The FCA has issued proposed guidance on its approach to compromises by regulated firms, which will have the effect of putting consumer outcomes front and centre for any firm proposing a compromise with retail customers. With a particular focus on schemes (or other compromises) relating to redress liabilities - for instance in relation to mis-selling claims - the guidance inevitably recalls many of the aspects of the ill-conceived scheme proposed by Amigo Loans last year, which the High Court ultimately refused to sanction. 

The guidance covers schemes of arrangement, restructuring plans and company voluntary arrangements proposed by regulated firms, and sets out the FCA's expectations regarding early engagement with the regulator. The FCA will expect to see full and detailed information regarding the proposals, including the practical effect of the proposed compromise on relevant creditors. The guidance clarifies that the FCA will be unlikely to issue a letter of non-objection in relation to a scheme or other compromise, but may take part in the court process. 

In assessing a compromise, the FCA states that, in line with their consumer protection objective, a central consideration will be whether the firm "has put forward the best proposal possible for customers". This focus on the best possible outcome imposes a higher standard than the classic "fairness" test for sanction of a scheme of arrangement, in which the court considers whether the scheme is one which "a reasonable and honest man, having regard to his own interests, might properly approve". In the context of protecting unsophisticated and potentially vulnerable consumers, however, a higher standard seems wholly justified.

In particular, the FCA notes that they would be concerned if a firm proposed a compromise which would pay customers less than their full redress entitlement, but intended to continue to trade, where the liabilities were the result of serious and/or deliberate misconduct by the firm. However, a scheme which offers consumers less than the full amount of their claims may be acceptable if the only genuine alternative is insolvency.

The illustrative examples given in the guidance demonstrate that, where a firm intends to compromise redress liabilities, the FCA will expect a simple, customer-friendly process which is clearly communicated (taking into account the different accessibility and language needs of customers). The firm should provide for repeated contact with customers in different formats to ensure that all customers make their claim, and offer a reasonable time period to allow them to do so. The firm will be expected to pay as much money into the scheme as possible to meet its redress liabilities. A situation (as seen in the Amigo Loans scheme last year) where customers are required to accept a significant haircut, while shareholders remain unimpaired and the firm continues to trade, will not be considered acceptable.

The consultation on the proposed guidance closes on 1 March 2022.