Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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InsS Annual Review, part 3: less carrot, more stick?

The Insolvency Service’s September 2018 report pulled no punches in expressing dissatisfaction over some monitoring outcomes: we want fewer promises to do better and more disciplinary penalties, seemed to be the tone.  Has this message already changed the face of monitoring?

The Insolvency Service’s September 2018 Report can be found at www.gov.uk/government/publications/review-of-the-monitoring-and-regulation-of-insolvency-practitioners and its Annual Review of IP Regulation is at www.gov.uk/government/publications/insolvency-practitioner-regulation-process-review-2018.

In this article, I explore the following:

  • On average, a quarter of all IPs were visited last year
  • But is there a 3-yearly monitoring cycle any longer?
  • 2018 saw the fewest targeted visits on record
  • …but more targeted visits are expected in 2019
  • No RPB ordered any plans for improvement
  • Instead, monitoring penalties/referrals of disciplinary/investigation doubled
  • Is this a sign that the Insolvency Service’s big stick is hitting its target?
  • IPs had a 1 in 10 chance of receiving a monitoring or complaints sanction last year

 

How frequently are IPs being visited?

With the exception of the Chartered Accountants Ireland (which is not surprising given their bumper year in 2017), all RPBs visited around a quarter of their IPs last year.  It’s good to see the RPBs operating this consistently, but how does it translate into the apparent 3-yearly standard routine?

Firstly, I find it odd that coverage of ACCA-licensed IPs seems to have dropped significantly.  After receiving a fair amount of criticism from the InsS over its monitoring practices, the ACCA handed the regulating of its licensed IPs over to the IPA in October 2016.  Yet, the number of ACCA IPs visited since that time has dropped from the c.100% to 79%.

Another factor that I had overlooked in previous analyses is the effect of monitoring the volume IVA providers (“VIPs”).  At least since 2014, the Insolvency Service’s principles for monitoring VIPs has required at least annual visits to VIPs.  Drawing on TDX’s figures for the 2018 market shares in IVAs, the IPA licensed all of the IPs in the firms that fall in the InsS’ definition of a VIP.  On the assumption that each of these received an annual visit, excluding these visits would bring the IPA’s coverage over the past 3 years to 56% of the rest of their IPs.  Of course, there are many reasons why this figure could be misleading, including that I do not know how many VIP IPs any of the RPBs had licensed in 2016 or 2017.

The ICAEW’s 64% may also reflect its different approach to visits to IPs in the largest firms: the ICAEW visits the firm annually (to cover the work of some of their IPs), but, because of the large number of IPs in the firm, the gap between visits to each IP within the firm is up to 6 years.  I cannot attempt to adjust the ICAEW’s figure to exclude these less frequently visited IPs, but suffice to say that, if they were exceeded, I suspect we might see something approaching more of a standard c.3-yearly visit for all non-large firm ICAEW-licensed IPs.

These variances in the 3-year monitoring cycle standard, which cannot be calculated (by me at least) with any accuracy, mean that there is very little that can be gleaned from this graph.  Unfortunately, the average is no longer much of an indication to IPs of when they might expect to receive their next monitoring visit.

 

The IPA’s new approach to monitoring

In addition to its up-to-4-visits-per-year shift for VIPs, at its annual conference earlier this year, the IPA announced that it would also be departing from the 3-yearly norm for other IPs.

The IPA has published few details about its new approach.  All that I have seen is that the frequency of monitoring visits is on a risk-assessment basis (which, I have to say, it was in my days there, albeit that the InsS used to insist on a 3-year max. gap) and that it is a “1-6 year monitoring cycle – tailored visits to types of firm” (the IPA’s 2018/19 annual report).

In light of this vagueness, I asked a member of the IPA secretariat for some more details: was the plan only to extend the period for those in the largest firms, as the ICAEW has done, or at least only for those practices with robust in-house compliance teams with a proven track record?  The answer was no, it could apply to smaller firms.  He gave the example of a small firm IP who only does CVLs: if the IPA were happy that the IP could do CVLs well and her bond schedules showed that she wasn’t diversifying into other case types, she likely would be put on an extended monitoring cycle.  The IPA person saw remote monitoring as the key for the future; he said that there is much that can be gleaned from a review of docs filed at Companies House.  He explained, however, that IPs would not know what cycle length they had been marked up for.

