Why do so many financial services companies go into CVL?

“Until the financial adviser’s company went into liquidation (CVL), we didn’t know that our pension savings had gone missing,” according to our clients. It was found that the investment company recommended by their independent financial adviser (IFA) never held their pensions but had them transferred to offshore companies that misused the money to the point it went missing, and the FCA didn’t do anything to recover it. “We understand that the advice was contrary to regulations, but no action was taken against our IFA.”

The median recovery from CVLs for all creditors is 0, according to a recent paper published on 17 December 2024 titled CVL research report for the Insolvency Service. 

However, the median amount paid to IPs as a percentage of assets realised was 21%. IPs naturally won’t accept appointments if there is no chance they will be paid. 

54% of cases were “sifted in” by the Insolvency Service, which means insolvent companies were identified as in scope for investigation, of which 19% were inspected. Of those targeted, the outcome led to a disqualification (DQ) in 49% of cases. This corresponds to 5% of the total dataset resulting in a DQ. It is believed that no regulated financial services companies were included.  

Targeting for investigation usually arises from the confidential IP report on directors to the Secretary of State. However, no breakdown by industry is available to compare sectors, making it a generic statement about all company and partnership CVLs. 

Financial Services is a sector that has what appears to be a disproportionate number of CVLs. This article explores why insolvency of regulated companies deserves special attention. 

Regulated companies that become insolvent are listed by the FSCS in regular press releases that can be seen here. “In default” means a complaint has been upheld against a firm for “mis-advising” and compensation paid to the complainant. In the 12 months to the end of November 2024, 60 regulated firms were declared in default. If so many regulated entities become insolvent, should there be a distinction between them and other industries? Regulated companies that self-dissolve are not included in these numbers. 

From our experience this is because IPs aren’t made aware that the main cause for insolvency is the inability to pay compensation to clients with complaints upheld by the Financial Ombudsman Service (FOS).  Most of these complaints are for dishonest advice to vulnerable clients to invest, something that is banned by FSMA 2000, the regulations that the FCA is meant to enforce. 

Who should advise IPs that directors of financial services companies in liquidation acted dishonestly as financial advisers and fiduciaries? Directors, shareholders and approved persons won’t, it would be self-incriminating. FOS gives detailed grounds in decisions upholding complaints that are published on their website. Should it be the Financial Services Compensation Scheme, as they handle complaints against companies that become insolvent? Should it be the Financial Conduct Authority, as it regulates the industry?  

The truth is surprising. None of these agencies is permitted to act against directors. The most they can do is fine and ban them from the industry. What about the Serious Fraud Office and police? They treat regulated company misfeasance as a “civil matter”, not criminal, and only get involved where it can be shown that client funds have been stolen. Giving advice to invest in illiquid, high-risk and non-standard funds is not seen as fraud! 

A very recent and high-profile example is London Capital & Finance (LCF), from which £237.8m of investor money was lost. In a court of appeal decision, it was determined that the company operated as a Ponzi scheme, where new investors' funds were used to repay previous ones. The senior managers and directors have been ordered to pay compensation. According to BBC News, London Capital & Finance fraud was the 'biggest ever Ponzi scheme': 

“Five men behind a fraud which was branded the "largest Ponzi scheme in British history" have been told by a High Court judge they are liable to pay back almost £400m.Two directors of London Capital & Finance were found liable to pay £180m, while another three men who provided "dishonest assistance" were liable for £211m, The High Court of Justice in London heard. Mr Justice Robert Miles said it was "very unlikely" that the defendants involved with the fraud, which had its roots in Sussex, would be able to pay the amount. LCF raised £237m from more than 11,600 investors by issuing mini-bonds between 2013 and May 2018. Investors thought they were putting money into UK small and medium-sized businesses, the High Court heard. Instead, Mr Justice Miles concluded that money raised was misappropriated to make payments to people connected to the company. LCF operated as a Ponzi scheme to pay old bondholders with new bondholder's money before going into administration in 2019. A hearing in November found CEO Michael Thomson and associate Spencer Golding liable for breaches of duties as directors. The judge on Friday said they were liable for £180m. John Russell-Murphy, from Eastbourne, Paul Careless and Robert Sedgwick, were liable for £211m, the court heard. Previous court documents stated that the directors used money to buy property, supercars, pay for luxury travel and make donations to the Conservative Party." 

LCF engaged a direct marketing company, Surge Financial Ltd, and paid them 25% of funds that were invested in the Ponzi scheme as commission.  

However, no criminal charges have yet to be made. 

The decision against the directors of regulated companies such as LCF demonstrates there is little to stop them from exploiting and misappropriating funds from vulnerable clients. When it is discovered that investors have been misled and lost all their money, directors can simply put the company into liquidation (CVL). It took six years for the court to hold the directors of LCF to account, but there have been no custodial sentences.  

This has happened countless times because the system enables it. There are consultants who advise on this and have generated considerable wealth. And it is happening right now with many compulsory liquidations and others. IPs and administrators seem to have no understanding or incentive to report such dishonesty but to liquidate assets, take their fees and dissolve. 

Is financial services a “protected” industry? On 26 November 2024, an All Party Parliamentary Group on Investment Fraud and Fairer Financial Services, made up of 30 MPs and 14 members of the House of Lords, said that the FCA was “incompetent at best, dishonest at worst”.

Financial services agencies, insolvency practitioners and The Insolvency Service are independent and regulated separately.  Much greater clarity is required as acting independently helps cover up gross misfeasance 

When will the government appoint an independent commissioner to investigate and understand the system of dishonest regulated financial advice and resulting CVLs?