FCA updates guidance for insolvency practitioners appointed over regulated firms

The Financial Conduct Authority (FCA) has updated its Guidance for insolvency practitioners on how to approach regulated firms (the Guidance), which took effect from 28 April 2025. The Guidance explains how insolvency practitioners (IPs) should address regulatory considerations that arise when they are acting in the insolvency of a financial services provider.

The Guidance is aimed at IPs appointed over financial services firms which are solely authorised or registered by the FCA whether under the Financial Services and Markets Act 2000 or as electronic money or payment institutions, although it will also be relevant to IPs appointed over firms which are dual regulated by both the FCA and Prudential Regulation Authority (PRA).

Regulated firm insolvencies – why was Guidance needed?

Firms in an insolvency process - whether administration, liquidation, or one of the special administration regimes tailored to certain financial institutions - continue to be subject to their regulatory obligations. And while the FCA does not regulate the IPs appointed over the regulated firms, it needs a close working relationship with them, as ultimately its approval is needed for the firm's business to be closed down.

The FCA consulted on updating its previous Guidance as part of its 2022 - 2025 Strategy promise that it would prioritise reducing harm from firm failures. It cannot stop firm failures, but it wants to minimise disorderly failures that cause serious harm to consumer and markets. The updated Guidance aims to raise awareness of the continuing obligations of insolvent regulated firms, and the FCA's expectations of IPs who take appointments over them.

There have been a number of key developments in the legal, regulatory and economic landscape since the FCA published its original Guidance in 2021, including:

• Changes in the legal frameworks relevant to firm failures, such as the expansion of the special administration regime to cover payments and e-money institutions
• The Consumer Duty, which came into force on 31 July 2023
• Availability of Financial Services Compensation Scheme (FSCS) protections in relation to funds held for e-money or payments customer by failed credit institutions
• Shifts in the UK economy, including a significant increase in interest rates.

These considerations are particularly important for IPs in regulated firm insolvencies, and the FCA concluded with the help of stakeholder feedback that while the original Guidance remained appropriate, IPs would benefit from further direction by the regulator as to its expectations of them.

In the more recent consultation, the FCA heard responses from insolvency trade body R3, the Insolvency Lawyers' Association, and IP firms including Evelyn (now S&W), Interpath and Quantuma.

What's new in the Guidance?

The FCA expects that any IP appointed in the failure of a regulated firm should understand the business model of the firm, the regulated activities it conducts and the regulatory requirements that apply to the firm. The updated Guidance stresses the FCA's expectation that a prospective office holder should check the FCA Register and other sources to determine the regulatory status of the firm, any previous names, and the identity of its senior management.

Consumer Duty

Financial institutions and their advisers will be well aware of the Consumer Duty, which introduced more stringent standards of consumer protection across the financial services industry, requiring firms to ensure they deliver good outcomes for retail customers.

Consumer Duty rules require firms to consider the needs, characteristics and objectives of their customers throughout the customer journey, and crucially, to be able to understand and evidence whether good customer outcomes are being achieved.

The Consumer Duty continues to apply throughout a firm's insolvency, until the firm's regulatory permissions are cancelled.

Respondent feedback to the consultation centred on how IPs ought to deal with conflicts between the requirements of the Consumer Duty and their obligations as office holders to act in the best interests of creditors. Interestingly, the FCA's response acknowledged that IPs must indeed act in the interests of creditors, but the regulator of the view that ensuring a regulated firm complies with the Consumer Duty does not conflict with that obligation - and as a result made few changes to its proposed guidance on this issue.

The Guidance now outlines key elements of the Duty and highlights its impact on IP obligations throughout, including that IPs should:

• Bear the Consumer Duty in mind when communicating with retail clients, ensuring communications are likely to be understood by the relevant audience, and that suitable helplines/contacts are provided to deal with queries
• Rather broadly, conduct the affairs of the firm in a way that is "compatible" with the Duty
• Consider how best to deal with customers with characteristics of vulnerability - the FCA does however recognise that the ability of the IP to support will depend on the circumstances of each particular case.

The FCA has also clarified that the Consumer Duty does not have retrospective effect.

Special administrations: PESAR

The Payments and E-Money Special Administration Regime (PESAR) is a bespoke insolvency regime for payments and e-money institutions. The Guidance now clarifies - as it already does with the special administration regime for investment banks - that if a payment or e-money firm is eligible to use PESAR, but is considering a different insolvency procedure, an IP may not be appointed over it unless the FCA is notified of preliminary steps taken in respect of that procedure.

The FCA will have a period of two weeks after being notified to inform the notifier whether it: gives consent to the alternate insolvency procedure; or intends to apply itself for that (or another) insolvency procedure, including a special administration order.