While I do not wish to throw cold water on this development, as I have long supported risk-based monitoring, this does seem a peculiar move especially in these times when questions are being asked about the current regulatory regime: if a present concern is that the regulators are not adequately discouraging bad behaviour and that they are not expediting the removal of the  “bad apples”, then it is curious that the monitoring grip is being loosened now.

Also, now that I visit clients on an annual basis, I realise just how much damage can be done in a short period of time.  It only takes a few misunderstandings of the legislation, a rogue staff member or a hard-to-manage peak in activity (or an unplanned trough in staff resources) to result in some real howlers.  How much damage could be done in 6 years, especially if an IP were less than honest?  Desk-top monitoring can achieve only so much.

What this means for my analysis of the annual reports, however, is that the 3-year benchmark for monitoring visits – or one third of IPs being monitored per year – is no longer relevant ☹ But it will still be interesting to see how the averages vary in the coming years.

 

Targeted visits drop to an all-time low

Only 10 targeted visits were carried out last year – the lowest number since the InsS started reporting them – and it seems that all RPBs are avoiding them in equal measure.

But 2019 may show a different picture, as several targeted visits have been ordered from 2018 monitoring visits…

 

Are the Insolvency Service’s criticisms bearing fruit?

I was particularly alarmed by the overall tone of the Insolvency Service’s “review of the monitoring and regulation of insolvency practitioners” published in September 2018.  In several places in the report, the InsS expressed dissatisfaction over some of the outcomes of monitoring visits.

I got the feeling that the Service disliked the focus on continuous improvement that, I think, has been a strength of the monitoring regime.  Instead, the Service expected to see more investigations and disciplinary actions arising from monitoring visit findings.  The report singled out apparently poor advice to debtors and apparently unfair or unreasonable fees or disbursements as requiring a disciplinary file to be opened with the aim of remedies being ordered.  It does seem that the focus of the InsS criticisms is squarely on activity in the VIPs, but the report did worry me that the criticisms could change the face of monitoring for everyone.  

2018 is the first year (in the period analysed) in which no monitoring visit resulted in a plan for improvement.  On the other hand, the number of penalties/referrals for disciplinary/investigation action doubled.

Could the InsS’ report be responsible for this shift?  Ok, the report was published quite late in 2018, in September, but I am certain that the RPBs had a rough idea of what the report would contain long before then.  Or perhaps the Single Regulator debate has tempted some within the RPBs/committees to be seen to be taking a tougher line?  Or you might think that these kinds of actions are long overdue?

I think that the RPBs have tried hard over the last decade or so to overcome the negativity of the JIMU-style approach to monitoring.  In more recent years, monitoring has become constructive and there has been some commendably open and honest communication between RPB and IP.  This has helped to raise standards, to focus on how firms can improve for the future, rather than spending everyone’s time and effort analysing and accounting for the past.  It concerns me that the InsS seems to want to remove this collaborative approach and make monitoring more like a complaints process.  In my view, such a shift may result in many IPs automatically taking a more defensive stance in monitoring visits and challenging many more findings.  Such a shift will not improve standards and will take up much more time from all parties.

Getting back to the graph, of course a referral for an investigation might not result in a sanction at all, so this does not necessarily mean that the IPA has issued more sanctions as a consequence of monitoring visits.  Also, the IPA’s apparent enthusiasm for this tool may simply reflect the IPA’s (past) committee structure whereby the committee that considered monitoring reports did not have the power to issue a disciplinary penalty, but could only pass it on to the Investigation Committee.  As this was dealt with as an internal “complaint”, I suspect that any such penalty arising from this referral would have featured, not in the IPA’s monitoring visit outcomes, but in complaint outcomes.

So how do the RPBs compare as regards complaints sanctions?

 

Complaints sanctions fall by a quarter

Although the IPA issued relatively fewer sanctions last year, I suspect that the monitoring visit referrals will take some time to work their way through to sanction stage, so it is unlikely that this demonstrates that the monitoring visit referrals led to a “no case to answer”.

