The big story of last week was the disciplinary sanction ordered to an EY IP for breaches of the Ethics Code. But I think this is just one more straw on the camel’s back. Every new criticism of apparent poor ethical standards that is added to the pile increases the risk of a regulatory reaction that would be counter-productive to the effective and ethical work of the majority.
Plenty has been said about the “noise” around pre-packs. Therefore, I was not entirely surprised – but I was disappointed and frustrated – to read that the latest sanction had been twisted to fit one journalist’s evident attempt to keep shouting: “It was the classic cosy insolvency I wrote about last month: a company calls in insolvency advisers who conduct an ‘independent business review’, take the job of administrator and act on the sale as well. On Wind Hellas, the creditors could not see how Ernst & Young could take both appointments without compromising their integrity. Six-and-a-half years later, the professional body has at last agreed with them.” (http://goo.gl/aIY9rU)
Actually, a look at the ICAEW notice (https://goo.gl/H7jUov) suggests that they did nothing of the sort. The relationship that got the IP into hot water related to the fact that an associated company, Ernst & Young Societe Anonyme, had carried on audit related work during the three years before the IP took the appointment as Joint Administrator of the company.
It is unfortunate that a failure to join the ethical dots between a potential insolvency appointment and the firm’s audit-related connection with the company has been used to pick at the pre-pack wound that we might have hoped was on the way to being healed.
Speed of complaints-handling
Is the journalist’s reference to 6½ years another distortion of the facts? I was surprised to read an article in the Telegraph from February 2011 (http://goo.gl/8902YO). Apparently, the ICAEW’s investigation manager wrote to the IP way back then, saying that “the threat to Ms Mills’ objectivity ‘should have caused you to decline, or resign, from that appointment’”. Given that that conclusion had been drawn back in 2011, it does seem odd that it took a further four years for the ICAEW to issue the reprimand (plus a fine of £250,000 to the firm and £15,000 to the IP). Perhaps the recouping of £95,000 of costs is some indication of why it took four years to conclude.
I found it a little surprising to read in the Insolvency Service’s monitoring report in June 2015 (https://goo.gl/Lm5vdU) that the Service considers the that ICAEW operates a “strong control environment” for handling complaints, although it did refer to some “relatively isolated and historical incidents” as regards delays in complaint-processing (well, they would be historic, wouldn’t they?). In addition, in its 2014 annual review (https://goo.gl/MZHeHK), the Service reported that two of the other RPBs evidenced “significant delays” in the progression of three complaints referred to the Service.
Although I do understand the complexities and the need for due process, I do worry that the regulators risk looking impotent if they are not seen to deal swiftly with complaints. I also know that not a few IPs are frustrated and saddened by the length of time it takes for complaints to be closed, whilst in the meantime they live under a Damocles Sword.
Ethics Code under review
In each of the Insolvency Service’s annual reviews for the last three years (maybe longer, I didn’t care to check), the Service has highlighted ethical issues – and conflicts of interest in particular – as one of its focal points for the future. In its latest review, it mentions participating in “a JIC working group that has been formed to consider amendments to the Code”.
Ethical issues still feature heavily in the complaints statistics… although they have fallen from 35% of all complaints in 2013 to 21% in 2014 (SIP3 and communication breakdown/failure accounted for the largest proportions at 27% apiece). Almost one third of the 2014 ethics-based complaints related to conflicts of interest.
The Service still continues to receive high profile complaints of this nature: its review refers to the Comet complaint, which appears to be as much about the “potential conflict of interest” in relation to the pre-administration advice to the company and connected parties and the subsequent appointment as it has to do with apparent insufficient redundancy consultation.
I suspect that the question of how much pre-appointment work is too much will be one of the debates for the JIC working group. Personally, I think that the current Ethics Code raises sufficient questions probing the significance of prior relationships to help IPs work this out for themselves… but this does require IPs to step away and reflect dispassionately on the facts as well as try to put themselves in the shoes of “a reasonable and informed third party, having knowledge of all relevant information” to discern whether they would conclude the threat to objectivity to be acceptable.
It is evident that there exists a swell of opinion outside the profession that any pre-appointment work is too much. Thus, at the very least, perhaps more can be done to help people understand the necessary work that an IP does prior to a formal appointment and how this work takes full account of the future office-holder’s responsibilities and concerns. Are Administrators’ Proposals doing this part of the job justice?
Criticisms of Disciplinary Sanctions
Taking centre stage in the Insolvency Service’s 2014 review are the Service’s plans “to ensure that the sanctions applied where misconduct is identified are consistent and sufficient, not only to deal with that misconduct, but also to provide reassurance to the wider public”.
Regrettably, the body of the review does not elaborate on this subject except to explain the plan to “attempt to create a common panel [of reviewers for complaints] across all of the authorising bodies”. I am sure the Service is pleased to be able to line up for next year’s review that, with the departure of the Law Society/SRA from IP-licensing, the Complaints Gateway will cover all but one appointment-taking IP across the whole of the UK.
But these are just cosmetic changes, aren’t they? Has there been any real progress in improving consistency across the RPBs? It is perhaps too early to judge: the Common Sanctions Guidance and all that went with it were rolled out only in June 2013. Over 2014, there were only 19 sanctions (excluding warnings and cautions) and seven have been published on the .gov.uk website (https://goo.gl/F3PaHj) this year.
A closer look at 2014’s sanctions hints at what might be behind the Service’s comment: 15 of the 19 sanctions were delivered by the IPA; and 20 of the 24 warnings/cautions were from the IPA too. To license 34% of all appointment-taking IPs but to be responsible for over 80% of all sanctions: something has got to be wrong somewhere, hasn’t it?
The ICAEW has aired its own opinion on the Common Sanctions Guidance: its response to the Insolvency Service’s recommendation from its monitoring visit that the ICAEW “should ensure that sanctions relating to insolvency matters are applied in line with the Common Sanctions Guidelines” was to state amongst other things that the Guidance should be subject to a further review (cheeky?!).
Other Rumbles of Discontent
All this “noise” reminded me of the House of Commons’ (then) BIS Select Committee inquiry into insolvency that received oral evidence in March 2015 (http://goo.gl/CCmfQp). There were some telling questions regarding the risks of conflicts of interest arising from pre-appointment work, although most of them were directed at Julian Healy, NARA’s chief executive officer. Interestingly, the Select Committee also appeared alarmed to learn that not all fixed charge receivers are Registered Property Receivers under the RICS/IPA scheme. Although it seems contrary to the de-regulation agenda, I would not be surprised to see some future pressure for mandatory regulation of all fixed charge receivers.
The source of potential conflicts that concerned the Select Committee was the seconding of IPs and staff to banks. I thought that the witnesses side-stepped the issue quite adeptly by saying in effect, of course the IP/receiver who takes the appointment would never be the same IP/receiver who was sitting in the bank’s offices; that would be clearly unacceptable! It was a shame that the Committee seemed to accept this simple explanation. But then perhaps, when it comes to secondments, the primary issue is more about the ethical risk of exchanging consideration for insolvency appointments, rather than the risk that a seconded IP/staff member would influence events on a particular case to their firm’s advantage.
Bob Pinder, ICAEW, told the Committee: “It used to be quite prevalent that there were secondments, but he [a Big Four partner] was saying that that is becoming less so these days because of the perception of conflict… There is a stepping away from secondments generally”, so I wonder whether there might not be so much resistance now if the JIC were to look more closely at the subject of secondments when reconsidering the Ethics Code.
The FCA’s review of RBS’ Global Restructuring Group, which was prompted by the Tomlinson report (and which clearly was behind much of the Committee’s excitement), is expected to be released this summer (http://goo.gl/l96vtl). When it does, I can see us reeling from a new/revived set of criticisms – one more straw for the camel’s back.