FCA concerns about restructuring

The FCA is expected to consult on guidance regarding its approach to schemes of arrangement and other restructuring tools later this year. This follows letters of concerns being published in relation to schemes of arrangement proposed for lenders Amigo and Provident.  

The two letters of concerns, and the FCA’s opposition in court to the Amigo scheme, give some indication of the Regulator’s expectations.  

We have summarised some of the key issues that restructuring professionals should be aware of when advising regulated firms while we await the draft guidance for confirmation of the FCA’s position.

You can find the full letter of concerns for each proposed scheme here:

Provident Personal Credit Limited Letter of Concerns (fca.org.uk)

FCA letter of concerns to Amigo Loans

The FCA’s role in restructuring

If an Insolvency Practitioner is advising a regulated firm on a scheme of arrangement, restructuring plan or company voluntary arrangement (CVA), the FCA expects notification of the plans from the firm “in good time”. This is to allow it to prepare any representations it may make at a court hearing or creditors’ meeting. This expectation is set out in the recently published guidance for insolvency practitioners, which we have summarised in our insight: FCA guidance for insolvency practitioners. Recent amendments to legislation also allow the FCA to receive notice of applications for a restructuring plan, and to participate in the relevant hearings and creditors’ meetings.  

While there are certain regulatory approvals required for a solvent scheme of arrangement, the FCA is most concerned with restructurings where the firm is in financial difficulty. Where a regulated firm proposes a scheme of arrangement it is customary, but not obligatory, to request a letter of non-objection from the FCA, which, if given, would usually be included with the evidence before the Court.  

Even if a firm chooses not to seek prior approval for a restructuring, the FCA will continue to assess the proposals as part of its usual supervisory functions. It undertakes this assessment in line with its objectives, rules and guidance and may well consider issues that are different to those raised before the court at any convening or sanction hearing.

The FCA can make representations at a court hearing to sanction a scheme of arrangement or restructuring plan, or at a creditors’ meeting to approve a CVA.    It may also take regulatory action if it considers that the proposed restructuring breaches the FCA’s rules or principles for businesses.

Learning points arising from the letters of concerns

In essence, any restructuring, particularly where it involves customers who may have experienced financial difficulties or may be vulnerable, should be designed as simply as possible, be openly and clearly explained and work as a customer might expect.  

The FCA:

• Expects restructuring proposals for regulated firms to be prepared in line with its objectives of:

- Making sure the relevant markets function well;

- Protecting consumers;

- Protecting financial markets; and

- Promoting competition;

• Is particularly concerned about any restructuring proposal that will impact on the value of redress payable to customers;
• Will look closely at how customers who are entitled to redress are treated in the proposals in comparison to other creditors ranking equally in priority to them in an insolvency situation;
• Expects firms to do all that they can to consult with and encourage early engagement, consultation and negotiation particularly with creditors who would lose their rights to claim redress in the event the restructuring goes ahead (the appointment of a customer advocate and law firm to provide the redress creditors with advice on the scheme was not considered to be enough to meet these expectations in the Provident scheme);
• Will pay close attention to the fairness (or otherwise) of the basis on which votes will be calculated;
• Is concerned about the use of special purpose vehicles to assume joint liability under any proposal particularly where the creditors include ordinary consumers; and
• Has particular concerns about the use of restructuring or insolvency procedures being used to achieve phoenixing.

Practical steps

We await the FCA’s draft guidance on restructuring, and will provide an update when the consultation begins. In the meantime, restructuring professionals who are advising regulated firms should familiarise themselves with the FCA’s general guidance for Insolvency Practitioners, and also the specific issues raised in the two recently published letters of concerns.  

The need to continue to comply with regulatory rules and principles, as well as to communicate with the FCA, should be factored into the structure of the proposals. This may lead to delays, and is best addressed at an early stage. If you would like to discuss any aspect of the issues raised in this article, please contact a member of our Restructuring & Insolvency team.

Contributors: Robin Penfold & Tessa Durham