What this and the previous graph show quite dramatically, though, is that last year the ICAEW seemed to issue far fewer sanctions per IP than the IPA.  As mentioned in my last blog, the IPA does license a large majority of the VIP IPs and there were more complaints last year about IVAs than about all the other case types put together.  One third of the published sanctions also were found against VIP IPs.

 

Likelihood of being sanctioned is unchanged from a decade ago

In 2018, you had a 1 in c.10 chance of receiving an RPB sanction, which was the same probability as in 2008…

I find it interesting to see the IPA’s and the ACCA’s results converge, which, if it were not for the suspected VIP impact, I would expect given that the IPA deals with both RPBs’ regulatory processes.

There’s not a lot that can be surmised from the number of sanctions issued by the other two RPBs: they’re a bit spiky, but it does seem that, on the whole, the ICAEW and ICAS has issued much fewer sanctions.  It seems from this that, at least for last year, you were c.half as likely to receive a sanction if you were ICAEW- or ICAS-licensed as you were if you were IPA- or ACCA-licensed.

 

Is a Single Regulator the answer to bringing consistency?

True, these graphs do seem to indicate that different regulatory approaches are implemented by different RPBs.  However, I do think that some of that variation is due to the different make-up of their regulated populations.  There is no doubt that the IVA specialists do require a different approach.  To a lesser degree, I think that a different approach is also merited when an RPB monitors practices with robust internal compliance teams; it is so much more difficult to have your work critiqued and challenged on a daily basis when you work in a 1-2 IP practice.

Differences in approach can also be a good thing.  Seeing other RPBs do things differently can force an RPB to challenge what they themselves are doing and to innovate.  My main concern with the idea of a single regulator is the loss of this advantage of the multi-regulator structure.

Perhaps a Single Regulator could bring in more consistency, but it would never result in perfectly consistent outcomes.  I’m sure I’m not the only one who remembers an exercise a certain JIEB tutor ran: all us students were given the same exam answer to mark against the same marking guide.  The results varied wildly.  This demonstrated to me that, as long as humans are involved in the process, different outcomes will always emerge.

 


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Is the Pre-Pack’s Sun Setting?

As HMV has demonstrated, buying a business out of an administration does not guarantee its survival.  But the sale of the HMV business 5 years’ ago was not a pre-pack – the Company had traded for several months in administration before the deal was done.  Does the pre-pack deserve to be demonised?  In view of the SBEE Act’s sunset clause deadline of May 2020, what are the pre-pack’s chances of survival?

As promised way back in July, this is my third article looking at the Insolvency Service’s 2017 review of regulation.  My sincere apologies to regular readers.  I have soooo wanted to blog, I have had articles aplenty in my head, but I’ve simply not had the time to get them out.  I will try harder in 2019!

The Insolvency Service’s 2017 Review of IP Regulation can be found at:  https://tinyurl.com/ycndjuxz

The Pre Pack Pool’s 2017 Review is at: https://tinyurl.com/y92fvvqf

 

SIP16 Compliance Rate Flatlines

Of course, we all know that compliance with the SIP16 disclosure requirements has no real relevance to whether a pre-pack is “good” or “bad”.  Personally, I’d also argue that strict compliance with the disclosure requirements does little to improve perceptions… not when compliance is measured on whether or not the IP has ticked every last little disclosure box.  However, this is what the RPBs are measuring us on, so it can only be to our advantage to try to meet the mark.The analysis of this rate by each RPB shows an intriguing effect:Last year, the stats for the two largest RPBs appeared poles apart: the IPA’s compliance rate was 91% but the ICAEW’s was less than half this figure, at 39%.  But now look at those two RPBs’ rates: they have converged on 59%.  How odd.

I very much doubt that the IPA’s IPs have got decidedly worse at SIP16 compliance over the year.  I wonder if it has more to do with RPB staff changes – perhaps it is more than coincidental that an ICAEW monitoring staff member moved to take up a senior role within the IPA in late 2016.

What about the change in the ICAEW’s IPs’ fortunes last year?  It is more difficult to identify a trend in the ICAEW’s figures, as they reviewed only 23% of all SIP16 statements received in 2017 – they were the only RPB to have reviewed only a sample, which they chose on a risk-assessment basis.  The ICAEW had focused on SIP16 statements submitted by IPs for the first time, or for the first time in a long time, or by IPs whose previous statements had fallen short of compliance.  On this basis, it is encouraging to see such an improved compliance rate emerging from what might seem to be the high risk cases.  It makes me wonder what the compliance rate would have been, had the ICAEW reviewed all their SIP16 statements: rather than the flatline, would we have seen an overall strong improvement in the compliance rate?

