Navigating financial services regulation in the UK: A guide for insolvency practitioners

Introduction

This article guides Insolvency Practitioners (“IPs”) through the financial services regulatory framework of the United Kingdom (“UK”), with a focus on the critical points of interaction with these regulations. It is focussed on IPs’ interaction with the Financial Services and Markets Act 2000 (“FSMA”), the general prohibition set out in FSMA (“General Prohibition”) and various related statutory instruments. It also addresses the potential risks to IPs of non-compliance, and the scope and boundaries of the exclusions available to them. 

Legal background

At the heart of the UK’s financial services regulatory environment is FSMA and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 ("RAO”). FSMA and the RAO govern the carrying on of various activities (known as “regulated activities”) by companies and individuals in the UK.

Another component of this regulatory framework is the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO”). The FPO sets out the circumstances under which a communication will be considered a financial promotion and the rules around making such a communication.

In summary, section 21 of FSMA and the FPO restrict unauthorised people from making financial promotions unless the relevant promotion is approved by an authorised person or falls within one of the exemptions specified in the FPO.

The General Prohibition

The General Prohibition is set out at section 19 of FSMA.  It provides that it is a criminal offence for any person to carry out a regulated activity by way of business in the UK unless (in summary) they are exempt or an exclusion applies. Where an exemption or an exclusion applies, a course of conduct that would otherwise be a regulated activity does not, in fact, fall within the scope of the given regulated activity.

Consequences of a breach

Breaching the General Prohibition is a criminal offence that can result in severe penalties. Individuals and firms that perform regulated activities without proper authorisation or an applicable exemption or exclusion may face prosecution, which can lead to fines or imprisonment.

The Financial Conduct Authority (“FCA”) has the power to impose civil sanctions, including public censure, financial penalties, and restitution orders to compensate consumers affected by the breach.

The enforcement of these penalties serves as a deterrent against the provision of unauthorised financial services and aims to ensure that the market operates transparently and fairly for those involved, particularly for consumers. It also provides a mechanism for redress for those consumers who may have been harmed by unauthorised activities.

Insolvency Practitioners and the general prohibition

While much of an IP’s day-to-day work will not involve regulated activities, certain aspects can bring them within the scope of FSMA. For example, IPs may handle the sale or transfer of financial products, they may be involved in winding up collective investment schemes, or they may be appointed to manage FCA-regulated entities. In doing so, IPs might unintentionally carry out regulated activities and attract the scrutiny of the FCA.

Given the nature of their work, which can often require swift action to preserve value for creditors, IPs may find themselves grappling with their professional duties and the requirements of FSMA and the RAO. It is vital for IPs to have a clear understanding of the law and their role within this regulatory framework to ensure they do not fall foul of the General Prohibition.

The Insolvency Practitioners’ exclusions

Recognising the unique position of IPs and the potential for them to engage in regulated activities, the RAO provides a specific exclusion which can allow IPs to carry out would-be regulated activities, without breaching the General Prohibition or needing authorisation from the FCA.

Key exclusions under article 72H of the RAO

The key exclusion relevant to IPs is found at article 72H of the RAO. This provision sets out an exhaustive list of activities, including managing investments (article 72H (2)(e)) and debt collecting (article 72H (2)(i)), that are excluded from the General Prohibition when they are carried on by a person “acting as an insolvency practitioner”.

The article 72H exclusion means that IPs do not need to be authorised by the FCA to carry out the specific activities listed in article 72H (2) that would otherwise be regulated, provided they are acting within the scope of their role as an IP. Whether an IP is considered to be “acting as an insolvency practitioner” for the purpose of this exclusion will turn on the facts of each case.

Additional exemptions under article 55B of the FPO

An additional, ancillary exemption for IPs is set out at article 55B of the FPO, which confirms that the financial promotion restriction “does not apply to any non-real time communication or solicited real time communication by a person acting as an insolvency practitioner… in the course of carrying on an activity which would be a regulated activity but for article 72H of the Regulated Activities Order”.

While the above exclusion and exemption appear broad, they do not afford IPs carte blanche to undertake would-be regulated activities or make financial promotions without due consideration of the facts. This position was recently summarised by Judge Nicholas Aleksander in Promethean Finance Limited v The Financial Conduct Authority [2024] UKUT 00229 (TCC):

“We find that art 72H RAO and art 55B FPO are limited in scope, and do not provide a blanket exemption for all activities and financial promotions of regulated insolvency practitioners.”

In this case, the Upper Tribunal determined that the IPs were not able to rely on the exclusion provided by article 72H of the RAO, as they had not engaged in any of the activities specified within that article. Consequently, the exclusion under the FPO could also not be invoked, given that its applicability is contingent upon the engagement of one or more of the activities listed in article 72H of the RAO.

Other regulatory considerations for IPs

When IPs are appointed over firms regulated by the FCA or the Prudential Regulation Authority (“PRA”), they must also consider a range of specific regulatory requirements and guidelines in addition to the General Prohibition and the financial promotions restriction.

Key considerations for IPs

Notification and Approval

IPs must promptly notify the FCA of their appointment to a regulated entity. The FCA has certain powers to approve or object to the appointment of an IP to a regulated firm, and IPs must be aware of the potential for the FCA to intervene. IPs should also ensure that, where they are to be appointed as administrators of an FCA or PRA regulated entity out of court, the FCA or PRA (as applicable) has consented to the IPs’ appointment. The appointment of an IP will be considered defective without such consent.

Client Assets and Money

Regulated firms often hold client assets and money, which must be dealt with in accordance with FCA's Client Assets Sourcebook (CASS). IPs must ensure that these are appropriately segregated and protected, and that the firm's records are accurate to facilitate this process.

Ongoing Regulatory Requirements

IPs must ensure that the regulated entity continues to meet ongoing regulatory requirements throughout the insolvency process. These requirements include compliance with FCA rules and principles, treating customers fairly, and maintaining appropriate records.

Communication with the FCA

In addition to the specific point re appropriate consent described above, IPs are expected to engage proactively with the FCA both prior to and after appointment over a regulated firm and to maintain open and cooperative communication with the FCA, providing regular updates and responding promptly to FCA inquiries.

Conduct of Business

IPs must ensure that the conduct of the business during the insolvency process is in line with the FCA's conduct of business standards.

IPs must navigate these considerations, amongst numerous others, while also fulfilling their duties to creditors and other stakeholders.

Conclusion

IPs must tread carefully within the regulatory framework set out by FSMA, the RAO and the FPO. While exclusions exist that allow IPs to perform their roles without FCA authorisation to an extent, the boundary between non-regulated and regulated activities is nuanced and IPs should not proceed on the assumption that their actions are covered by the exclusions set out in article 72H of the RAO and article 55B of the FPO. IPs must also be aware of their additional obligations when appointed over FCA-regulated firms.

Given the complexity of these issues, IPs should seek legal advice where they are concerned about their compliance with the necessary rules and regulations.

For more information on how the above may affect you and the services you provide, please contact Daniel Moore, Jack Sears and Richard Ellis.