Michael Lord, Head of Investments at the FSA, said: "Phoenix firms are not only failing to treat their customers fairly but are being very unfair on their fellow advisers, who are left to foot the bill."
Phoenix firms occur when the assets of one Limited company are moved to another legal entity, sometimes at a price below their true market value, and without moving the liabilities or meeting liabilities to consumers. In these situations some or all of the directors are the same in both entities.
The FSA has recently investigated 18 potential phoenix firms and has already referred one firm to Enforcement. Although it cannot prevent firms becoming insolvent, it can take steps to minimise the impact. These include:
-asking directors to sign undertakings to honour the liabilities in relation to customer claims on their previous business
- encouraging firms to 'ring fence' funds to be held by the departing firm to meet any further potential liabilities thus avoiding future claims
- refusing the application for authorisation of the new business where the directors of the departing firm will not make reasonable arrangements for claims arising out of their previous business
- referring individuals to Enforcement where their actions have actively disadvantaged customers.
The FSA plans in future to work more closely with liquidators to investigate the conduct of directors. This could lead to action by the FSA or the liquidator making an adverse report to the Department of Trade and Industry (DTI), which has powers to ban directors.