From my personal reviewing experience, I am finding that many SIP16 statements are still missing the 100% compliant ideal, but the errors and omissions are far more trivial than they were years’ ago.  I suspect that few of the 38% non-compliant statements spotted by the RPBs contained serious errors.  Having said that, earlier this year the IPA published two disciplinary consent orders for SIP16 breaches, so we should not become complacent about compliance, especially as pre-packs continue to be a political hot potato and now that the RPBs have been persuaded by the Insolvency Service to publicise IPs’ firms’ names along with their own names when disciplinary sanctions are issued. 

 

A Resurgence of Connected Party Sales

Regrettably, the Insolvency Service’s 2017 review provided less information on pre-packs than previous reviews.  No longer are we able to examine how many pre-packs involved marketing or deferred consideration, but we can still look at the number of sales to connected parties:

Last year, I pondered whether the pressure on IPs to promote the Pre Pack Pool may have deterred some connected party sales.  I was therefore interested to see that, not only had the percentage of connected party sales increased for 2017, but the percentage of referrals to the Pool has decreased – coincidence?

Personally, now I wonder whether the presence of the Pool has any material influence on pre-pack sales at all.  I suspect that the increased percentage of connected party sales may have more to do with the economic climate: who would want to take on an insolvent business with such economic uncertainties around us?  I suspect that now it is more and more often the case that connected parties are the only bidders in town.

 

Insights of the Pre Pack Pool

With such a tiny referral rate – the Pool reviewed only 23 proposed sales over the whole of 2017 (there were 53 referrals in the previous 14 months, since the Pool began) – does the Pool have any real visibility on pre-packs?

The Pre Pack Pool issued its own annual review in May this year.  Here is an analysis of the opinions delivered by the Pool:

This seems to suggest that the quality of applications being received by the Pool is deteriorating.  But, as the Pool gives nothing much away about how they measure applications, I am not surprised.

The Pool’s review states that: “Although the referral rate is much lower than expected, the Pool does perform a useful function where it has been approached.  Feedback from both connected party purchasers and creditors has been positive where we have received it.”

But what exactly are the benefits of using the Pool?

The Pool suggests that creditors/suppliers could put more pressure on Newcos to make use of the Pool, but it also notes that less than 1% of all complaints to the InsS in 2016 were about pre-packs (shame the Pool’s report did not refer to the number of pre-pack complaints in 2017: zero).  Maybe there is little pressure put on purchasers to approach the Pool, because the reasonableness or not of the pre-pack doesn’t really come into it when creditors are deciding to supply to Newcos.  The Pool review suggests that major stakeholders such as lenders and HMRC could insist on a Pool referral, but why should they when the Pool has yet to prove its value?

 

What makes a Bad Pre-Pack?

Stuart Hopewell, director of the Pool, has been quoted as stating that he “has seen cases where the objective [of the pre-pack] was avoidance of liabilities”, which led to the tagline that “businesses are sidestepping tax bills amounting to tens of millions of pounds using an insolvency procedure that the government is considering banning” (Financial Times, 26/11/2018).

How does Hopewell spot these abuses?  The Pool itself is not at all transparent about what, in its eyes, results in a “case not made” opinion, but the same article referred to the Pool giving “a red card, based on the tax situation”.  This suggests to me that their focus may be more on how the company became insolvent, rather than whether the pre-pack sale is the best outcome for the creditors at that point in time.  It seems to me that the Pool may be deciding that the pre-pack is the final step in a director’s long-term plan to rack up liabilities and walk away from them, whereas I suspect that most IPs first see a director who – as a result of wrong decisions or for reasons outside their control – is at the end of the road, having racked up liabilities they can no longer manage.  What should happen?  If the pre-pack were refused, the likely outcome would be liquidation with strong chances that the director would, via a S216 notice, start up again, possibly with a cluster of the original workforce and assets purchased at liquidation prices.  On the other hand, if the pre-pack were completed, it would most certainly generate more sales consideration and would be less disruptive for the employees, customers and suppliers.  But wouldn’t refusing a pre-pack result instead in a business sale to someone else, an unconnected party, even if at a reduced price?  I think that this is doubtful in the vast majority of cases.

