How does an Ethics Code more than triple in size overnight? In my view, largely by adding lots of unnecessary words. The devil, however, is in finding the detail hidden within the new Code that affects how we should be viewing and handling things differently from 1 May.
A primary reason why the new Code is substantially longer is that we now have “requirements” – highlighted in bold and given an “R” paragraph number – and “application material”, identified by normal text and “A” paragraph numbers. This application material is “intended to help an insolvency practitioner to understand how to apply the conceptual framework to a particular set of circumstances and to understand and comply with a specific requirement” (1.4 A1). So don’t be misled into viewing “A” paragraphs as optional guidance: although all the “shall”s appear in the “R” paragraphs, the language of most of the “A”s indicates that they also are necessary to achieve compliance.
Although I have tried to highlight the main areas of change, I do recommend that you read through the Code in its entirety yourself. There is a great deal more detail to explain RPB expectations and you could find that the particular circumstances of you or your firm and your engagements gives rise to ethical threats that you may have overlooked in the past.
The ICAEW’s version of the new Code can be found at www.icaew.com/-/media/corporate/files/technical/ethics/insolvency-code-of-ethics.ashx?la=en and the IPA’s version of the new Code is at www.insolvency-practitioners.org.uk/regulation-and-guidance/ethics-code (although the IPA hasn’t amended the text of the page to highlight that the link is not to the Code that came into force in 2009, nor have they archived the accompanying docs that relate to the old Code). The ICAEW’s Code has an additional “2” at the start of each paragraph (to fit the insolvency section into its overarching Code). In this article, I have used the IPA’s numbering.
Do I think that the implementation date of the new Code should have been postponed? Yes, I do!
True, we have been waiting a loooong time for a revised Code – the JIC’s consultation on a draft revised Code concluded in July 2017. However, the new Code is so much different from the old one (and from the 2017 draft), it is not at all an easy read at 70 pages, and there are many new requirements in there. Therefore, expecting IPs to have absorbed and adapted systems to the new Code and to have trained staff by 1 May is grossly unfair in these extremely difficult times. Shame on you, IS/RPBs!
Surely the Fundamental Principles are the same?
Generally, yes of course. Some look a bit different now, though.
“Integrity” has been beefed up. In addition to the “straightforward and honest” statement, we now have that an IP (R101.2):
“shall not knowingly be associated with reports, returns, communications and other information where the insolvency practitioner believes that the information:
- Contains a materially false or misleading statement;
- Contains statements or information provided recklessly; or
- Omits or obscures required information where such omission or obscurity would be misleading.”
The Code allows IPs to be viewed as not in breach of this where they “provide a modified report” (101.2 A1), although I guess they could still have fallen foul of the principle of professional competence and due care by allowing the incorrect or misleading statement to be released in the first place.
As another solution, the Code requires an IP to “take steps to be disassociated” (R101.3) from such information when they become aware of having been associated with it. Thus, it goes further than the advertising and marketing requirements of the old Code, capturing the spoken word and information that might wriggle out of “advertising”, and it makes clear that the IP need not have a marketing agreement with the party issuing the information, the IP just needs to be “associated” with it.
Having said that, the Code’s “Advertising, Marketing and Other Promotional Activities” section (360) has also been expanded on, making unacceptable standards more explicit.
“Confidentiality” has also grown by a page and a half. Comfortingly, though, this Code has elevated the requirement for transparency, i.e. to report openly to creditors etc., by putting it up-front at R104.2, rather than buried as at para 36 in the old Code. Most of the new text are statements of the obvious, e.g. being alert to the possibility of inadvertent disclosure in a social environment or to family and not using confidential information for the personal advantage of the IP or of third parties.
“Professional Competence and Due Care” is now accompanied by a new 1.5 page section, “Acting with Sufficient Expertise”, but I saw nothing in here that I thought really needed to be said.
“Professional behaviour” contains a subtle change: no longer must IPs only avoid action that discredits the profession, but they are required to avoid “any conduct that the insolvency practitioner knows or should know might discredit the profession” and they “shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession” (R105.1).
What about the Framework Approach?
Yes, we still have the basic framework of:
- identifying threats;
- evaluating them; and
- eliminating or reducing those threats to an acceptable level, often with the use of safeguards.
And in case there was any risk that we might forget this, it is provided in full twice (at 1.5 A1 and R110.2) and then appears in the introduction to almost every other section. In fact, the word “framework” appears 45 times in the new Code (and only 6 times in the old Code).
Ok, so what has changed? More paperwork, right?
