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FCA issues court warnings over ‘unfair’ use of insolvency law

The FCA has told firms it expects to be informed as soon as a firm is considering a scheme of arrangement or other compromise to manage liability and set out the information it should receive.

Firms using insolvency or company law to manage their liabilities have been warned they could face court action by the FCA if their proposals “unfairly” benefit them at the expense of their customers.

It revealed the FCA has seen an increase in the number of firms developing proposals, such as Scheme of Arrangements, to deal with significant liabilities to consumers, in particular redress liabilities.

The authority has made it clear to firms seeking to limit their liabilities that they should provide the best possible outcome for customers, which will include providing the maximum amount of funding possible to meet compensation claims by customers.

Failure to do so could result in the FCA objecting to the firm’s proposals in court. The FCA will also use its regulatory powers, including enforcement actions for misconduct by firms or their senior managers, when appropriate.

The FCA said it has told firms it expects to be informed as soon as a firm is considering a scheme of arrangement or other compromise to manage liability and set out the information it should receive.

Some firms have requested a ‘letter of non-objection’ from the FCA in relation to their proposal to manage their liabilities. Today’s guidance consultation confirms that the FCA would be unlikely to ever issue a letter of non-objection.

The FCA will instead focus on assessing each proposal on a case-by-case basis to ensure firms are meeting their regulatory obligations, including treating their customers fairly.

Sarah Pritchard, executive director of Markets at the FCA, said: “Under existing company and insolvency law, firms have options to limit their liabilities. When making use of these, they still have a responsibility to treat their customers fairly.

“We will take action against firms that don’t meet this obligation. The guidance we are consulting on should help firms understand our expectations and ultimately help firms to avoid proposing compromises that are unacceptable to us because they fail to provide the best possible outcome for consumers.”

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