 

It’s not all about the Pool

The Insolvency Service’s annual review lists some questions that its pre-Sunset Clause pre-pack review will seek to answer:

  • “Has the Pool increased transparency and public confidence in connected party pre-pack administrations?
  • “What numbers of connected party purchasers have chosen not to approach the Pool and why?
  • “What is the success rate of the new company where purchasers approached the Pool between 1 January 2016 and 31 December 2016?”

While these are all valid questions, I do hope the questions won’t stop there.

Ever since Teresa Graham’s recommendations in 2015, the Pre Pack Pool has occupied the limelight.  I think that’s a real shame, as I believe that other things are responsible for the improvements to the pre-pack process that we have seen over time.  Although I complain about the micro-monitoring that the Insolvency Service has inflicted on SIP16 compliance, it cannot be denied that the regulators’ emphasis on SIP16 compliance has improved the amount of detail provided.  More importantly perhaps, the RPBs’ emphasis on documenting decisions has helped some IPs question why certain strategies are pursued – most IPs do this anyway, but I think that some need to challenge their habitual reactions and sometimes exercise a bit more professional scepticism at what they’re being told.

The mood music around the pre-pack review seems to be about increasing the Pool’s reach, potentially making a referral to the Pool mandatory (for example, see R3’s May 2018 submission: https://tinyurl.com/y7kf22ul).  However, as with all proposed reforms, the first steps are to identify the problem and to define what one wants to achieve.  I would question whether the problem is still a lack of public confidence in pre-packs – it seems to be more about a lack of confidence in dealing justly with directors who ignore their fiduciary duties in a host of different ways – and, even if it were about confidence in pre-packs, we’re a long way from determining whether the Pool is the best tool to fix this.

 

Slow Progress

Finally, here is a summary of other items that were on the Insolvency Service’s to-do list at the time of publication of their 2017 annual review.  Of course, to be fair the government has kept the Insolvency Service otherwise occupied over the year.  You might be forgiven for having a sense of deja-vu – it looks frighteningly similar to 2017’s list and I assume that the tasks will now be carried over to 2019:

  • Replacement of the IS/RPB Memorandum of Understanding with “Guidance” – their initial draft required “a number of changes” and, as at May 2018, was being run past the “DfE” (Department for Education?). Nevertheless, the Service had anticipated that the guidance would “come into effect during the course of 2018”.
  •  A solution to the bonding “problem”? – the Insolvency Service’s call for evidence closed in December 2016 and they expected a follow-on consultation “soon”. A Claims Management Protocol, i.e. to set out how bond claims should proceed, is being developed: “possible publication, later this year”.  The Service is also looking at the bond wording.
  • Cash for complainants? – the early message that the Service was exploring with the RPBs if a redress mechanism for complainants could work seems to have evolved into work to determine how redress will be incorporated. “Once agreement has been reached”, the Service plans to include information on the Complaints Gateway website “to ensure complainants are aware of this recent development”.  Oh well, that’s one way to reverse the trend in falling complaint numbers!
  •  Revised IVA Protocol – although .gov.uk holds minutes of the IVA Standing Committee only up to July 2017, the Service reported that the Committee anticipated that we could look forward to a revised IVA Protocol likely later in 2018.
  • Revised Ethics Code – this was also expected later in 2018. I understand that accountancy bodies’ ethics code is currently being revised and therefore the JIC has decided to wait and see what emerges from this before finalising a revised insolvency code.

 


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SIP16 and the Pool: Great Expectations as yet Unrealised?

I think we’ve all shared in the pain of SIP16 compliance. We’ve tried really hard, haven’t we? So why is it that the wholly-compliant rate dropped from 87% in 2015 to 62% last year? Where are we going wrong?

In this blog, I air my suspicions about the stats, not only on SIP16 compliance, but also on the changing profile of pre-packs and the role of the Pool, as presented in the Insolvency Service’s and the Pre Pack Pool’s 2016 Reviews. Yes, I know I’m a little late on this story (I blame the 2016 Rules!).

The Insolvency Service’s 2016 Review of IP Regulation can be found at: https://goo.gl/Jkwz19

The Pre Pack Pool’s 2016 Review is at: https://goo.gl/fPEXTe

 

SIP16 Compliance Rates Fall Back to Square One

There has been a significant drop in the reported rate of SIP16 compliance – at 62% of 2016’s SIP16 statements considered wholly compliant, it is the lowest annual rate on record (note: several years are estimates because not all SIP16 statements received were compliance-reviewed):

Why is this? It’s true that it takes time to adapt to a new SIP and this is bound to hit compliance, but is this the whole story? Or has the shift of the job of reviewing SIP16s from the Insolvency Service to the RPBs introduced an element of inconsistency into the process?

Let’s drill down into the overall compliance rate of 62% to see how the rate varies from RPB to RPB:

As you can see, the rates range from ICAS’ 100% of SIP16 statements wholly compliant to the ICAEW’s 39%.

I consider it highly unlikely that ICAEW-licensed IPs are in reality far worse at complying with SIP16 than other IPs, so this indicates strongly to me that there is a great diversity in the standards being applied. Given that the ICAEW reviewed 54% of all SIP16s received last year, it’s not surprising that the overall compliance dropped from 2015’s 87% to 62%.

The Insolvency Service’s Review does not help us to understand what might be behind the non-compliances, although it gives us some comfort. It states: “for the vast majority of non-compliant statements, the breach was not deemed to be serious and was merely of a technical nature”.

The ICAEW has published some feedback on their reviewing (Feb 2017, available to their Insolvency & Restructuring Group members at https://goo.gl/YkExP7), which suggests that the following have been lacking in some cases:

  • An explanation of the pre- and post-appointment roles of the IP (the ICAEW acknowledges that SIP16 does not strictly require this explanation in the SIP16 Statement, but it needs to be delivered to creditors and directors somewhere);
  • An explanation of why no requests were made to potential funders to fund working capital (even if in some cases, it is obvious);
  • If the business has not been marketed on the internet, an explanation why not (even if the nature of the business makes this obvious);
  • An explanation of the reasons underpinning the marketing strategy (whereas some appear to have simply provided a list of what marketing has been done);
  • An explanation of the reasons behind the length of time of the marketing (even if there were obviously financial pressures that limited this);
  • The date of the initial introduction – not simply “in December 2016”;
  • An explanation of the rationale behind the basis/bases of valuations (helpfully, the ICAEW give a clear steer on what they expect: “where you have obtained going concern and forced sale valuations, tell [creditors] that you’ve obtained valuations on both bases as you’re seeking to understand whether realisations will be maximised by breaking up the business and selling the assets on a piecemeal basis or whether it’s better to try to find a buyer for the business as a going concern”);
  • If goodwill is valued, an explanation and basis for the valuation provided; and
  • An explanation of the method by which consideration was allocated to different asset classes.

Given the prevalence of some apparent failures to state the bleedin’ obvious, perhaps other RPB reviewers are measuring compliance against a different list of tick-boxes.

 

The Shifting Profile of Pre-Packs

Probably the main difference between the old and the new SIP16 was the introduction of the “marketing essentials”, with the clear message that an absence of marketing should most definitely be the exception. Has the new SIP16 pushed up the frequency of marketing?

I certainly think that the SIP16 pressure has influenced attitudes towards marketing, as this graph indicates. Even in cases where the offer on the table looks too good to beat, I suspect that many view some marketing effort as essential to shield one from criticism. I doubt that safety-blanket marketing in these cases increases realisations and it will increase costs, but if it answers the sceptics’ questions about possible undervalue sales, then it seems to have everyone’s blessing.

Then again, perhaps I am being unfair: is it merely coincidental that the graph above shows that, as the frequency of marketing has increased, the prevalence of connected party purchasers has taken a dive? Could it be that increased marketing has widened the pool of potential purchasers, resulting in more occasions when connected interested parties lose out to the competition?

I am surprised that no one (as far as I have seen) has connected these two trends with this simple cause-and-effect explanation. Rather, perhaps I am not the only person who suspects that the fall in the number of connected purchasers is more a consequence of the new SIP16 pressures on connected party pre-packs, including the pressure to apply to the pre-pack pool. As revealed in its 2016 Review, the Pre Pack Pool is evidently of this view:

“It may be that the introduction of the Pool and the wider post-Graham reforms have deterred some connected party pre-packs from being proposed in the first place.”

But what has replaced these pre-packs? Are connected party sales avoiding the SIP16 obstacles altogether?

Perhaps hurdles are being overcome by having connected party sales accompany liquidations instead of Administrations. Well, I was surprised to discover that the numbers of Gazette notices for S216 re-use of a prohibited name do not follow a trend suggesting more sales in liquidation:

So could it be that Administration sales are being shifted out of the pre-pack definition either by being completed before Administration or perhaps negotiations are not starting until after appointment? This doesn’t ring true either: SIP16 statements as a percentage of the total number of Administrations has been fairly steady since the introduction of the Pool (2015: 29%; 2016: 24%):

* The SIP16 review actually covered 14 months, but for the purpose of this graph the number has been pro rated for 12 months.

Although the number of Administrations continues to fall, I find this picture encouraging: at least the SIP16 and Pool pressure does not seem to be persuading people to find ways around the measures. Pre-packs have a role and it seems that IPs are sticking with them.

 

Is the Pre Pack Pool making its mark?

In light of the second-hand warnings I’ve heard over the past years about how strongly the Insolvency Service feels about the need for IPs to embrace the Pool, I found the Service’s annual review surprisingly dead-pan. In contrast, the ICAEW’s release on the subject stated that the number of referrals to the pool was “disappointingly low”.

However, the ICAEW was relatively subtle about IPs’ role in the referral process: “the aim of the pool is to increase transparency and confidence around prepacks and low level use of the pool is unlikely to achieve that. We know you can’t compel a connected party to approach the pool but encouraging them to do so supports the overall aim of the pool”. I found the Pre Pack Pool less subtle: “the insolvency profession and creditors have important roles to play in ensuring connected party purchasers are informed of the option to use the Pool and putting pressure on them to do so”. How does the Pool expect IPs to “put pressure” on potential purchasers, I wonder.

The Pool also acknowledges that “creditor awareness of the Pool has been low and few have taken the time to read through administrators’ reports”. On the other hand, they report that “those connected party purchasers who have used the Pool have said it has been an important step in building credibility and trust in the ‘NewCo’ among creditors”. The Pool’s Review does not elaborate, but there are some interesting quotes in an article written by Stuart Hopewell, director of Pre Pack Pool Limited, and David Kerr, IPA’s Chief Executive, for Credit Magazine in November 2016 (www.insolvency-practitioners.org.uk/download/documents/1467).

As shown on one of the graphs above, 13% of all pre-packs were referred to the Pool. This represents 28% of all connected party pre-packs. Personally, I’m surprised it was that many! My personal view is that those who find this uptake disappointingly low had unrealistic expectations.

 

The Performance of the Pool

Given that referral to the Pool is voluntary, personally I wasn’t expecting any negative decisions to emerge. After all, if you didn’t have to sit an exam, you wouldn’t do so unless you were certain of passing it, would you? I was wrong…

The breakdown of the Pool’s opinions over the 14 months to the end of 2016 is as follows:

  • 34 referrals: the case for the pre-pack is “not unreasonable”
  • 13 referrals: the case is “not unreasonable but there are minor limitations in the evidence provided”
  • 6 referrals (although 4 were a group of connected companies): the case for the pre-pack is “not made”

I appreciate that the Pool doesn’t want to give away its secrets, but unfortunately the Review gives nothing away about what factors tipped the balance or indeed how they measure a good pre-pack from the bad. The author ends the Review by stating that “hopefully referrals to the Pool will increase in 2017 as stakeholders become more familiar with the way it works and the reassurance it provides”, but without more feedback than simple statistics I cannot see this happening.

 

The Future of Pre-Packs

As we know, the Small Business Act included a reserve power to legislate the operation of pre-packs, with a sunset clause ending in May 2020. The Service’s Review continued its dead-pan mood, simply stating that they would carry out an evaluation “in due course”.

The Pool seemed barely more enthusiastic, simply stating in its Review that “it would be a shame to lose” pre-packs.

