FCA Guidance Consultation: Approach to compromises

FCA publishes guidance consultation for firms who seek to limit their liabilities

Firms using company or insolvency law to manage their liabilities have been warned they could face assertive action by the Financial Conduct Authority (FCA) if their proposals unfairly benefit them at the expense of their customers. 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. 

In proposed guidance published today, the FCA 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 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. Following their assessment, the FCA will communicate any concerns to firms, and if necessary the courts, and consider any further regulatory action.   

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."    

This consultation is open until 1 March 2022 - the FCA welcomes views from all interested parties before its guidance is finalised. Although this is guidance on the circumstances in which the FCA will exercise its existing rules, the FCA welcomes feedback before determining final guidance.  

Notes to editors: 

·      Read the guidance consultation

·      Schemes and RPs are court approved agreements between a company and its creditors and/or shareholders under the Companies Act 2006. Creditors vote on it and the court will sanction it. CVAs are governed by the Insolvency Act 1986; creditors will vote on it and the court is notified. There is no court hearing unless the CVA is challenged by a creditor or the FCA. 

·      There is no statutory requirement for the FCA to provide non-objection letters.