Availability of the FSCS for payments and e-money customers

In March 2023, the PRA made FSCS depositor protections available to certain customers of payment or e-money institutions in respect of their share of safeguarded funds in the case of the failure of a credit institution holding those funds.

The Guidance now clarifies that while eligible customers may receive compensation in specific situations, IPs should avoid giving customers misleading impressions as to the FSCS protections they might receive, because the availability of relief is case-specific. Where relief is available, IPs are advised to liaise with the FSCS, including on whether clients or creditors ought to be involved.

EMRs and the Ipagoo case

The Court of Appeal in Re Ipagoo LLP [2022] EWCA Civ 302 held that the Electronic Money Regulations 2011 (EMRs) – contrary to the FCA's view as appellant in the case - do not create a statutory trust over funds held by an e-money institution, but that the relevant 'asset pool' includes not only funds that were properly safeguarded, but also an amount equivalent to relevant funds that should have been safeguarded but were not.

The Guidance now reflects the FCA's understanding of the decision, and informs IPs of the need to 'top-up' the asset pool where there is a shortfall in safeguarded funds.

However, IPs should note that the FCA is currently updating the safeguarding framework for payments firms: the final rules are anticipated by the end of H1 2025, and will further impact considerations for insolvent firms and their IPs. The safeguarding consultation noted the legal uncertainty generated by the Ipagoo judgment – namely how any top-up exercise should rank against creditor claims – and the FCA highlighted that if its proposals for a statutory trust over relevant funds are taken forward, the principles of the judgment will no longer apply. When its final rules are published, the FCA will assess how any changes affect the Guidance.

Compromises

In July 2022, the FCA published guidance on its approach to compromises – where a firm uses a procedure such as a scheme of arrangement, company voluntary arrangement (CVA), or restructuring plan to restructure their debts and continue trading.

The Guidance now refers IPs to the 2022 guidance, which sets out factors the FCA will consider when deciding whether to take actions to ensure an appropriate degree of protection for consumers and the integrity of the UK financial markets. It also now confirms the FCA's rights to make representations at court and creditor meetings for all restructuring procedures.

The FCA considers that preparing for a compromise without notifying the FCA of the proposals is a significant breach of Principle 11 – applicable to all firms, and requiring them to deal with regulators in an open and cooperative way, and disclose anything relating to the firm of which the regulator would reasonably expect notice – and specific notification requirements set out in the FCA's Supervision Handbook.

Dormant Asset Scheme expansion

The Dormant Assets Act 2022 expanded the previous scope of dormant assets legislation to allow an authorised reclaim fund to accept a wider range of dormant assets than previously, including in the insurance, pensions, investments and wealth management sectors.

As anticipated in the Guidance consultation, the FCA published its final rules facilitating the expansion of the Dormant Asset Scheme in August 2024. The Guidance now advises IPs to liaise with the relevant authorised reclaim fund if the failed firm was a participant in the scheme and is holding customer records in relation to dormant funds transferred to the reclaim fund. IPs of insolvent firms are also expected to update the FCA on any such engagement with a fund.

Other changes

• Sufficient experience of IPs: the Guidance already referred to the Insolvency Code of Ethics, which requires that IPs should only accept appointments where they have, or can acquire, sufficient expertise. It now states that IPs ought to be aware of the range of different financial services businesses that fall within the FCA's remit – from those focusing on retail clients, to those operating exclusively in wholesale markets. The Guidance that the way IPs must approach a firm insolvency will be driven partly by the specific characteristics of the firm and its market(s).
• Wind-down planning: in common with the regulators' recent focus on effective operational resilience, the sections recognising that an IP may be involved with a firm pre-insolvency now clarify that a wind-down plan should detail steps a firm will take prior to or leading up to
• MVLs and client money: the Guidance now highlights that where a firm holds client assets under the FCA's CASS rules or subject to the payment services or e-money safeguarding requirements, entry into an MVL will have certain consequences, so IPs advising on a potential MVL should specifically consider whether returning client assets before entry into an MVL can deliver better outcomes
• Temporary appointments: the Guidance also confirms that its audience of IPs appointed (or looking to be appointed) over regulated firms includes those taking provisional and interim appointments.

Interestingly, the consultation had proposed updating the first page of the Guidance – which sets out the FCA's commitment to ensuring firm failures are managed carefully – to stress that if IPs fail to ensure firm compliance with relevant rules, guidance and legislation aimed at achieving better outcomes for consumers and market participants, the FCA may intervene with the insolvent firm using its supervisory and / or enforcement powers. This statement was dropped in the final Guidance. While indicating a shift in focus by the FCA, this does not negate the FCA's existing supervisory and enforcement powers, which IPs should remain aware of when taking into account the regulatory framework to which the firm remains subject.