Phoenixing occurs when financial firms, often advisory firms, fail and then re-emerge as Claims Management Companies and encourage previous clients to claim compensation from government bodies such as the FSCS.

PIMFA describes phoenixing as a “particularly unpleasant practice” that sees claims management companies (CMC) created from the ashes of failed financial services firms.

Simon Harrington, head of public affairs at PIMFA, said: “We are pleased the FCA has listened to PIMFA's recommendations and intervened in this market and consider it to be long overdue.

"As we set out in our paper on FSCS reform, the existence of the FSCS can act as a market distortion, especially in instances of firms seeking to phoenix as CMCs once they have defaulted onto the FSCS. Today's policy statement represents a much-needed closure of this loophole and the FCA should be congratulated on taking action."

PIMFA has long argued that the practice should be stamped out.

The FCA announced last year that it would move to stop firms from phoenixing into CMCs.

In one case cited by the FCA, the managing director of a financial advice firm provided “inadequate service" to consumers but after he was barred from acting as a company director, his wife set up a CMC.

The CMC then represented customers claiming more than £5m from the FSCS in claims against the husband’s former financial advice firm. The FCA refused the authorisation of the CMC as the firm did not meet standards.

The FCA said that while the FCA was able to stop claims management phoenixing by refusing authorisation the new rules will put a stop to claims management phoenixing across the market.

Sheldon Mills, executive director of consumers and competition at the FCA, said last year: “Consumers should be able to choose to use a CMC to help them claim compensation from the FSCS. But paying someone to provide help who is connected with the firm that caused the consumer's loss is wrong, particularly where the firm had a responsibility before winding up to help its customers to obtain compensation.”

The FCA became responsible for the regulation of claims management companies in April 2019, following a Government review. Since then, the FCA has dealt with 979 applications for authorisation, with around 20% of CMCs leaving the sector. Some 656 firms have been approved, while 24 have been refused or rejected.

In addition, 168 applications have been withdrawn with around 75% of these withdrawals occurring following FCA scrutiny.