FSA Issues Warning To 'Phoenix Firms'

by Robin Pilgrim, LawAndTax-News.com, London

14 June 2005

The UK's Financial Services Authority (FSA) on Friday warned that it would not tolerate firms attempting to sidestep their liabilities to customers by moving assets between companies.

Michael Lord, Head of Investments at the FSA, announced that:

"Phoenix firms are not only failing to treat their customers fairly but are also being very unfair on their fellow advisers, who are left to foot the bill."

According to the FSA, the creation of a so-called 'phoenix firm' occurs when the assets of one limited company are moved to another legal entity, sometimes at a price below their true market value, and without moving the liabilities or meeting liabilities to consumers. In such situations, some or all of the directors are the same in both entities.

The regulator revealed that it has recently investigated 18 potential phoenix firms and has already referred one firm to Enforcement. Although it acknowledged that it cannot prevent firms becoming insolvent, it announced that it plans to take steps to minimise the impact.

These include:

• Asking directors to sign undertakings to honour the liabilities in relation to customer claims on their previous business;
• Encouraging firms to 'ring fence' funds to be held by the departing firm to meet any further potential liabilities thus avoiding future claims;
• Refusing the application for authorisation of the new business where the directors of the departing firm will not make reasonable arrangements for claims arising out of their previous business; and
• Referring individuals to Enforcement where their actions have actively disadvantaged customers.

The FSA also announced that it plans in future to work more closely with liquidators to investigate the conduct of directors. This could lead to action by the FSA or the liquidator making an adverse report to the Department of Trade and Industry (DTI), which has powers to ban directors.

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