The Financial Conduct Authority (FCA) has published guidance on its approach to compromises for regulated firms, providing much needed clarification - on the issues taken into consideration and the type of information a firm is required to provide - before entering a compromise with its creditors and/or shareholders. "Compromises" in this context include schemes of arrangement, Part 26A restructuring plans, and voluntary arrangements.
The aim of the guidance is to safeguard consumer protection and ensure that the integrity of the market is upheld. It is hoped that the guidance will also assist firms (and those advising them) when considering proposing a compromise to ensure that any such compromise is deemed appropriate by the FCA.
Required documentation and information
Regulated firms should notify the FCA of any proposed compromise as early as possible to avoid a breach of Principle 11 and of its notification requirements under SUP 15 of the FCA Handbook.
Firms should gather as much of the information required by the FCA as soon as possible to enable the FCA to carry out the relevant assessment within a manageable timeframe, and reduce the risk of any FCA objection.
At the initial stages of a proposed compromise, the FCA has set out the following minimum information that a firm is required to provide:
- an explanation of how the firm’s liabilities which form part of the compromise arose
- the types of liabilities which are to be compromised
- what actions the firm has taken or is taking to remedy the cause(s)
- details of the creditor cohorts or classes to which the compromise will apply
- the anticipated return to creditors
- the intended trading activity before, during and after the compromise
- any other additional information depending on the particular situation
At the full assessment of a compromise, and where the information has not been provided at the initial stage, the FCA will require the following additional information:
- details of the substance of the proposed compromise
- the practical effect of the proposed compromise on relevant creditors
- any other relevant information
The above list is not exhaustive so it is likely that, depending on the nature of the compromise, a firm may find itself having to provide the FCA with further information. In some instances, the FCA may also require a firm to appoint a skilled person to provide a report into any aspect of the business.
The information process can impose a huge administrative burden, especially at a time of distress (as is usually the case when firms are usually considering a compromise), so it is crucial that communication with the FCA is commenced as early as possible.
FCA’s approach to a proposed compromise
The FCA does not take a blanket approach to proposed compromises, nor does it have the same statutory powers towards all compromises. Each proposed compromise will be assessed on a case by case basis which will be considered against the FCA’s rules, objectives, and principles.
The treatment of customers in any compromise (including intended outcomes and the firm’s plans for when the compromise is to terminate) is a key issue for the FCA. A proposed compromise should provide for a fair allocation of funds between the stakeholders of the firm, although it is unlikely that any compromise over client assets will be appropriate. Any potential misconduct that could have contributed to the proposed compromise will also be considered. The guidance makes clear that the FCA will take the necessary steps, including any regulatory action, if it considers a proposed compromise does not meet the relevant requirements.
As a safety measure, firms and their advisors have previously sought a "letter of non-objection" to a proposed compromise from the FCA. In a break from this historic practice, the FCA has clarified that letters of non-objection are unlikely to be appropriate for compromises that fall within the remit of the guidance, and they instead intend to focus on assessing the proposed compromise and taking any necessary associated enforcement action. Firms should therefore be mindful of the above factors when proposing a compromise to avoid any potential objection, but they should not expect to receive a letter of non-objection for the benefit of the court.
Participation in court proceedings
The FCA’s engagement with the courts will depend on the type of compromise that a firm is proposing and in accordance with its statutory powers:
- Voluntary arrangements - the FCA has statutory powers under the Financial Services and Markets Act 2000 to challenge voluntary arrangements. However, the guidance clarifies that the FCA will only consider bringing a challenge in exceptional circumstances.
- Schemes and Restructuring Plans (RPs) – although the FCA does not have statutory powers to challenge Schemes and RPs, the court will generally be interested in the FCA’s views. Where the FCA has any concerns, these will be communicated to the firm and, if appropriate, the court. If the FCA participates in the court process, it will make representations at the relevant hearing. The guidance notes that consideration of schemes and RPs is not “business as usual work” for the FCA, so it may charge a special project fee for the costs associated with its involvement.
In order to avoid any potential FCA objection to a proposed compromise, it is sensible for a firm to seek the appropriate advice as soon as possible to ensure that they understand the process and requirements. We are experienced in advising regulated firms seeking a compromise with their creditors and/or stakeholders (with the necessary regulatory consent) and would be pleased to assist any firm contemplating entering such a compromise.