An investigation by New Model Adviser® has revealed that the first firm to cease pension transfers for British Steel Pension Scheme (BSPS) members is a reincarnation of a previous firm which was closed down after pension transfer complaints from clients.
An investigation into the history of this firm, Active Wealth (UK) and its sole director and shareholder Darren Reynolds, shows:
- Reynolds held CF10 compliance responsibilities at a firm called Active Investment Services (AIS) before it went out of business and was declared in default by the Financial Services Compensation Scheme (FSCS).
- The Financial Ombudsman Service (FOS) ruled against AIS twice over advice it gave clients to transfer out of defined benefit (DB) pension schemes.
- A new company run by Reynolds, Active Wealth (UK), purchased the client book of AIS for £5,000 after the original company went into liquidation.
Active Wealth (UK) advised 100 members of the BSPS to transfer out of the scheme. Reynolds was called to appear before the Work and Pensions Committee in December, but declined to appear in front of MPs at the end of last year.
Our story once again raises the troubling issue of phoenixing, where a firm facing mounting claims goes into liquidation, allows its liabilities to fall onto the FSCS, and then starts up again, using a similar name and with the same clients.
Meanwhile all advisers end up picking up the bill for claims against the firm that no longer exists. Last week the FSCS set a provisional £87 million levy on all life and pension advisers for the 2018/19 financial year. It is the fourth year in a row that advisers in the space will face the maximum levy.
Reynolds claims in a detailed statement to New Model Adviser® (see below) that this is not a phoenix situation.
How did we end up here?
AIS was the subject of two complaints upheld by the FOS in January and March 2014, both of which related to advice to clients to transfer out of final salary pension schemes. You can read details of the complaints here and here.
Both complainants became clients of AIS in 2008, before Reynolds joined the firm in July 2009. According to the Financial Conduct Authority (FCA) register he had both CF30 customer facing responsibility and CF10 compliance oversight responsibility. The sole director and shareholder of AIS at the time, as listed on Companies House, was Gary Steven Porter.
In November 2015 AIS appointed Butcher Woods as part of a voluntary liquidation. According to a statement of affairs filed by the liquidator shortly after its appointment, AIS faced a £150,000 claim from an individual called Dr T Guilding £150,000 at the time it entered liquidation. This is the maximum amount the FOS can order a firm to pay out.
AIS was declared in default by the Financial Services Compensation Scheme (FSCS) on 23 November 2016 and was dissolved following it liquidation on 8 June 2017.
A later report from Butcher Woods, covering the period between 17 November 2015 and 16 November 2016, states the company received a bid from 'an associated company': Active Wealth (UK) Ltd.
'Upon my appointment renewal income of £2,153 was received. An offer of £5,000 was subsequently received from Active Wealth (UK) Ltd, an associated company by way of common director and shareholder for the goodwill of the company to include future renewal income. This offer was above the amount of expected additional renewal income and was therefore accepted.'
Active Wealth (UK) had been incorporated by Reynolds on 28 July 2014, four months after the second complaint was upheld against AIS. There is no record on Companies House of Reynolds being a shareholder or director of AIS, or of Porter being a shareholder or director of Active Wealth (UK).
Yet the liquidator states this was a bid from ‘an associated company by way of common director and shareholder’, so there is some confusion here.
Meanwhile, Companies House also names Reynolds and Porter as directors of a dormant firm with no trading history called Active Professional Trustees Ltd.
The role of the FCA
The FCA has stepped up its efforts against phoenixing since New Model Adviser® first revealed the extent of the problem in September 2014.
This case draws particular attention to the issue because it is connected to the British Steel problem that hit news headlines at the end of 2017. Active Wealth (UK) advised around 100 BSPS members to transfer out of the scheme, according to a letter Reynolds sent to MPs on the Work and Pensions committee earlier in January.
In the same letter he said the FCA first visited his firm in August 2016. ‘I received no feedback that the FCA had any concerns about the files or the practices in operation within Active Wealth until they visited the company in July 2017,’ he added.
Reynolds’ representative said it was important to note ‘the FCA will have had access to all of the relevant information when Active Wealth (UK) was applying for authorisation’.
Phil Young, director at Zero Support, said: 'Firms do go into liquidation for various reasons, but if there is a real fundamental problem with the conduct of an individual the FCA can identify, then they can stop that individual gaining approval again.
