Compromises – some thoughts on the FCA’s guidance

The FCA has issued Finalised Guidance on its approach to compromises for regulated firms (FG22/4; July 2022). It says that this is in the context of the increase it’s seeing in the number of firms proposing compromises to deal with significant liabilities to consumers, particularly redress liabilities. Compromises are arrangements between a firm and its creditors and/or shareholders that can be used to reorganise a company or group structure and restructure debts. They involve schemes of arrangement, restructuring plans and voluntary arrangements. The Guidance applies to all firms, including dual-regulated firms from the perspective of conduct regulation, and sits alongside the rules that apply to regulated firms under the FCA’s regulatory framework.

The FCA’s interest in compromises is driven by its statutory objectives, particularly protecting consumers and market integrity, and the position of consumers features prominently in the Guidance. The FCA doesn’t oversee or approve a compromise but, as regulator, it can challenge voluntary arrangements and a court considering a scheme of arrangement or restructuring plan will generally be interested in the FCA’s view of the firm applying for approval of the scheme or plan.

The Guidance sets out, in some detail, what the FCA is looking for from firms, including the information it will want to receive, and how it will assess a proposed compromise. Some observations are discussed below.

• Consumers first and foremost – one of the key messages in the Guidance is that the FCA is seeking an appropriate degree of protection for consumers and that’s a high threshold: “Where firms determine there is no better alternative outcome for consumers than to propose a compromise…”. If a compromise is proposed in respect of redress liabilities the firm “should ensure it is the best proposal the firm can make, which includes the firm providing the maximum amount of funding for the compromise so that consumers receive the greatest proportion of what is owed to them”.

• Red team/blue team – in view of this strong emphasis on consumer protection, there could be considerable value in a firm setting up a team to act as the consumers’ champion, considering how the proposal might impact consumers and what more – or what alternative things – could be done for them. This team should be separate from the main project team and should be given a clear remit to challenge. There are benefits from having independent, external views but there also needs to be sound knowledge of the business, so a mix of internal and external people in the challenge team is probably the optimal approach. Firms might include a ‘challenge’ workstream as part of their compromise project plan in any event. However, formally establishing a separate team and giving it terms of reference allow team governance to be evidenced to the FCA when the proposal pack is submitted.

• Immediate notification – there’s a clear message in the Guidance that the FCA expects to be told immediately where a firm is considering proposing a compromise. Exactly when that will be will depend on the circumstances of each case but firms should assume that it’s at a very early stage. In order to consider a compromise proposal, a board will need to review information that might need to be both detailed and extensive. However, delaying notification to the FCA until all of that information has been prepared and reviewed by the board and the compromise proposal considered risks breach of Principle 11 and FCA notification rules. Timing might be finely balanced but it’s best to err on the side of caution. That could result in notification before formal consideration by the board. Prompt notification is also important for senior managers as failure to notify at a sufficiently early stage could result in breach of the senior manager conduct rule requiring appropriate disclosure of any information of which the FCA would reasonably expect notice.

This article is intended to provide general information about recent and expected items that might be of interest. It does not provide or constitute, or purport to provide or constitute, advice relevant to any particular circumstances. Legal or other professional advice relevant to any particular circumstances should always be sought.

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