• The FCA has issued a consultation on its approach to compromises for regulated firms (GC22/1) 
  • Following criticism of its uncertain approach to Provident and its more muscular response to the first Amigo scheme the market will welcome greater clarity
  • Our cross-discipline team are actively engaged advising regulated clients faced with difficult choices

Context

Regulated firms have reported a sharp increase in complaints.  Firms have reported to regulators that claims management companies are driving complaints without proper client authority.  Commentators are concerned that as lenders increasingly vacate the market, the rising numbers of people with poor credit ratings will have little option than to access illegal lending with its attendant evils.

It is within this context that the issue of whether, and upon what terms, sub-prime lenders are able to continue trading whilst settling claims comes into sharp focus.  There is the additional question of what the extent of the regulatory burden for sub-prime lenders should be if they are to be encouraged to remain active.

The process used in the two most commonly reported attempts to effect suitable compromises is a Scheme of Arrangement (Scheme). In common with the Restructuring Plan (RPs), introduced into UK insolvency law in June 2020 by the Corporate Insolvency and Governance Act 2020, a Scheme does not require an entity to be insolvent and is a creature of our companies legislation.  Both processes can be used where there are a large number of stakeholders and significant liabilities that render informal restructurings impossible.  This makes them well suited to regulated firms.  Schemes can involve significant outlays and we have advised upon the use of an RP to achieve a more cost effective outcome.

Schemes of arrangement and restructuring plans

A Scheme is a court-based procedure under Part 26 of the Companies Act 2006 (CA 2006) that allows a firm to make a compromise or arrangement to settle its liabilities with creditors and/or shareholders. The court will sanction a scheme voted through by the relevant classes if it deems the proposals fair and reasonable, and a genuine attempt to reach an agreement between a company and its creditors and/or shareholders.

A RP under Part 26A of the CA 2006 can only be used in order to eliminate, reduce, prevent or mitigate the adverse effect on a company's ability to carry on business as a going concern that will encounter or is likely to encounter serious financial difficulties. A RP includes a "cross-class cram down" statutory provision, which allows the court to sanction the plan as binding even if a dissenting group in a class of creditors or shareholders results in the plan not receiving the 75% approval (where such group is unaffected economically by the RP).

Recent examples of where Schemes have been used (or sought to be used) by regulated businesses have arisen where redress has become due to consumers following a Financial Ombudsman Service investigation.  Schemes and RPs create a mechanism to enable the firm to manage the (often unforeseen) liabilities arising from such an investigation and to continue to trade.

FCA role

The FCA is the conduct regulator for financial services firms and financial markets in the United Kingdom. It has a duty under section 1B of the Financial Services and Markets Act 2000 (FSMA 2000) to pursue certain objectives, one of which is the consumer protection objective.

This means that the FCA will assess any Scheme or RP in the discharge of its statutory functions. This is to ensure that the proposed arrangement is compatible with the FCA’s rules, including the FCA’s Principles for Businesses. These are likely to be broader considerations than those considered by the court when considering a Scheme or RP. 

An Insolvency Practitioner advising a firm should notify the FCA in good time and guidance has been issued in that regard (see FCA FG21/4: Guidance for insolvency practitioners on how to approach regulated firms). The FCA has rights to make representations at court and creditor meetings for all restructuring procedures, including schemes of arrangement. If a firm is likely to be placed into administration or liquidation while subject to a scheme, the firm is required to promptly notify the FCA (see SUP 15 (General notification requirements) and Principle 11 (Relations with regulators)).  In our experience, early and effective engagement with the FCA is essential to ensure the best prospects of facilitating an effective arrangement.

The  FCA has taken different approaches in the Re Provident[1] and Re ALL Scheme[2] cases.

In Re Provident the FCA was concerned the Scheme would be used to avoid the company having to pay claimants the full value of their entitlement under the redress scheme.  The FCA claimed the Provident Finance Group could contribute more than was on offer to the consumers; however, it stopped short of formally objecting to the Scheme, did not involve itself in the sanction hearing and did not offer an alternative solution.

However, in Re ALL Scheme the FCA submitted a formal objection to the court based upon the potential harm to consumers, the lack of consultation and the fact that alternative solutions were available to the company.  The court agreed with the FCA's viewpoint and ultimately did not sanction the Scheme.  A further proposal has been issued.

FCA guidance

With the rise in the use of Schemes in regulated businesses the FCA has commenced consultation on its proposed guidance in respect of its approach to compromises for regulated firms (GC22/1) with a deadline for responses by 1 March 2022.  The guidance provides helpful clarity on the FCA's expectations and likely approach to considering compromises.  There is, though, some concern that this increased scrutiny of compromises could lead to sub-prime lenders being held to regulatory levels that are unaffordable and the inevitable market turmoil that would ensue should this lead to a greater number of business failures in the market.

A key theme that pervades the guidance is the need to engage early with the FCA (and other stakeholders of the business) should a business be considering a compromise of liabilities.  

Addleshaw Goddard has an experienced cross-discipline team who are currently engaged on such matters and are can help navigate businesses through the process.

Footnotes

[1] Re Provident SPV Limited, [2021] EWCH 2217 (Ch)

[2] Re ALL Scheme Ltd [2021] EWHC 1401 (Ch)

 

Key Contacts

Paul Fleming

Paul Fleming

Partner, Head of Restructuring - London
London, UK

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Steven Francis

Steven Francis

Partner, Financial Regulation
London, UK

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