 

The Future of the Pool?

Back in May, the Times reported (https://goo.gl/QRcVZc) that Frank Field, Labour MP and Chair of the House of Commons’ Work & Pensions Select Committee, found the number of referrals to the Pool “deeply worrying” and he raised the prospect of the Committee scrutinising the Pool after the election. Sir Vince Cable also said that the number of referrals raised “worrying questions” and said that moves should be made towards making Pool referrals mandatory.

The Pre Pack Pool may be contemplating how to enlarge its role, but not necessarily with mandatory pre-pack referrals in mind. In the Credit Magazine article mentioned earlier (www.insolvency-practitioners.org.uk/download/documents/1467), Stuart Hopewell and David Kerr considered the extension of the Pool’s remit in the context of the revision of SIP13, suggesting “perhaps there is a role for the Pool to represent [creditors’] interests in all connected sale situations?” Although I continue to be concerned that much of the media outrage at connected party sales is levelled at the liquidation equivalents of pre-packs, surely the Pool must first provide convincing evidence that it is achieving the objective for which it was created before we seek to cast its net farther afield.

Are we to conclude that Hopewell/Kerr’s perception is that SIP13 sales to connected parties is an issue and having an independent review will regulate these sales?  I am not aware of any research into whether Liquidation connected party sales need regulating, so it would seem again that the tide is pulling us to tackle perceptions. Considering that the regulatory objectives include “promoting that maximisation of the value of returns to creditors” and encouraging IPs to provide “high quality services at a cost to the recipient which is fair and reasonable”, I struggle to see how these objectives are met by contributing further to this expensive over-regulated PR exercise.


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2017: it’s not all about the Rules

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A watched kettle never boils, so I’ll stop watching for the new Rules to land – having missed their “aim” of w/c 10/10/16, the Insolvency Service is now claiming that it was always their “plan” to have them issued this month – and instead I’ll shift my focus to what other delights the next year may bring.

 

A Review of the Bonding Regime

What do you think? Is the bonding regime fit for purpose? Does it really work as an effective protection?

The Government has issued a Call for Evidence to explore the weaknesses and reform possibilities of the bonding regime. The opportunity for submissions closes on 16 December 2016 and the Insolvency Service’s document can be found at: https://goo.gl/wiKc0K.

The document notes that the Insolvency Service has “seen evidence where the costs claimed by an insolvency practitioner in proving a bond claim are disproportionate to the loss suffered by the insolvent estate”, whilst the specific penalty bond premiums have increased for smaller firms by 200% in one year. No wonder there are questions over whether bonding is achieving its objective.

The Call for Evidence explores questions (albeit worded differently) such as:

  • Would a system similar to the legal profession’s arrangements for dealing with fraud and dishonesty work for insolvency?
  • Could a solution be a “claims management protocol” incorporating a panel of IPs to deal with bond claims and ways to limit cost?
  • Alternatively, perhaps the bonding regime should be abolished altogether?

 

Complaints-handling by the RPBs

In September, the Insolvency Service released a summary of its review into the RPBs’ complaints-handling processes.

The Service reported that “the introduction of Common Sanctions Guidance has improved transparency in decision-making but there is scope to ensure more consistency in the application of the guidance”. The Service’s answer is to work with the RPBs to make changes to the guidance.

Three other main recommendations emerged from the review:

 1.  The RPBs should ensure that information is sought from the IP, e.g. “if the complainant has not provided or is unable to provide evidence to support their complaint”, unless there is a justified reason not to do so (whatever that looks like).

The report explains that “the most common reasons for closing a complaint at the assessment stage are the complainant’s failure to respond to further enquiries or their inability to provide evidence to support their complaint”. The Service also reports that “the review identified that some cases had been closed which appeared to merit further investigation”. Thus, the Service is recommending that RPBs look to the IPs for the information and evidence.

The Service seems to be expecting the RPBs to conduct thorough investigations on receipt of nothing more than unsupported suspicions raised by parties who then go to ground as soon as they’re asked to explain or substantiate their allegations. The Service also seems to take no account of the costs to IPs in responding to RPB requests, which of course are not recoverable from the insolvent estates irrespective of whether the complaint is founded. