The FCA plans to act if the management of liabilities benefits the firm at the expense of clients.

The regulator said it has seen an increase in the number of firms developing proposals, such as Scheme of Arrangements, to deal with significant liabilities to consumers.

Some failing firms may be trying to avoid compensating clients by deliberately winding up the business or forcing insolvency.

In proposed guidance published today, the FCA said firms seeking to limit their liabilities must provide the best possible outcome for customers. This will include providing the maximum amount of funding possible to meet compensation claims by customers.

It said failure to do so could result in the FCA objecting to the firm’s proposals in court.

The FCA said it will also use its regulatory powers, including enforcement actions for misconduct by firms or their senior managers, when appropriate.

The regulator told firms it expects to be informed as soon as a firm is considering a scheme of arrangement or other compromise to manage liability.

Some firms have requested a ‘letter of non-objection’ from the FCA in relation to their proposal to manage their liabilities. However, the guidance consultation confirms that the FCA would be unlikely to ever issue a letter of non-objection.

The FCA will focus on assessing each proposal on a case-by-case basis to ensure firms are meeting their regulatory obligations, including treating their customers fairly.

Following their assessment, the FCA will communicate any concerns to firms and, if necessary, the courts and consider any further regulatory action.

Sarah Pritchard, executive director of markets at the FCA, said: “Under existing company and insolvency law, firms have options to limit their liabilities. When making use of these, they still have a responsibility to treat their customers fairly. We will take action against firms that don’t meet this obligation.

“The guidance we are consulting on should help firms understand our expectations and ultimately help firms to avoid proposing compromises that are unacceptable to us because they fail to provide the best possible outcome for consumers.”

When looking to manage their liabilities, firms usually turn to schemes such as an RP (restructuring plan) or CVA (company voluntary arrangement).

Schemes and RPs are court-approved agreements between a company and its creditors and/or shareholders. Creditors and shareholders vote on it and the court then sanctions it.

CVAs are governed by the Insolvency Act 1986 but work in a similar manner to RPs. Creditors will vote on it and the court is notified. There is no court hearing unless the CVA is challenged by a creditor or the FCA.

This consultation is open until 1 March.