Yes, of course!
Some have expressed the view that the requirements to evidence pre-appointment ethical considerations haven’t increased, if we’d been documenting things properly in the first place. As the old Code had a simple “record considerations” message, there is some truth in that, but it is difficult to deny that the new Code reflects the record-keeping mission creep that the profession has seen over this century.
To avoid doubt over the extent of documentation required, we now have a list of six items to be documented at R130.2 – they are what you would expect, but you would do well to ensure you’re your Ethics Checklists specifically prompt for these items.
In addition, this list of six items should define the structure for documenting your ethical considerations when a threat arises after appointment (130.1 A1).
Under the old Code, we were required to keep threats under review, simple as that. This has survived the revision (R210.7), but we now have added “application material” – 210.7 A1 – that helps define what such a review process should look like:
- has new information emerged;
- or have the facts or circumstances changed (facts cannot change, can they..?);
- that impact the level of a threat;
- or that affect the IP’s conclusions about whether safeguards applied continue to be appropriate?
Again, periodic review checklists may need to be enhanced.
Other paperwork: using specialists (Section 320)
To be honest, I never did like the old Code’s “obtaining specialist advice and services” section. Its meanings were ambiguous; I never really understood in what circumstances periodic reviews had to be conducted and whether these were to be on a firm-wide or a case-by-case basis.
The new Code leaves us with no (ok, fewer) doubts.
The four “R”s in the section are key:
- R320.3: “When an insolvency practitioner intends to rely on the advice or work of another, from within the firm or by a third party, the insolvency practitioner shall evaluate whether such advice or work is warranted.”
- R320.4: “Any advice or work contracted shall reflect best value and service for the work undertaken.”
- R320.5: “The insolvency practitioner shall review arrangements periodically to ensure that best value and service continue to be obtained in relation to each insolvency appointment.”
- R320.6: “The insolvency practitioner shall document the reasons for choosing a particular service provider.”
So every time an IP plans to instruct a third party (or another department within the firm) to provide advice or work, they need to determine whether the instruction is warranted and then why they have decided on the particular provider, having in mind the need to achieve best value and service. Then, they need to review periodically whether best value and service is being achieved for each appointment.
This sounds like another checklist or file note process per instruction together with more prompts on case reviews.
To reduce the detail required on each case’s instructions, it may be possible to create a firm-wide process evaluating the value and service provided by regular suppliers – in effect, an approved supplier list. This would seem particularly relevant when using a specific service provider (e.g. storage agents, insurers/brokers and pension and ERA specialists) across your whole portfolio.
And more disclosure to creditors?
Oh yes! In relation to using specialists, the Code says: “Disclosure of the relevant relationships and the process undertaken to evaluate best value and service to the general body of creditors or to the creditors’ committee” (320.6 A6) is an example of a safeguard to address a threat arising from instructing a regular service provider in the firm or those with whom there is a business or personal relationship.
The new section, “Agencies and Referrals”, also provides as an example safeguard similar disclosure to address threats created by any referral or agency arrangement (330.5 A2).
What about disclosure of ethical threats generally?
This is an area that appears to have been watered down. The old Code stated that generally, it would be inappropriate for an IP to accept an appointment where an ethical threat existed (or could reasonably be expected to arise) unless disclosure were made prior to appointment to the court or creditors.
However, the new Code simply requires IPs to consider disclosure of the threats and the safeguards applied (210.5 A3)… although as disclosure is a safeguard, IPs would do well to disclose wherever this is practical (200.3 A3).
New Section (330): Agencies and Referrals
I would strongly urge you to read through Section 330 in full and consider how this impacts on your firm’s processes and communications. There are a lot of disclosure and other safeguard requirements, which, when you think about it, could encompass a number of dealings.
For example, at the immaterial end of the spectrum, how do you decide where to send directors who have a Declaration of Solvency to swear? Do you recommend the solicitor around the corner (or, now, one who is prepared to witness swearings remotely)? Such referrals, even if the decision is a geographical no-brainer, must be subject to the rigorous evaluation and disclosure standards.
Of course, there will be other more material referrals, e.g. when assisting businesses outside (or prior to) formal insolvency or when conflicted from taking on an appointment or from advising directors personally, as well as recommendations made to individuals in IVAs. These will require substantial documentary evidence that the appropriateness of the referral or introduction has been carefully and objectively considered and that a great deal of information (including the alternatives) has been provided.
Any change to referral fees?
There are some subtle changes in Section 340.