'But in a case like this where you have a completely different shareholders and directors listed for the new firm, they are more likely to get it through. The FCA didn't have the benefit of hindsight and would not necessarily have known what they were looking for at the time. One would hope that they might do more digging in light of this.'
Young said another concern was that changes proposed in the Senior Managers & Certification Regime (SMCR) would exacerbate the risk of firms being able to 'phoenix'. Indeed, the FCA has indicated that it is rethinking these proposals in light of the BSPS saga.
He added: 'As it stands, SMCR would place more responsibility on firms to make judgements as to whether people they employ are fit and proper, and make directors accountable for decisions. This means the regulators themselves are less likely to look at this stuff going forward.
'The FCA is trying to affect long term behavioural and cultural change with this move, but those with the intention of circumventing the rules from the off won't be swayed by that. It just opens a greater loophole.'
Reynolds’ lawyer said:
The suggestion of ‘phoenixing’ from AIS to Active Wealth does seem a rather tenuous accusation as the director and shareholder of AIS did not take on the same roles at Active Wealth. More importantly, though, the FCA will have had access to all of the relevant information when Active Wealth was applying for authorisation.
We refer you to the FCA Regulatory Guides: The Winding Down Planning Guide (WDPG). WPDG 3.6 deal with an impact assessment of who might be affected by the wind-down of a regulated firm.
WPDG 3.6.4G states:
Firms can support their impact assessment of winding down by a risk assessment of each stakeholder group along with the mitigating actions the firm would consider appropriate.
Some factors that a firm may consider include:
(2) Can the firm help transfer its customers to another financial institution? If the firm has many customers to be transferred out, do other firms in the same sector have the capacity to take them on?
It is evident that as part of the process of planning for an orderly wind-down of a regulated firm, the FCA expects a firm to consider the impact of the process on its clients and to consider the feasibility of transferring them to another entity with the capacity, capability and regulatory permissions to take on the clients of the firm that is to be wound down.
It is therefore both wholly inappropriate and inaccurate to refer to the transition from AIS to Active Wealth as ‘phoenixing’.
'Phoenixing' itself is not illegal. It is a widely used administration tactic that allows company directors to escape personally footing the bill for a failed firm’s liabilities.
However, the practice does rightly come under fire from the advice community because it partly foots the bill for the offloaded liabilities via the FSCS. The FCA has indicated that it is moving to address these concerns on a number of occasions.
Active Wealth denies that it is a ‘phoenix’ firm, but whatever the label, there is at the very least a disturbing irony that aspects of a firm which closes down following poor pension transfer advice could re-emerge in a similar vehicle, to go on to give widespread pension transfer advice in the BSPS case and then cease doing so following the FCA’s intervention.
Whether this is regulatory failure, regulatory arbitrage (shifting the liabilities and starting with a clean sheet) or something else remains to be seen when the full facts are known.
What we do know is that in cases of regulatory failure, often the cause is poor communication between different bodies involved. In this case you have to question whether the communication between the FOS, the FCA and the FSCS was good enough. Reynolds’ lawyers merely say that ‘the FCA will have had access to all of the relevant information when Active Wealth was applying for authorisation’. This seems to us a carefully worded statement. They had access, but did the FCA actually look at it?
Something has to shift in this issue because it is patently unfair to the vast majority of advisers. Perhaps the FCA should require a sizeable deposit to be made when a person involved in a failed firm wants to start up again with the same clients. The deposit gets forfeited (and used to pay some of the compensation) if that firm has cases against it upheld within say the next five years.
Last week the FCA revealed that 33% of the 129 BSPS transfer advice files it reviewed could be considered unsuitable, and in 16% of the files it was unclear whether advice was suitable. It is not known how many of these files were taken from Active Wealth, or whether any client will be able to successfully complain against the firm.
However, should a swathe of complaints rain down upon the FSCS eventually, advisers will be picking up the bill for a fiasco which was eminently identifiable, and preventable. This will strengthen an already palpable sense of injustice throughout the profession.
Liquidators have to file reports to the secretary of state for trade and industry when a company is put into voluntary liquidation – as in this case. Perhaps that report should also go to the FCA when the failed company was FCA regulated. Certainly, there is a case for greater FCA involvement in transactions involving liquidated regulated firms, which could take the form of direct visibility of the liquidator's report.
IFAs parting with their earnings to compensate for potentially preventable regulatory oversights is not a sustainable structure.
The FCA declined to comment.