation application, and act as a ‘front’ for the real controllers or managers;
- Sale at an undervalue – when a firm sells its assets – usually its client bank – at below-market value;
- Restructuring – changing the corporate structure of the group to isolate and protect assets; and
- Proceeds of sale not applied to redress – when funds available from an asset sale are not used to address the potential or actual redress liabilities a firm has.
The FCA wants polluters to pay for the liabilities they create so that customers and markets feel confident about doing business with authorised firm. It notes that consumers reliant on the FSCS may not receive the full amount they are owed, and that the rising cost of the FSCS levy impacts all firms.
Specifically, the regulator says that firms should:
- Take reasonable and verifiable steps to ensure: any potential and actual redress liabilities have been provisioned for;
- Ensure a customer contact exercise is completed, giving clear and timely communications to inform customers of the firm’s intention(s) to sell the client bank, potential impacts and customers rights to claim in respect of past advice, particularly where the transferring entity is proposing to dissolve;
- Obtain a fair, independent valuation for client banks, and avoid or declare any potential conflicts of interest to ensure transparency in the sale process;
- Agree on the transfer of liabilities alongside the customers or assets to ensure good customer outcomes in line with the Consumer Duty;
- Submit a SUP 15 notification (authorised firms only) to inform the FCA of anything it ought to be made aware of in good time before transactions take place (for example, the intention to sell or purchase the client bank, transfer assets or restructure);
- Seek FCA approval where required, prior to any change in control;
- Submit a robust wind-down plan (where applicable), tailored to the firm’s business model/size/risk exposure; and
- Ensure SMF candidates have the relevant skills and experience required to run the firm effectively and in a compliant manner, including looking at their regulatory history.
The FCA says that firms should expect more scrutiny at the gateway assessment stage if the regulator identifies a greater risk of polluter behaviour, which includes closely examining the fitness and propriety of SMF candidates.