29
Apr
22
Articles, Property, Chancery & Commercial
FCA Uses Emergency Powers to Preserve Assets of Financial Advisory Firms

The FCA has used emergency powers to prevent financial advice firms who advised members of the British Steel Pension Scheme (BSPS) from disposing of assets to avoid paying compensation[1].

The measures were taken in an attempt to ensure that those firms involved in providing unsuitable financial advice to members of BSPS, to transfer out of the defined benefit pension scheme, would have sufficient assets available to satisfy any liability the firm had under the Redress Scheme announced on 31 March 2022.

Redress Scheme

For only the second time, the FCA has used its powers pursuant to s.404 of the Financial Services and Markets Act 2000 (“FSMA”) to set up a compensation, or ‘redress’, scheme to compensate those individuals who suffered loss after receiving unsuitable advice.

The scheme relates to advice given by numerous firms (approximately 90) to individual members of the BSPS between 26 May 2016 and 29 March 2018 (“the Relevant Period”). The FCA’s evidence suggests that 46% of the advice given was unsuitable and resulted in financial loss to the individual.

It is anticipated that the scheme will result in approximately £71m of compensation being paid to consumers.

Firms which are assessed as having provided unsuitable advice will be presented with a ‘redress bill’ which they will have to pay into the scheme. In some cases, depending on the number of individuals advised, a firms’ redress liability could run into the millions of pounds.

The FCA is currently consulting on the scheme until 30 June 2022 and it is expected that the scheme will be in place by early 2023, with compensation starting to be paid in late 2023.

Asset Freeze

In order to ensure that firms which may be subject to the redress scheme do not dissipate their assets to avoid paying their redress liabilities, the FCA has imposed an asset restriction on any firm (including a firm’s appointed representatives) which advised five or more BSPS members to transfer out within the Relevant Period.

Those restrictions took effect as of 12:01am on 27 April 2022 and will continue until 31 January 2023.

The detail of the restrictions is set out in the FCA’s Policy Statement, published on 25 March 2022.

In scope firms are subject to the requirement until they are in a position to notify the FCA that they have carried out and passed the Financial Resilience Assessment (“FRA”) introduced by the rules.

FRA

The FRA requires in scope firms to undertake a basic assessment of the adequacy of their financial resources to meet potential liability arising from unsuitable BSPS advice.

The scheme prescribes a methodology for how the calculation is to be carried out (see Annex B to Appendix 1 of the Policy Statement) which uses the FCA aggregate data in respect of unsuitable advice by reference to a firms’ regulatory capital, the number of individuals it advised and an average redress liability figure as follows:

C – (N x L x AL)

C = the firms regulatory capital.

N = number of BSPS members the firm advised (less any if has compensated in full).

L = likelihood the firm’s advice was unsuitable (assessed by the FCA as 46%).

AL = the average liability the firm incurs for unsuitable BSPS advice (prescribed as 16% of the average transfer value for BSPS advice).

The calculation can also take into account a firms professional indemnity insurance, which will reduce the potential liability, depending on the level of cover provided by the policy assuming it bites in respect of pension transfer advice.

There is a helpful example calculation on page 12 of the Policy Statement.

If the result of the calculation is a positive value, the firm may conclude that it has sufficient resources to meet its potential redress liability and the asset restriction will not apply. If negative, the firm will remain subject to the asset restriction.

All firms affected have until 27 May 2022 to carry out the FRA and notify the FCA of the result of it.

Terms of the Restriction

The terms of the asset restriction itself appears at 3.3 of Annex B to Appendix 1 of Policy Statement and say (in summary) that a firm “must not in any way dispose of, withdraw, transfer, deal with or diminish the value of any of its own assets (whether in the United Kingdom or elsewhere), unless:

a) The relevant transaction occurs in the ordinary course of business of the firm; or

b) The firm has notified the FCA that it can pass the FRA, has not subsequently failed the FRA and has calculated that it will continue to be able to meet claims for unsuitable BSPS advice after the transaction has been carried out.

If a firm passes the FRA and notifies the FCA of that, the asset requirements will cease to apply, albeit the firm is required to review the calculation and an continue to notify the FCA on a monthly basis that it continues to pass the FRA.

There is a non-exhaustive list as to what will constitute transactions in the ordinary course of business, an area where there is scope for argument, as well as a list of transactions which will be unlikely to be considered to be in the ordinary course of business.

The payment of dividends (which could allow a firm to dispose of its liquid assets) is specifically dealt with at paragraph 3.3.6 of the scheme. In short, a firm may only treat a dividend payment as within the ordinary course of business if it obtains the prior consent of the FCA to do so.

It is those holding senior management functions (“SMF Managers”) within a firm who are personally accountable for any breach of the requirements.

Conclusion

It remains to be seen if any challenge is made to the blanket implementation of asset restrictions, but the FCA has indicated that it will act swiftly to ensure that firms with redress liabilities retain assets which can be used to satisfy those obligations.

The FCA will review the FRA of firms subject to the restriction requirements and where it disagrees with an assessment, it cand use its own initiative powers under FSMA to impose the asset restriction on a firm which it does not accept can pass the FRA.

This article provides a summary of the primary points arising from the Policy Statement and the FCA’s actions and is not intended to provide legal advice.

[1] Using its general rule making powers under s.137A of FSMA 2000.

Written by or involving: Christopher Pask

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