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What is this week's blog about?
In this week’s blog, we look at the recently issued RICS Practice Alert relating to phoenix firms. This is essential reading for all RICS APC and AssocRICS candidates, as well as qualified surveyors. It is relevant to the Ethics, Rules of Conduct and Professionalism competency.
What is a phoenix firm?
In our previous blog on closing down an RICS Regulated Firm, we looked at what a phoenix firm is.
A phoenix firm is where an RICS Regulated Firm closes in a disorderly way and then re-registers quickly as a new trading entity. This goes against the RICS Rules of Conduct, which confirms that members and firms should manage finances diligently and treat others with respect. It is, however, the disorderly manner of closure, not the mere fact of becoming insolvent (which can happen for many reasons), that leads to the high risk associated with phoenix firms.
Phoenix firms are typically small with 1 to 4 partners, although they can come in a variety of shapes and sizes.
Areas of high risk include a lack of security concerning client money and having insufficient run-off cover. Phoenix firms are also unlikely to have any robust documentation of how the firm was closed down correctly. This includes compliance with legislative and statutory requirements, as well as dealing with any liabilities transparently.
RICS recommend that a member or firm who is facing insolvency should take early advice from an insolvency practitioner or the Insolvency Service. RICS Regulation should also be contacted as soon as possible.
What does the Practice Alert say?
Nigel Clarke, Chair of the RICS Standards and Regulation Board, states in the Practice Alert that:
‘While small in number, so-called ‘Phoenixing’ can undermine public and consumer confidence in the high professional and ethical standards expected of RICS members and Regulated Firms – and undermine the reputation of the vast majority of high performing Regulated Firms’.
The Responsible Principal or Director of a potentially insolvent Regulated Firm (or a firm which has become insolvent in the past 2 years), must now provide the following information to RICS:
‘a. the liquidator/insolvency practitioner/official receiver, including their contact details,
b. proof of the current Professional Indemnity Insurance Policy, as well as details of the ‘run-off’ cover,
c. details of any ADR Awards against the firm in the preceding 12 months and proof that the Awards have been paid,
d. details of any pending ADR matters,
e. the Firm’s Client Money accounts and steps taken to secure the funds in accordance with the RICS Client Money Protection Scheme Rules (RICS Client Money Protection Scheme) and Professional Standard on Client Money Handling (Client Money Handling, 1st edition (rics.org) or arrangements made to repay the client funds to clients,
f. steps you have taken in relation to the retention of any confidential files and documents, including confidential client files,
g. steps you have taken to inform clients/customers of the intended winding up/liquidation,
h. steps you have taken to inform creditors of the intended winding up/liquidation,
i. steps you have taken with your employees regarding the intended winding up/liquidation,
j. all RICS members working for or employed by the RICS Regulated Firm (in any capacity),
k. any other firms or entities under which you are undertaking surveying services.
After being provided with the above information, RICS may undertake additional enquiries. This may include the following:
‘a. evidence or information of alleged fraudulent behaviour by the company or any of its directors,
b. the company submitted all tax returns and paid all tax and any other money due,
c. the company and the directors did not continue to trade to the risk, or potential disadvantage of creditors, clients, or consumers at a time when the company was insolvent,
d. there has not been any conduct that removed, or attempted removal of assets or funds that should have been available to pay creditors,
e. the director/s ensured that the company was run with appropriate due diligence, and exercised reasonable care, skill and diligence having regard to UK law and RICS Professional Standards,
f. the company kept and can produce appropriate accounting records,
g. the company prepared and filed all accounts and returns at Companies House,
h. the company and the director/s co-operate fully with any official receiver or insolvency practitioner appointed to the company,
i. all Client Money was kept in accordance with RICS Client Money Handling Professional Standard and Statement and RICS’ Client Money Protection Scheme rules, including repayment of funds to all clients,
j. that the directors are / were not subject to director’s disqualification for any reason.
RICS may make further inquiries to insurers and third parties to verify information provided by the firm and its directors / Responsible Principals prior to deregistering the firm’.
RICS also carry out checks into Directors and Responsible Principals when new Regulated Firms are registered. They also state that phoenix firms cannot use other parties to ‘front’ the firm and avoid the link to the previous Director or Responsible Principal. In addition, any Responsible Principal must meet the RICS requirements.
What action can RICS take in relation to a phoenix firm?
As phoenix firms pose a significant risk to former clients, employees, creditors and the public interest, RICS have the following measures at their disposal:
Refusing registration of the phoenix firm or delaying registration until any disciplinary proceedings are completed;
Further investigation of the Director or Responsible Principal;
Requiring risk mitigation measures or imposing licence conditions;
Requiring staff training;
Monitoring the new firm;
Providing additional support and guidance to the firm.
What should I do if I have a concern about a newly Regulated Firm?
Email RICS at complaints@rics.org if you have any concerns about a newly Regulated Firm (or, any concerns of a professional or ethical nature). We all have a professional duty to promptly disclose potential breaches of the RICS Rules of Conduct and it is what helps to make the profession stronger and more trusted by the public.
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Stay tuned for our next blog post to help build a better you.
N.b. Nothing in this article constitutes legal, professional or financial advice.