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Consumer Trends 2024: The special administration regime and consumer hardship

23 January 2024
Special administrators must strike a balance between supporting creditors facing financial hardship and upholding pari passu principles.

The special administration regime is a modified insolvency regime, designed to address the unique challenges faced in the insolvency of certain entities which provide regulated services, such as investment firms and banks. The regime gives insolvency practitioners special objectives which prioritise the continued supply of the regulated service in order to minimise systemic risk in the industry. In practice, this involves extensive and ongoing consultation between the special administrators and the relevant regulator - being the Financial Conduct Authority (FCA) in the case of a special administration of an investment firm or bank.

As recession looms in the UK economy, we anticipate that special administrators appointed over FCA-regulated entities will be encouraged more than ever to consider, and where reasonably possible, support consumers who face undue hardship as a consequence of their assets being locked up in the special administration.

Whilst the special administration legislation does not provide a carve out for consumers suffering hardship, the FCA's 'Guidance for insolvency practitioners on how to approach regulated firms' (FG21/4), states at paragraph 106: 

"Until the IP is able to distribute client assets, these will not be returned or available to clients. In such situations, the IP should consider hardship cases to help ensure that they are identified and responded to in an appropriate and consistent manner, including liaising with the FSCS if applicable. An IP may be able to provide earlier distributions of client assets to clients who can demonstrate hardship (although this may not always be possible). We therefore expect an IP to identify potential hardship policies and assess whether there is anything that can be done to support these cases. However, we recognise the ability of the IP to support will depend on the circumstances of the case."

DWF's specialist restructuring team is experienced at providing the tailored framework needed for special administrators to assess and process hardship claims, as contemplated by FCA's Guideline, and in a manner that does not compromise their duties to the general body of creditors - namely to treat creditors on equal footing. There are several options available to special administrators which strike the balance. DWF has recently advised on the novel implementation and carrying out of FCA-approved hardship loans to eligible consumers facing hardship. This is effectively a loan from the company's house estate (i.e. not client money nor custody assets) to help meet the consumers' immediate living expenses. Special administrators considering hardship loans should seek specialist advice to ensure pari passu principles are upheld, and appropriate mechanics are in place to manage repayment, enforcement, set-off, and the receipt of compensation amounts due to the eligible consumer under the financial services compensation scheme.

In light of current economic challenges, we anticipate the FCA will fortify its stance to safeguard consumers experiencing hardship in special administrations, which may lead to more hardship loans in this field.

If you have any questions or would like to discuss any of these topics and what they mean for you and your business, please get in touch with our Consumer sector and Restructuring experts. 

This insight was authored by Natasha Atkinson and Monica Hamid.

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