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Law360, London (June 5, 2020, 12:26 PM BST) -- Britain's financial regulator is preparing for thousands of businesses to fold under the weight of compensation bills and investors' liabilities as a result of the COVID-19 pandemic, a senior official has said.
The Financial Conduct Authority is asking 13,000 companies, including finance advisers and wealth managers, to provide information about their financial health. The regulator has acknowledged that the economic downturn caused by the nationwide lockdown could make even the most resilient firms vulnerable.
"In the current climate, we cannot duck the fact that some of these firms may exit from the market altogether," Megan Butler, an FCA executive, told a conference on Thursday. "In these circumstances, it is imperative to minimize any delay in the return of client money and custody assets, and to take action ahead of time to prevent shortfalls in what they should be holding on their clients' behalf."
Butler said the regulator is seeking the data to help it understand which companies are most likely to fail. "Then we can size the potential harm associated with that," she added.
Financial pressures could lead to companies cutting corners, increasing the likelihood of financial crime, poor record keeping and abuse of markets, Butler added. They could make unsuitable decisions about investments. And market volatility could reveal earlier examples of misselling, leading to more complaints and the need for redress.
Compensation that became due to investors as a result of poor conduct would be partly paid by the Financial Services Compensation Scheme, which is accountable to the FCA.
Butler also said the FCA had warned businesses that attempt to avoid their liabilities to investors by closing down and opening new companies — a practice known as phoenixing.
"We have been very clear that this is unacceptable," Butler told the conference, which was held online.
The regulator has also caught companies pre-emptively setting up new entities and applying for authorization before complaints and liabilities at their existing enterprises have emerged, which the FCA calls lifeboating.
Butler said the regulator also plans to stamp out a new development, in which financial advisers join claims management companies to pursue complaints against their own poor advice.
"A recent and particularly egregious development is the practice of advisors leaving financial advice firms that have run up liabilities... only to re-emerge in claims management firms to pursue claims against the advice they themselves had given," Butler said.
Butler said such practices are unacceptable and in breach of its so-called fit and proper test for regulated persons.
"If, as firms, you are considering any of these courses of action, be aware that we will be on to you and we will use all regulatory tools available to us to stamp it out," Butler said. "If you have outstanding liabilities to customers you should not expect to be allowed back into the regulatory perimeter."
The FCA took over supervision of the claims management sector from the government in 2019. The regulator has the power to force registered companies to change their business practices, strip them of authorization or fine them if it finds that they are not complying with rules aimed at protecting consumers.
--Editing by Ed Harris.
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