Regulatory crackdown on phoenixing is in full swing as some 136 firms are referred to Financial Conduct Authority.
The FCA’s bid to tackle phoenixing in the financial industry is well under way, as 136 financial firms are being referred to them by the Financial Services Compensation Scheme. The FSCS said it had identified the potential cases through its anti-phoenixing work and passed them onto the watchdog last month.
The FCA is against the act of phoenixing when it is undertaken by financial firms or individuals to avoid its liabilities to consumers. In April 2019, the Financial Services Regulatory Partners Phoenixing Group was set up by a number of regulatory bodies — including the FSCS, FCA and the Financial Ombudsman Service — to tackle the process.
Caroline Rainbird, chief executive of FSCS stated
Since September 2019, our claim handlers have picked up 19 potential cases of phoenixing which have been shared with the FCA.
A further 117 separate cases have been identified, leading to them being referred to the FCA.
Debbie Enever, head of external relations at the Financial Ombudsman Service, also stated in December 2019 about the matter:
Phoenixing can create significant issues for consumers and undermines other businesses.
We’re pleased that our data is helping the FCA prevent it. Action to tackle this issue needs to be coordinated and we are proud to continue to work with partners through this group to ensure consumers are treated fairly.
What is Phoenixing?
Phoenixing is a process in which a company can quite literally “rise from the ashes”. An insolvent company’s assets are purchased by the company’s directors during administration. After closing the old company, they start a new business which continues to operate in exactly the same way using the purchased assets.
The result of phoenxing is that a business can resume trading as a new corporate entity with a completely clean slate, having been in administration.
Where phoenxing is deemed fraudulent is the situation where a director racks up debts, sells off the company assets to a newly formed company with the same directors, sold below market value as the company approaches insolvency, benefiting the directors and defrauding creditors.
Some directors avoid their responsibilities by continually starting new companies in this way, moving on from struggling businesses without paying their creditors.
Marshall Bailey, chairman of the FSCS, said it was reassuring to know the FSCS’s work under the “Prevent” pillar, which includes its anti-phoenixing work, had been welcomed by members of the industry.
Mr Bailey added:
The FSCS is focused on helping facilitate good customer outcomes. We are working at pace with our colleagues to prevent further detriment. The early successes of our joint work on phoenixing has great support.
How can Smooth Commercial Law help?
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Should you have a claim, we can deal with your case and look to recover compensation for not just your loss of investment but also any adverse tax liabilities that you may now be facing as well.