By number of defaults, the investment sub-scheme is the largest. However, the majority of firms do not give rise to any realistic recovery prospects. For example, firms are often a dissolved company or a now discharged bankrupt sole trader, so that claims are extinguished. Further, many defaults relate to "historic" claims, in particular under the Pension Review, for which little evidence is available and which may be time barred by the time FSCS has the rights to pursue a recovery.
Further details of some avenues of recovery are set out below. However, the usual avenues of recovery can include actions against:
- the firm in default itself (i.e. through its insolvency) or a contribution from the firm’s principal(s) (in the context of a sole trader or partnership);
- the firm’s professional indemnity insurer;
- the rights to future payments/returns on the investments themselves; and
- other relevant third parties (such as a product provider in the context of the default of an IFA, or IFAs in the context of a provider failure).
If an IP is appointed to the firm, FSCS will seek to ascertain the prospects of a dividend, and submit a proof of debt. Generally FSCS's proofs are accepted by IPs. In some cases, where disputed, settlements of the claims have been agreed with the IP and shareholders to facilitate a cost-effective distribution from the estate.
(ii) Solvent individuals
In claims against firms comprising sole traders or partners who are not bankrupt, FSCS determines the recoveries prospects on the basis of the information obtained in the default investigation process. Where an individual appears to have sufficient resources, FSCS will seek a contribution towards the cost of compensation.
(iii) Third party recoveries – professional indemnity insurance
As well as claims against connected parties such as providers or intermediaries, FSCS will routinely investigate the availability of professional indemnity insurance and, where possible, make claims with insurers. Even where the identity of the insurer is established, recoveries are often rejected by insurers on the basis of no or inadequate notifications, material misrepresentation or breach of warranty, or non-co-operation by the insured. Nonetheless, FSCS proceeds where it is realistic and continues to pursue a significant number of recoveries from insurers.
In some limited situations it may be possible to pursue (on a personal basis) the directors or shareholders of a company declared in default.
(iv) Phoenix firms
A few defaults are of firms whose business has been transferred to (and continued by) a successor entity, authorised by FCA, run by the same individuals (known as a 'phoenix firm').
In these cases FSCS will press any IP to establish whether the transfer was properly carried out, or whether it was at an undervalue. If at an undervalue, the IP may take action to set aside the transfer. FSCS may be required to fund any action; this would be decided on the facts on each case.