Redress Liabilities: The Polluter Pays

The FCA deems polluting behaviour to be where firms that try to avoid potential or actual liabilities whilst still benefiting from the assets of a business. As it is already known, firms providing poor advice, products or services are expected by the regulator to compensate customers as and when this is identified. As regulated entities, there is also a level of expectation that firms have overarching governance strategies which allows them to forward plan and continuously monitor the outcomes consumers are experiencing, whilst also ensuring that adequate financial provisions are kept in place to account for the potential and actual liabilities.

Whilst there are many forms of polluting behaviours, the FCA have outlined 6 main examples they want firms and consumers to be aware of:

• Basic Phoenixing: this is the event of an authorised firm shutting down and a new firm emerging in its place with the previous firms assets. The shut down entity is either dissolved or ceases trading and leaves behind unresolved consumer liabilities.
  
  
• Lifeboating: this is when authorised firms use existing connections with another firm to preserve assets. These companies can be group holding companies, set up from scratch or be acquired and often feature Appointed Representative arrangements with the authorised firm. Lifeboats can be used by authorised firms to move their customers to but without passing over the commitment to take on liabilities and pollution occurs when the firm which retains the liabilities dissolves.
  
  
• Fronting: this is the process of firms in the Direct Authorisation application process using individuals with clean regulatory histories to be controllers or managers to cover up the identity of the real controllers and managers, who may have a poor regulatory record including closing down firms and leaving liabilities behind.
  
  
• Sale at an undervalue: this is where a firm sells assets such as its client bank at a below-market value which then impacts its ability to cover potential or actual liabilities. The FCA has also noticed examples of individuals responsible for liabilities moving from the selling firm to the acquirer, meaning that whilst assets have been preserved and liabilities abandoned, the individual could continue to benefit from the commission payments received on the assets.
  
  
• Restructuring: this is the activity of changing the corporate structure of a group in order to isolate liabilities and protect assets via the insertion of a holding company, overpaying on dividends or selling or transferring the client bank.
  
  
• Proceeds of sale not applied to redress: In this event, a firm has generated funds through the sale of assets whilst also having potential or actual redress, however the firm choses not to use the proceeds from the sale to address the liabilities.

As part of the FCAs ongoing Consumer Duty commitments to put consumer needs first, the regulator wants these so-called ‘polluters’ to pay for the liabilities they create. The FCA expects its supervised firms and the appointed representatives they oversee to plan for potential liabilities and hold adequate capital to remediate clients when it is required. Firms are expected to notify the FCA if they identify that they do not have adequate financial resources to provide potential redress, they intend to sell or transfer their client bank, the sale of which could have an impact of their risk profile or value or resources, or if they plan to offer less redress to consumers than may be potentially due. Any lack of the above notifications will cause the regulator to question a firm and the responsible individuals’ fitness and propriety to hold the FCA approval status.

Thistle can assist your firm if it is in the process of identifying potential redress liabilities or if you are looking to sell assets such as your client bank. With a plethora of experience within the Mergers and Acquisitions space, we are able to perform detailed due diligence from both a vendor and acquirer perspective, and will work alongside your requirements to satisfy any conditions of sale or purchase.

For enquiries, please contact us at 0207 436 0630 or via email at info@thistleinitiatives.co.uk.