The Financial Conduct Authority has announced plans to ban what it calls claims management company phoenixing. Usually, phoenixing refers to the situation where the assets of an insolvent firm are bought from administration or liquidation by the firm’s directors, and where the business re-commences trading as a new entity.
However, what the FCA classes as CMC phoenixing is where a regulated firm ceases trading, then one or more individuals from that firm become involved with a CMC to pursue claims relating to their own previous misconduct. As the previous firm is insolvent, claims in these circumstances are usually handled by the Financial Services Compensation Scheme.
The full proposal is “to prohibit CMCs from managing FSCS claims if a person connected to the CMC is or was linked to the financial services activity that is the subject of the claim.”
It must also be acknowledged that the FCA proposal made here is simply to introduce a formal rule which explicitly sets out that this practice is not permitted. The FCA has already refused CMC authorisation applications where it has identified that the applicant firm intends to engage in phoenixing. FCA speakers have also made it clear in the past that phoenixing is not acceptable, even under existing FCA rules and principles.
Nevertheless, the FCA believes that, of the 250 CMCs with permission to manage financial claims, at least 18 (7%) have connections to previously authorised firms, and that this could allow these individuals to benefit from the previous firms’ poor conduct.
The regulator says that CMC phoenixing leads to:
- Public confidence in the regulatory system and the integrity of the market being undermined
- Creation of a situation where firms are incentivised to act against the interests of their customers
- CMCs who have not benefited from phoenixing being at a competitive disadvantage
The FCA invites responses to its consultation up until June 21.
Sheldon Mills, Executive Director of Consumers and Competition as the FCA, said:
“Consumers should be able to choose to use a CMC to help them claim compensation from the FSCS. But paying someone to provide help who is connected with the firm that caused the consumer’s loss is wrong, particularly where the firm had a responsibility before winding up to help its customers to obtain compensation.
“Our proposals are designed to put an end to this practice and to increase consumer trust and confidence in financial services firms, CMCs and the redress system.”