The new Code repeats the old Code’s principle that the benefit of any referral fees or commissions received post-appointment must be passed on to the insolvent estate. The new Code extends the reach, though, in stating that no associate (as well as neither the IP nor their firm) may accept a referral fee or commission unless it is paid into the insolvent estate (R340.7). Associates include connected companies and those with common shareholdings or beneficial owners (340.8 A1).
The new Code also puts a duty on IPs who do not control decisions on referrals to get information on referral fees received (340.8 A6). This could be challenging for IPs in large firms or with a wide network of associates.
Its reach also extends to “preferential contractual terms… for example volume or settlement discounts” – these must also be passed on to the insolvent estate in full (R340.8).
Also, whereas previously the IP only needed to consider making disclosure to creditors, now, where an insolvency appointment is involved, any referral fee or commission payments must be disclosed to creditors (R340.6 and 7).
What about paying referral fees out?
The new Code is more direct in stating simply that an IP “shall not make or offer to make any payment or commission for the introduction of an insolvency appointment” (R340.4). It also wraps the firm and associates in this prohibition and, again, if the IP does not control the referrals paid out by their firm or associates, they nevertheless need to ascertain what they are (340.8 A6).
I am not sure why we have now lost the old “furnishing of valuable consideration” prohibition. After all, not every benefit is couched as a “payment”.
But then the old Gifts and Hospitality section has been substantially lengthened from half a page to four and a half pages, so non-monetary inducements connected with improper motives are caught elsewhere.
“Inducements, including Gifts and Hospitality” (Section 350)
This is another section that I’d recommend reading in full, as it has been beefed up.
The old Code had included assessing the appropriateness of a gift by having regard to what a reasonable and informed third party would consider appropriate. However, the new Code makes the connection more directly with motive:
- R350.6: “An insolvency practitioner shall not offer, or encourage others to offer, any inducement that is made, or which the insolvency practitioner considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another.”
- R350.7: “An insolvency practitioner shall not accept, or encourage others to accept, any inducement that the insolvency practitioner concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another.”
It goes further than this too, even stating that the Code’s requirements (including the “A”s) “apply when an insolvency practitioner has concluded that there is no actual or perceived intent to improperly influence the behaviour of the recipient or of another” (350.9 A3).
Examples of such inducements that might still create threats are where (350.9 A3):
- “An insolvency practitioner is offered hospitality from the prospective purchaser of an insolvent business…
- “An insolvency practitioner regularly takes someone to an event…
- “An insolvency practitioner accepts hospitality, the nature of which could be perceived to be inappropriate were it to be publicly disclosed.”
The Code also imposes an obligation on IPs to remain alert to inducements being offered to, or made by, close family members and requires IPs to advise the family member not to accept or offer the inducement, if it gives rise to a threat (R350.12 and 13).
New Section (390): “NOCLAR”
Presumably, accountants are already familiar with this acronym for “non-compliance with laws and regulations”. The new section in the Insolvency Code certainly seems to be a lift-and-drop from the accountancy code, but in my view a clumsy one.
For example, instead of referring to the “firm”, which had been nicely defined and otherwise used throughout the Code (except where other lift-and-drops have been unsuccessful), this section refers to the IP’s “employing organisation”, which I think could mislead some into assuming that IP business owners do not need to apply many of the requirements.
But more fundamentally, this section fails to acknowledge IPs’ relationships with insolvents.
I can see how accountants working with live clients need to understand how they should react when they discover that their client has breached a law or regulation. Although of course IPs often deal with live clients, the vast majority of their time is taken up as office holders over non-trading entities and individuals and it’s those engagements that – very often – reveal non-compliances committed by the insolvent.
The new Code makes no distinction between non-compliance committed by: (i) the IP’s/firm’s clients; (ii) the entity/individual over which the IP has been appointed office holder; or indeed (iii) the IP or their staff themselves. I think that each of these situations gives rise to different concerns and so they each deserve a different approach.
In a nutshell, the core requirements of this section are: to explore all non-compliances (including suspected or prospective non-compliances); and then, unless they are clearly inconsequential non-compliances (except where they are money laundering related etc.), to report them upwards within the firm and, where appropriate, to those charged with governance of the entity/business and to appropriate authorities. In addition, if the case is an MVL of an audit client or a CVA, the IP must consider communicating it to the audit partner/auditor (R390.12 and 13).
The Code also imposes similar exploration and internal reporting duties on insolvency team members.
Of course, there is an expectation that this will all be documented, although the Code only encourages IPs/team members to document the matter and actions taken (390.16 A2 and 390.20 A2).
