The scheme of arrangement is a flexible and popular, court-sanctioned restructuring tool used recently (in addition to the new restructuring plan) to facilitate domestic and cross-border corporate, financial and creditor-led restructurings. FCA-regulated entities can make use of the scheme structure in the same way as other corporates to refinance or restructure their businesses but with certain special requirements and consents imposed on them by the FCA as it seeks to balance its regulatory objectives, protecting customers and ensuring they receive redress on the one hand and ensuring continuity of the financial markets on the other. 

This article considers recent developments in relation to schemes of arrangement involving FCA-regulated firms, exploring the FCA's approach as it treads the tightrope between customer protection and market stability – and the court's reaction to FCA involvement when deciding whether or not to sanction a scheme. This includes the Morses Club scheme which was approved in May, and similar schemes proposed by Amigo Loans and Provident Financial. 

In all instances, the FCA expressed concerns at various stages in the process, but a form of scheme was eventually sanctioned, compromising creditors' claims – raising the question of whether the FCA's powers in relation to schemes of arrangement have any teeth in practice. 

The FCA's powers 

The FCA does not have an express statutory power to challenge or veto a scheme of arrangement under the Companies Act. However, immediate notification and early provision of information to the FCA is required when a firm proposes a scheme, and the FCA has rights to make representations at any scheme meetings and court hearings. Accordingly, the usual form of communication sought by firms proposing schemes is therefore a "letter of non-objection" from the FCA in respect of any scheme of arrangement a firm intends to propose. There is no legal requirement that such a letter be obtained for a scheme for a regulated company, but the FCA can of course take action if it considers that the scheme company will be breaching the general FCA rules and Principles for Businesses. 

Particularly given the additional cost that FCA involvement is likely to involve, early dialogue with the regulator is key. However, it is also worth considering how the courts have reacted to FCA intervention, as set out in further detail below.  

The FCA's general position on schemes

The FCA has consistently made clear that it has significant concerns about schemes being used by firms to avoid paying customers redress in full. 

The FCA published an approach note in July 2022 (FG22/4)¹ in which it stated that it would assess schemes on a case-by-case basis against its statutory objectives, and consider whether the proposed compromise set out in the scheme is compatible with the FCA's rules, including the Principles for Businesses. As might be expected, the FCA's key considerations include the fair treatment of customers, their information needs, and issues around managing conflicts of interest. The FCA will weigh the outcomes a customer would receive under the proposed scheme compared to other stakeholders and consider whether the firm has put forward the best possible proposal from a consumer perspective. 

In each of the cases discussed below, the relevant firms revised their initial proposals to take into account the FCA's concerns. However, although the FCA has been vocal on its views, it has also been careful in outright opposing schemes of arrangement, even when not completely satisfied that all of its requirements will be met because, in some cases, forcing the firm to wind down could create even more damaging results for consumers. The FCA has therefore had to accept less than perfect plans from a consumer protection perspective when faced with an even less satisfactory alternative.

How has the FCA's position played out in practice?

Three recent cases demonstrate how the FCA is approaching schemes of arrangement in practice. 

There is a common concern that firms need to do more in their proposals to reduce the burden on consumers and share it equally across all classes of creditors, including customers owed redress, shareholders and secured creditors. Unsurprisingly, the FCA is likely to directly oppose a scheme which it views as very unfavourable to customers. However, if the firm is able to show that the burden is being spread fairly and winding down is a less favourable alternative for redress customers, the FCA is more likely to be open to the scheme of arrangement being sanctioned as a practical outcome, even if there are issues surrounding the implementation of the scheme. 

Morses Club

Morses Club is the UK's largest home-collected credit provider, providing short-term loans to those on moderate incomes (typically those with a limited or poor credit history). The scheme of arrangement applies to consumers who received a loan between 1 April 2007 and 2 August 2022 and made a redress claim on or after 11 August 2022 due to the loan being unaffordable. 

Morses Club proposed a scheme of arrangement after the firm was hit with a wave of claims, with most of the complaints being upheld and resulting in the firm being required to pay out more than £19 million in compensation to its customers between January 2016 and August 2022. The scheme of arrangement caps the total amount that Morses Club can pay in compensation to consumers. The firm says it decided to use a scheme "to ensure that all eligible customers are treated equally" and to maximise redress payments to customers. Without the scheme of arrangement, Morses Club would have become insolvent and gone into administration. In an administration scenario, redress customers would likely only have received between 1% and 3% of any redress owed, according to Morses Club, less than the amount offered through the scheme.

Prior to the first convening hearing, the FCA issued a letter in March 2023 in relation to the proposal expressing serious concerns about its design, particularly whether the scheme would indeed produce a better outcome for consumers than an immediate administration of Morses Club. The regulator expressed issues regarding the uncertainty of the funding needed for the scheme as the proposed contribution from shareholders had not been received, and may not be received until 2024, presenting a risk of customers not receiving payment at all. 

The FCA also expressed concerns around whether the risks of the scheme would be brought to customers’ attention effectively, and about the methodology for identifying customers owed compensation. Morses Club said it would consider the FCA's concerns and the convening hearing was adjourned to allow Morses Club and the FCA to agree the details of the notification of the explanatory statement and creditors' meeting. 

Revisions were agreed prior to the second convening hearing, which was acknowledged by the FCA in a second letter published in March. The FCA noted that Morses Club had made some improvements to the proposal but that it would continue to monitor the situation, and that it maintained its scepticism towards the effectiveness of the scheme because certain issues, such as receipt of funds from the firm's shareholders, had not been resolved. Despite these concerns, the court sanctioned the scheme in May 2023. 

Amigo Loans

Amigo Loans also faced redress claims following the provision of loans to consumers that led to complaints around affordability. This firm, like the others, proposed a scheme of arrangement as it could not afford to pay redress to customers in full. 

In an unsuccessful first attempt to put in place a scheme of arrangement in spring 2021, Mr Justice Miles refused to sanction the scheme as a result of the FCA's objections. The FCA had considered the 2021 scheme to be inherently unfair, stating that it placed a disproportionate burden on customers, rather than shareholders and bondholders, to keep the company afloat. 

It is also worth noting that the FCA intended to impose a fine of £72.9 million on Amigo Loans. However, the firm demonstrated that paying this penalty would cause it serious financial hardship and would threaten its ability to meet the commitments of the proposed scheme of arrangement. To ensure the best outcome for customers, the FCA agreed to waive the financial penalty and instead publicly censured the firm. 

Amigo Loans later proposed two alternative revised schemes in spring 2022 which would provide a better return for customers, one of which was sanctioned. The FCA did not object to the scheme in its final form. 

Provident Loans

Similarly, Provident Loans sought a scheme of arrangement to compensate consumers who were mis-sold loans they could not afford. Redress payments were capped at 4p to 6p per £1 of compensation owed to customers, meaning borrowers who took out loans between April 2007 and 17 December 2020 were to get back less than 10% of what they were owed. The announcement came after a High Court judgment in August 2021, which granted Provident Loans permission to cap total pay-outs at £50 million. 

The FCA made it clear that it did not support the proposed scheme for a number of reasons, including the key concern that customers were being offered significantly less than the full amount of redress they were owed. Nonetheless, given the alternative was the insolvency of Provident Loans (in which case, consumers would likely receive no redress), the FCA decided not to formally oppose the scheme in court and instead listed its concerns in a letter to the lenders. 

In sanctioning the scheme, the court was somewhat critical of the FCA for raising concerns without formally opposing the scheme or making it entirely clear what it expected the court to do. The court noted that the FCA's objections were primarily regulatory in nature and were not relevant to the sanction decision: "unless the FCA is prepared to say that the regulatory regime requires that claims be paid in full, and that no scheme which provides for anything other than that should be sanctioned (which would be a bold position), this remains a matter for regulators to consider as part of their regulatory function and not for the court on a sanction application such as this."²

Accordingly, the scheme was sanctioned despite the FCA's concerns. 

Take away messages

Recent schemes have seen firms amend their proposals to take into account certain concerns from the FCA, particularly regarding customer detriment. However, without the right to veto a scheme, the FCA is left with its general regulatory sanctions if a scheme proposal involves the unfair treatment of customers, which are often limited where, for example, a financial penalty would cause a firm's insolvency and, as a result, worse outcomes for customers. Further, courts have demonstrated their willingness to sanction schemes even where the FCA has made its dissatisfaction clear. This raises the question of whether, when it comes to schemes of arrangement, the FCA really has meaningful power to drive forward its policy agenda, particularly its objectives around consumer protection. 

Other non-Companies Act forms of insolvency restructuring processes, such as administration and special regimes with specific statutory objectives and mechanisms, exist to govern how the courts should deal with the potential failure of financial institutions. These other options include the ability to hive off and preserve certain parts of the institution while running off other parts and the imposition of strict deadlines to ensure market stability while a resolution is agreed. As such, specific legislation for schemes involving FCA-regulated entities might give the FCA's concerns more traction. However, as a creature of the Companies Act rather than specific insolvency legislation, any changes to schemes of arrangement may prove easier said than done. 

1. https://www.fca.org.uk/publication/finalised-guidance/fg22-4.pdf↩
2. Re Provident SPV Limited [2021] EWHC 2217 (Ch) at [45]↩