Article

Restructuring options for IFA practices in distress

Restructuring Advisory Director Victoria Crutchley discusses how formal insolvency tools could provide better outcomes than ‘life-boating’ for firms in distress

The investigation of misadvised defined benefit (DB) pension transfers has been a key focus area for the Financial Conduct Authority (FCA) following a review which deemed many transfers were unsuitable – including the high-profile restructuring of the British Steel Pension Scheme in 2017 which left thousands of members with little time to make complex investment decisions.

The regulator’s ongoing commitment to tackling DB issues was underlined by comments made by Sarah Pritchard, the FCA’s Executive Director, Markets, at the Pension and Lifetime Savings Association’s 2021 annual conference. Here, Sarah emphasised that ‘decisive action’ should be expected on DB transfers where the regulator needs to step in.

Amid such a heightened regulatory focus, and the potential costs that come with investigation and enforcement, some practices at risk of, or already under FCA investigation have been accused of ‘life-boating’ – the act of pre-emptively setting-up of a parallel, authorised business and facilitating the transfer of advisors and clients in anticipation of the current business collapsing.

Although the circumstances surrounding the transfer may be legal, in some instances, this can lead to increased challenges and potentially create friction with the regulator. However, for businesses under pressure as a result of a potential or active investigation, using formal restructuring tools, and collaborating with the relevant agencies can secure stronger outcomes. Managed effectively, it can bolster their ability to continue trading, ensure customers receive adequate support and guidance, and facilitate the smooth transfer of a business through a sale if required – all while maximising returns for creditors and maintaining positive relationships with the regulator and allied agencies.

In the spotlight

Regulatory investigation can put firms under significant operational and financial pressure. If the FCA suspects negligence, its first step could be to request that a firm signs a Voluntary Requirements Notice (VREQ). This means a business agrees to not accept new business of a certain type – specifically, the type within scope of the investigation – while the notice is in place.

From the regulator’s perspective, this is a stopgap measure to protect consumers from what it perceives could be further harm – regardless of whether, at this stage, a firm’s activity has formally been judged to have been negligent.

In certain cases, a VREQ will be followed by a skilled persons review (SPR) – an independent investigation of a regulated firm’s processes and procedures conducted to help the FCA analyse, determine and subsequently address any fault. The outcome of an SPR can either be a fine, or the requirement to pay potentially sizeable redress to customers. And the process of a review itself can be costly. Liability for the final bill will rest on the shoulders of the business in focus – another bill firms under investigation must be prepared to pay.

A firm under investigation by the FCA will be advised to issue a block notification to its insurers. This could result in their insurance companies attempting to manage their exposure by hiking excesses or limiting cover – further increasing the potential bill for practices in meeting redress – or increasing premiums to a potentially unaffordable level.

More generally, limits on a firm’s ability to carry out certain types of advice, such as pension transfers, could significantly impact revenues, while the publicity of an FCA investigation could hamper a firm’s ability to attract or retain clients.

Another way forward

Facing what can be significant costs, some firms will be tempted to allow the business to collapse, or to ‘life-boat’ to protect their income streams, client books and goodwill.

While this could help advisers to continue trading – at least in a different guise – it won’t always deliver the best possible outcome for stakeholders and is likely to be viewed negatively by the regulator and allied agencies, such as the Financial Services Compensation Scheme (FSCS). The FCA may consider opening up an investigation into relevant advisors personally, a potentially more likely outcome where the migration of a book of business has occurred.

Winding down a business or allowing it to become insolvent could result in job losses – an undesirable and challenging outcome for any employer. At the same time, shifting a business to a new entity could leave clients without adequate advice, guidance or recourse making any claim for compensation via the ombudsman or FSCA more protracted.

Using formal insolvency tools and prioritising proactive, open, engagement with the agencies involved, can deliver better outcomes for all parties in the process. For example, partners in a distressed practice could seek to put a Partnership Voluntary Arrangement (PVA) in place. Similarly, if operating through a limited company, directors of the distressed practice can pursue a Company Voluntary Arrangement (CVA).

A PVA – cousin to the CVA – involves the partners in a firm setting up an agreement with unsecured creditors which will include the FSCS (for any uninsured claims) where it has already had to step in to compensate a firm’s customers, to manage the repayment of what is owed.

For a PVA to be approved, 75 per cent of its unsecured creditors must agree to the proposals. Once in place, it can give a business valuable protection from claims for unsustainable repayments of debt, while crucially allowing it to continue trading or provide time for a managed sale of its business. From the perspective of any stakeholder, this will likely be a far more preferential outcome than a business being wound-up entirely.

Through a structure like a PVA, the return to unsecured creditors is enhanced and assures client communication is managed effectively by the practice. At the same time, it demonstrates that partners of an Institute of Financial Accountants (IFA) practice respect the FSCS’ intended role as a fund of last resort – and are not wilfully misusing it to their own advantage.

Where a solution like a PVA is deemed inappropriate, an alternative route could be to pursue a ‘pre-pack’ administration. This involves administrators arranging the sale of some or all of an insolvent practice’s assets to a new or existing company which could include a firm’s existing partners. The administrators complete the sale upon their formal appointment, while the former firm may ultimately be liquidated, and the proceeds distributed to creditors.
Pre-pack administrations can only proceed where one of the statutory purposes of administration can be achieved; consultation with the FCA is always undertaken prior to any proposed transfer. Crucially, when done correctly, pre-pack administration can provide management teams with an effective route forward while again ensuring creditors still receive the largest possible return.

Through a structure like a PVA, the return to unsecured creditors is enhanced and assures client communication is managed effectively by the practice. At the same time, it demonstrates that partners of an Institute of Financial Accountants (IFA) practice respect the FSCS’ intended role as a fund of last resort – and are not wilfully misusing it to their own advantage.

Where a solution like a PVA is deemed inappropriate, an alternative route could be to pursue a ‘pre-pack’ administration. This involves administrators arranging the sale of some or all of an insolvent practice’s assets to a new or existing company which could include a firm’s existing partners. The administrators complete the sale upon their formal appointment, while the former firm may ultimately be liquidated, and the proceeds distributed to creditors.

Pre-pack administrations can only proceed where one of the statutory purposes of administration can be achieved; consultation with the FCA is always undertaken prior to any proposed transfer. Crucially, when done correctly, pre-pack administration can provide management teams with an effective route forward while again ensuring creditors still receive the largest possible return.

Early intervention

Early engagement with stakeholders at the first signs of financial distress is vital to ensure ‘buy-in’ from all parties. Open and clear communication will always be appreciated – consultation with stakeholders, including the likes of the FCA (and FSCS) must be undertaken in accordance with their guidance note, and will be essential to avoid intervention and secure support for proposed Arrangement.

Investigation can be a challenging time for many practices, and in many cases might not feel deserved. However, prioritising collaboration – and maintaining a focus on every stakeholders’ interests – will stand firms the best chance of securing a sustainable path forward.

Related team

Victoria Crutchley

Victoria Crutchley

  • Director
  • Restructuring Advisory
  • Leeds

Martyn Pullin

Martyn Pullin

  • Partner
  • Restructuring Advisory
  • Teesside

Philip Reynolds

Philip Reynolds

  • Partner
  • Restructuring Advisory
  • London