IFA the next target for claim management companies

IFA the next target for claim management companies

We’ve recently seen a lot of activity in the IFA market, where several clients have come under siege from claims management companies targeting IFA businesses who have provided individuals with pension transfer advice. The financial conduct authority is now acting as a regulator to this sector.

Claims management companies have turned their attention to this market after the PPI miss-selling compensation claims have quietened down, and the “falling sick whilst abroad” claims failed to gain any traction. You will have all heard the adverts on the radio, “have you recently received advice on moving your pension pot, call us today for a no-obligation consultation to see if you have been mis-sold, no win no fee”.

Once a formal complaint is received by the IFA, the matter is typically referred to the Financial Ombudsman Service, who makes an independent assessment if liability is due. Even if the Financial Ombudsman finds in favor of the advisor and no liability is awarded, the pull-on management’s time and resource can be crippling. Further, the notification to insurers of claims received can cause difficulties for the IFA business trying to place compulsory professional indemnity insurance moving forward.

We were recently engaged to advise an FCA registered IFA business, who had received several complaints in respect of historic pension transfer advice, and these matters were with the Financial Ombudsman for consideration. As a result of the complaints received and FCA being involved, the business had been refused PI cover by its insurers and the cover had lapsed.

This, unfortunately, left the business in the undesirable position of being FCA registered, with a live client base, but not being able to offer any financial advice to its clients because of having no PI cover in place as this is an FCA regulation.

Our first point of action was to work with our colleagues in Corporate Finance to determine if the business and/or the assets could be sold on the open market. The primary assets of the business were its client list, and the associated trail income commission being received from these clients. A brief campaign was undertaken to find a buyer, it quickly became apparent that no independent third-party purchasers could be found for this type of situation.

We communicated this to the business and advised the management team on the options now open to the business. The business was balance sheet and cash-flow solvent, with relatively few admitted liabilities, but was facing uncertainty from the high level of potential (but not admitted) claims in respect of the live complaints awaiting an outcome from the Financial Ombudsman. Insurers had confirmed these claims were not covered under the insurance policy, and an adverse finding against the business would have left the company insolvent.

The agreed way forward was to propose a Company Voluntary Arrangement, commonly referred to as a “CVA”, this formal insolvency procedure is discussed often in the press at the moment as its the restructuring mechanism used over the last year by high-street retailers such as Homebase, Mothercare, New Look and House of Fraser.

The CVA we designed and structured for this specific IFA company, allowed for its client base to be transferred to a connected FCA registered business, meaning the clients would continue to receive ongoing financial advice. The sales consideration to be paid by the connected party for access to the client base was the equivalent of a fixed period’s worth of the forecasted commission generated from the clients’ funds under management. The CVA Proposal allowed for this commission to be collected by the connected company, and repaid into the CVA on a monthly basis, creating a fund from which genuine creditors of the company could be paid. There was also an enhanced payment anti-embarrassment clause built into the agreement that protected the company, its directors and the Supervisors of the CVA from a sell-on of the client base at a higher arbitrage value.

The CVA Proposal also provided a claims approval procedure, whereby all creditors (including the ‘complainant’ creditors) would need to validly evidence their claims. The claims received are accepted or rejected by us as supervisors of the CVA, working in conjunction with information provided by management, and the creditor has recourse to apply to the High Court, for a Judge to determine if any liability was owed if they do not agree with our decision.

For any CVA Proposal to be accepted it needs to be approved by the creditors, and in broad terms, this means obtaining approval from 75% in value of the creditors voting on its terms.

We arranged a vote of the creditors and summarised the advantages of the CVA as:

  • Assets: Preserving the commission in order to create a fund to wind down the businesses’ affairs and deal with complaints.
  • Complaint and Creditors: Identify and deal with creditor claims within an agreed timescale, in order to enable a distribution to be paid to the valid creditors of the business.
  • Fair Treatment: The creditors’ claim acceptance and/or rejection procedure will enable genuine claims to be established and for those claims against the Company which are rejected to be notified of the rejection and their rights to apply to the High Court if they feel that they have not been treated fairly.

Our CVA Proposal was accepted by 99.79% in value of those creditors voting, and therefore the CVA was successfully approved and is now being implemented. A great result for all involved!

We are now 6 months into this assignment, the CVA is on track, and the genuine creditors will receive their distribution monies later in 2019.

Learning Points

If you have clients operating in this IFA Sector, then claims in respect of historic pension transfer advice may be hot on their radar. Dealing with the pressures of the FCA and the Financial Ombudsman, whilst trying to fend off the complaints of the claim’s management companies can be a very stressful time.

Solutions to these problems will be bespoke to the client’s needs. The CVA model outlined in this article, should not be viewed as a ‘one size fits all solution’, but it highlights problems our IFA clients may face, as well as demonstrating an example of one solution that the Business Restructuring and Insolvency Team can offer. We will always find a tailored solution.

If you have any queries or would like any further information, please don’t hesitate to get in touch with the Business Restructuring and Insolvency Team.

Author: Philip Yarwood

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