Setting aside all the “consider” and “where appropriate” steps, what does this section actually require an IP/team member to do in all circumstances?
- Take timely steps to comply with the NOCLAR section (R390.9)
- “Seek to obtain an understanding of the matter” (R390.10 for IPs and R390.17 for team members)
- For IPs: “discuss the matter with the appropriate level of management” (R390.11) and for team members: “inform an immediate superior” or, if they appear to be involved in the matter, “the next higher level of authority within the employing organisation” (R390.18)
In my view, these cumbersome NOCLAR requirements are OTT for the vast majority of non-compliances committed by insolvents (e.g. do IPs really need to discuss all director misconduct with “the appropriate level of management”?) and indeed a fair number of those committed by the IP/staff. You might be able to rely on the “clearly inconsequential” paragraph (390.6 A2), but experience with RPB monitors has taught me that there are diverse opinions over what non-compliances are inconsequential.
New Section (380): “The insolvency practitioner as an employee”
Although clearly this section is most relevant in the volume IVA market, it is an important section for all IPs who act as employees. Unsurprisingly, it reinforces the message that, even as an employee, the IP has a personal responsibility to ensure that they comply with the Code (R380.5).
Having said that, some statements seem to me unfair or perhaps the writers are simply treating IP employees as ethical novices. For example, 380.5 A2 describes a circumstance that might create ethical threats: where the IP is “eligible for a bonus related to achieving targets or profits”… but nowhere does the Code highlight that the business/beneficial owner IP might be exposed to a similar self-interest threat.
However, the section cuts to the core in highlighting the tension that an IP seeking to administer engagements ethically may experience with their superiors and peers across the rest of the firm. The Code doesn’t pull punches: in some circumstances, an IP’s efforts to disassociate themselves with the matter creating the conflict may demand their resignation from employment (380.7 A1).
My other gripes
Ok, this is just a final section to allow me to get some gripes off my chest. My main ones are:
- The whole of the Ethical Conflict Resolution section (140)
It took a debate with my partner, Jo, for me to understand that these requirements did not apply to a specific kind of conflict situation. The problem I have is that this section, which refers to “resolving ethical conflicts”, sits awkwardly alongside the rest of the Code, which refers to “managing ethical threats and keeping them under review”. In my mind, an ethical conflict is only resolved by removing it entirely, e.g. by walking away from an appointment, whereas in most circumstances an IP applies safeguards to manage threats to an acceptable level.
- The lack of change to the insolvency examples section
Last year, there was some consternation over the ethics of retaining an appointment over an MVL converting to CVL. The example in the old Code made no sense. It had stated that: “Where there has been a Significant Professional Relationship, an insolvency practitioner may continue or accept an appointment…” But the old Code had explained that a relationship is denoted as a Significant Professional Relationship (“SPR”) where, even with safeguards, the threats cannot be reduced to an acceptable level, so the IP should conclude that their appointment is inappropriate. Therefore, how was it possible for an IP to continue with an appointment in the face of an SPR? The new Code was the ideal opportunity to fix that. But there has been no change: paragraph 520.4 still states that in some cases an SPR will not block an IP’s appointment or continuation in office and this conflicts with R312.7, which more strongly states that, in the face of an SPR, the IP “shall not accept the insolvency appointment”.
I have similar issues with the example at 510.2, which deals with an IP accepting an appointment after having worked as an investigating accountant for the creditor. For starters, not all IPs are accountants, but they may still do investigation work for a creditor – the text indicates that those IPs are in the scope of the example… so why not change the heading?! More importantly, the instructions include impossibilities: they state that, where the secured creditor is seeking to appoint the IP as an administrator or admin receiver, the IP needs to “satisfy them self (sic.) that the company… does not object to them taking such an insolvency appointment”. But it then explains that an IP may still take the appointment, even if the company does object or where the directors haven’t had an opportunity to object… so the IP doesn’t need to “satisfy them self” then?!
On the bright side, at least IPs taking on Scottish or Northern Irish appointments are now better represented in the examples section.
And now the marketing footer
My partner, Jo Harris, has recorded two webinars covering the new Ethics Code (there was just too much for one sitting). We have also: created new checklists to address the new sections such as instructing specialists and dealing with referrals; substantially revised our main ethics checklists to address specifically the new Code’s requirements; and enhanced other docs like progress reports and case review forms.
If you would like more information on signing up for access to our webinars, document templates – we’re offering the ethics templates as a standalone package or you can subscribe to all our document packs and future updates – or technical support service, please do get in touch with us at firstname.lastname@example.org.