THE FUTURE OF INSOLVENCY REGULATIONS

There is a very important consultation taking place, and our members have been asked for their views.

The background and details are below, and in particular the Society has been asked to glean from their members:

What experiences do you have of the insolvency system? How could the system be improved (eg. achieve better outcomes for all creditors)? Any other comments/observations?

Executive summary

On 21 December 2021, The Insolvency Service issued proposals for reform of insolvency regulation. The reforms could materially impact ICAEW and those of its members involved with insolvency work. The deadline for responses is 24 March 2022.

The proposals are at an advanced stage, having followedon from a call for evidence in 2019 to which our Professional Standards Department (PSD) responded (Rep 107/19). We expect that action will result in the fairly short-term. We want to present to government what we believe are workable, practical solutions to the issues observed. The purpose of this paper is to explore the solutions that we believe should be considered. We need your views on whether you believe these changes would be effective as well as examples of how they would affect you.

Some of the issues and solutions are highly technical and may only be familiar to Insolvency Practitioners. But the insolvency system is relevant to all businesses and we want to help government get to a system that is good for the wider economy. For a summary of the issues we recommend you read Part A and Part B of the consultation document’s Executive Summary.

The Insolvency Service are heavily influenced by the report of an All-Party Parliamentary Group, co-chaired by Kevin Hollinrake MP, of September 2021 (APPG report). This was critical of the profession and the regulatory regime. It concluded the regulatory system ‘fails to sanction many mis-conducts, is slow and has a lack of transparency’. They identified conflicts of interest where ‘the IP not only advised that the company should go into insolvency but was then rewarded with the appointment’. The FT Editorial Board concluded that ‘a forecast wave of post-pandemic business failures should prompt an overhaul’.

The proposals also reflect growing concern around consumer ‘volume IVA’ providers and abusive practices in these markets, centring around inadequate or misleading advice.

There are five key proposals. One is that the four recognised professional bodies (RPBs) which currently licence and regulate insolvency practitioners (IPs), including ICAEW, should be replaced by a single regulator (being an arm of the Insolvency Service).

In responding to the government, it is crucial that we present a balanced and representative position to help them decide on the best course of action in the public interest. We will be engaging with Insolvency Practitioners through our Insolvency Committee and want to balance this input with wider consultation with business, boards and professional advisors. We view the Technical Advisory Committee as a key constituency and are interested to hear your perspectives on the insolvency regime.

Background

ICAEW’s Independent Regulatory Board (IRB) intends to respond to this consultation. ICAEW will submit its views in its own response, which will be led by Reputation & Influence and will draw upon insights from its volunteer groups including Technical Strategy Board and the Insolvency Committee. We are particularly keen to hear views from business – including those with experience as creditors and in insolvency. We want to highlight to government what we see as the most critical issues with the current system and help identify practical solutions that can be readily implemented. Coming out of the pandemic and with monetary policy tightening we believe that any actions identified must be capable of both taking effect in short-order and avoiding disruption in a period of potentially heavy demand for insolvency services.

The proposals for a single regulator and firm regulation will require primary legislation. Government reserved the power to create a single regulator through secondary legislation through reforms in 2014, but this does not enable the reforms now proposed.

The proposals and our initial stance

The five proposals are as follows. These are being considered by the IRB and ICAEW’s Insolvency Committee, but their feedback is not yet reflected below:

(1) Creation of a single government regulator - We opposed the idea that a single regulator is necessary in Rep107/19 and provided substantial evidence, including as to likely costs involved in the change. Our evidence has largely been ignored. While the evidence remains the same, we recognise the debate has moved on and it may now be time to consider whether regulatory consolidation could help respond to the issues government has raised.

If there is to be a single regulator, it should be independent of government, particularly as government is often the biggest creditor and, following recent changes, has preference.

(2) New regulatory framework for licensing of firms and individuals

Under the current insolvency regime, IPs are licensed as individuals, not as firms. This can create difficulties in enforcement etc, and this has been manifested in the volume IVA sector where large unregulated firms employ only a few IPs for many thousands of cases.

We have campaigned for firm level regulation (like audit regulation), e.g. in Rep 107/19, and welcome the general thrust of this proposal. We have concerns about some of the detail.

(3) New public register of authorised firms/individuals This is unobjectionable, but the Insolvency Service (or RPBs) could do this without legislation.

(4) New Compensation Fund We agree that there should be a compensation fund put in place as a last resort to pay out where losses have been suffered by creditors due to fraud or lack of insurance cover etc, but the proposals go beyond this and have not been well explained or developed. The risks of increased costs and liabilities need to be considered.

(5) Reform of the current insolvency bond process IPs are required to have insurance bonds (a general bond and a bond for each case) against their fraud and dishonesty. We agree that the process is flawed and needs reform. Questions about professional indemnity insurance also arise which overlap with the issue of a compensation fund.

Of the five issues, (1) and (2) are the most significant and the intended focus for R&I. We will need to decide how much resource to devote to the others if we may cease to be an RPB.

Proposed approach

Alongside ICAEW’s independent Regulatory Board’s work in this area, we have considered some of the issues arising through the Insolvency Committee in the past and are holding two extraordinary meetings to discuss further before their next scheduled meeting in March. The consultation was also discussed at the last Technical Strategy Board meeting last month.

We recognise government’s concerns and believe we have a strong role to play in helping it to deliver structural changes to address the issues outlined in the consultation. We agree that having an effective and appropriate system is imperative as we face a possible wave of insolvencies following the pandemic. We have already campaigned for firms to be regulated in the IVA/consumer debt market (most recently in Rep 119/21). IPs frequently refer to the burdens of being personally liable as office holders, but the proposals may open the door to greater financial liability for firms (both fees and fines) and impact the market (eg, small v large firms). Government consulted on bonding in 2016 and we may base our response on comments we made then (Rep 192/16). It is, however, unclear why it has taken 6 years to bring forward these proposals and why they are now deemed urgent (for implementation in advance of any single regulator implementation).

Some commentators have highlighted that the process for setting Statements of Insolvency Practice could be streamlined by separating it from the regulatory role of the Recognised Professional Bodies. We would like to explore this further during our consultation with members. We did not support the introduction of a reserve power to create a single regulator at the time (Rep 47/14) and do not find the latest consultation document persuasive on the point. However, having a single regulator would put an end to debate about whether the risk of systemic arbitrage or inconsistent practice between RPBs is real or merely perceived by some, and it may well be that during the course of our evidence-gathering phase we rethink our original stance on this matter. We think it is important that, if there is to be a single regulator, it is an independent regulator, and this means being independent of government, not part of it. Government is not an impartial or neutral participant in this process, with HMRC often being classified as a preferential creditor.

Government should therefore either nominate an existing RPB to be the single regulator (if any are prepared to take on the role) or create a new equivalent (with all the cost and disruption that would entail).

We are concerned that the persistent reference to our oversight as ‘self-regulation’ misunderstands the independent structure we have had in place since 2015 and fails to recognise the important role that professions have in society.

R&I will consider building on suggestions it has already made (eg, REP 119/21) that regulatory responsibility for consumer debt/insolvency should be passed to FCA. This could open the door to the creation of a single regulator for corporate/business insolvencies, which might most naturally be ICAEW.

Why it matters

We agree with government that a good insolvency regime is important for the economy. We also agree that the UK’s regime is one of the best in the world, albeit the crown may be slipping due to incoherent and piecemeal regulatory reforms by government. We believe that the single government regulator proposal will be damaging as currently envisaged and therefore it is in the public interest to oppose it.

ICAEW is the largest single regulator of IPs. ICAEW was formed in part to address perceived bad practices arising from insolvent companies in the nineteenth century in the public interest. If the proposal is taken forward, it will appear that criticisms of the profession have been vindicated and could damage our reputation. Underlying rationale for the single regulator proposal The evidence and rationale for the proposal are weak, with reference to ‘perceptions’ as much as to facts. We do not believe the reasons given at the time of the call for evidence were persuasive (see REP 107/19). We believe that since then the APPG report referred to above has had a disproportionate and unmerited influence. It catalogues many regulatory failures or alleged regulatory

failures, creating an unfavourable picture of the profession as a whole.

Many of the behaviours outlined could be prevented by change in regulation rather than change in regulatory framework. For instance, although we do not think it should do so, government could ban advisors from subsequently taking insolvency appointments or could ban IPs from participating in bank panel arrangements. Nevertheless, there are a number of structural changes that could be made, as we outline above, which we believe could help address the issues observed. Moreover, while it is unclear why those involved believe having a single regulator would prevent such events from recurring, it is clear that debate has now moved on and the creation of a single regulator may now be a likely outcome from the consultation. Plan of action

In advance of making our submissions, we expect to liaise with the other RPBs and R3 (the main insolvency trade body, which includes creditor groups) and our volunteer groups, including Insolvency Committee. We would also like feedback from members in business.

We are considering raising selected issues (including potential impact on staff and our ability to continue to act as an RPB) with ministers as a matter of urgency.

We expect to raise our views and concerns in the press and, potentially, with selected Members of Parliament and are working with our Public Affairs department. We will need to be selective on the points we wish to make. As with audit, where there are proven cases of deficient performance (conflicts etc) it can be difficult to defend the status quo or overcome inferences that non-proven cases are analogous. Some of the APPG commentary is emotive and simplistic and those concerned are unlikely to be persuaded by any evidence or receptive to nuance. It is inevitable that there will be examples of bad practice and with insolvency there are always losers.

We are therefore likely to focus on tangible disadvantages of the proposals, eg, additional costs, disruption pending implementation, dangers of having a government department as regulator (obvious potential conflicts).

Questions for the committee

- What experiences do you have of the insolvency system? - How could the system be improved (e.g. achieve better outcomes for all creditors)? - Does the committee have any insights on the effectiveness of government versus professional bodies as regulators? - If government becomes the single regulator, what mechanisms can be applied to control its costs (which it proposes should be covered by the firms (not individual

IPs) being regulated)?

The link to the gov.uk article is here: The future of insolvency regulation