FSIs that limit liabilities could face regulatory action

The UK’s financial watchdog has warned firms using company or insolvency law to manage their liabilities could face action if their proposals unfairly benefit them at the expense of their customers.

The Financial Conduct Authority (FCA) revealed it had seen an increase in the number of firms developing proposals like the Scheme of Arrangements to manage significant liabilities to consumers, in particular redress liabilities.

The regulator today published proposed guidance which states that financial services institutions (FSIs) seeking to limit their liabilities should provide the “best possible outcome for customers”. This would include providing the maximum amount of funding possible to meet compensation claims by customers.

The authority warned that failure to do so could result in it objecting to the firm’s proposals in court. The FCA added that it would use regulatory powers, including enforcement actions for misconduct by firms or their senior managers, when appropriate.

“Under existing company and insolvency law, firms have options to limit their liabilities,” said Sarah Pritchard, executive director of markets, FCA. “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.”

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.

It said that some firms have asked for a ‘letter of non-objection’ in relation to their proposal to manage their liabilities. But the FCA explained that the guidance consultation confirms that the FCA would be” unlikely to ever issue a letter of non-objection”. Instead, the regulator says it will be focussing on assessing each proposal on a case-by-case basis to ensure firms are meeting their regulatory obligations.

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