Whenever I hear of a new regulatory initiative designed to crack down on rogues or bad practice I always resist the temptation to cheer straightaway.

The reason for this is that experience tells me that trying to weed out the scammers and crooks is always going to be more of an ongoing battle than a war that can be won in a day.

This is true of the important steps announced this week by the FCA and the government to tackle the growing problem of phoenix financial firms.

In something of a twin-pronged attack, the government is to give the Insolvency Service more powers to tackle firms whose directors deliberately dissolve a business purely to escape their debts, particularly government-fund Covid-19 support loans, an emerging issue.

In the FCA’s case it has its sights set specifically on phoenix financial firms that work in tandem with Claims Management Companies (CMCs). The CMCs worked with directors of collapsed firms to take on clients en masse, forwarding claims to the Financial Services Compensations Scheme.

For many years it’s been the case that some failed financial services firms, including some advisers, have simply set up a phoenix firm from the ashes of their previous business and carried on regardless, sometimes even working with ex-clients and even carrying on very similar business. Legally there is little to stop this, however unethical it may be.

There is evidence now, the FCA says, that some phoenix firms are going further and may have deliberately gone bust purely to pass on their liabilities to CMCs they work closely with. The CMCs, it seems, are waiting, arms outstretched, for this rich new seam of business. Why not push a firm over the edge and make multiple claims to the FSCS even if it could have been saved?

The phoenix firms doing this avoid their liabilities to previous clients and dump their disgruntled clients on the FSCS, via a compliant CMC which may well additionally pay a handsome fee for the new clients. A kind of 'you scratch my back and I'll scratch yours' approach where the only losers are the poor levy-payers who have spend huge sums funding never-ending FSCS claims.

Now this is a very tricky area. The FCA cannot be seen to ban the CMC sector, much as I suspect it would like to, because they are (mostly) legitimate businesses apparently making claims on behalf of consumers who have lost out.

However, firms that fail deliberately and run away from their responsibilities to their clients are beneath contempt and need to be stopped. The difficulty here will be proving that firms that have folded deliberately in order to pass on claims to the CMCs, and ultimately the FSCS, were deliberately abusing the rules.

Still, it is a step in the right direction, if it can be made to work, and may halt some of the growth in CMC phoenix-firm claims to the FSCS.

Longer term, however, the FCA will need to tackle the whole issue of how the industry engages with CMCs. There is no doubt the number of CMC-inspired claims is growing, particularly in the pensions and investments arenas.The CMCs are openly touting for business, particularly in the SIPPs area. They are hungry for new business and the FCA will have its work cut out to stop a feeding frenzy that may jeopardise the stability of the sector.

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Kevin O’Donnell is editor of Financial Planning Today and a financial journalist with 30 years experience. This topical comment on the Financial Planning news appears most weeks. Follow @FPT_Kevin