"In the circumstances contemplated by IFAL’s application, the directors of IFAL will have been the directors of a regulated firm that has gone into insolvency"
The applicants are currently directors of another regulated firm, Strabens Hall, which is facing "inevitable insolvency" due to anticipated liabilities of £1,050,000 in relation to sales of the Connaught Income funds.
The FCA says that Strabens Hall would be unable to meet the liability arising from any of the eight complaints if an award becomes final and would become insolvent. IFAL admitted it would provide funding to Strabens Hall after it entered an insolvency procedure so it could continue to pursue a legal dispute with its professional indemnity insurer.
The proposals have the hallmarks, therefore, of what the FCA described as ‘phoenixing’.
IFAL’s submissions acknowledge this, stating: “We are conscious of the FCA’s views on so-called ‘phoenixing’ and firms seeking to avoid liabilities, which is why we disclosed our intention to the FCA before submitting the application to authorise IFAL.”
However the FCA raised concerns after the applicant stated: “In order to manage the risk of Strabens Hall becoming insolvent and to protect our clients and staff, we wish to transfer the business of Strabens Hall to a new FCA-regulated firm.”
“In summary, unless the [insurance] dispute is resolved in [Strabens Hall’s] favour, the firm will be unable to meet any binding decision by an Ombudsman in respect of any complaint about potential losses that may ultimately crystallise from investments made in the Connaught Income Fund S1 (CIFs1). As a consequence, the firm would be forced into liquidation, with significant detriment to all its clients, including the 59 CIFs1 investors (8 of whom have made complaints).”
The FCA noted that the 'seriousness' lies in Strabens Hall's inability to meet its liabilities to the FOS complainants and not a "decision to give IFAL a Part 4A permission per se".
However the FCA continued: "In the circumstances contemplated by IFAL’s application, the directors of IFAL will have been the directors of a regulated firm that has gone into insolvency, with unsatisfied liabilities to the FOS complainants.
"The application, as submitted and as developed in representations following the Warning Notice, lacked detailed and clear proposals on issues of importance to consumers and an appropriate recognition of the gravity of the anticipated circumstances of Strabens Hall’s failure and the consequences it could have for consumer creditors, public confidence in the system for redress provided by the FOS and for those funding the FSCS.
“In this case, the FCA notes the inadequacies in the original application and that IFAL has been slow to make changes to its application, that clarification has been provided in a piecemeal and incremental fashion and that IFAL has required considerable input from the FCA in developing its application.”
A response statement from Strabens Hall reads: "We wish to make clear that the sole purpose of seeking regulated status for IFAL was to ensure that Strabens Hall would be in a position to protect the best interests of all its clients including the small number involved in the investments in question covered by the Notice.
"With regard to the matters relating to the Connaught Income Fund, to which the Notice refers, these were first brought to the attention of the FCA by Strabens Hall Ltd in 2013 in line with its regulatory obligations and the firm believes it acted appropriately and with due care in advising clients in this regard.
"The Notice, while only published in June 2016, covers a phase of interaction with the FCA between September 2013 and the end of February 2015. There have been significant developments in the period since then and Strabens Hall Ltd is able to confirm that these include the successful conclusion of the dispute with its professional indemnity insurer on a satisfactory basis for all parties concerned. The FCA is fully aware of how the position has changed since February 2015 and Strabens Hall Ltd has maintained its positive working relationship with the regulator.
"Strabens Hall Ltd continues to more than meet its full legal and financial obligations, and is trading normally. Now that these matters have been concluded we look forward to continuing to focus on assisting clients meet their financial planning and investment objectives, whether directly or working in tandem with their other advisers."
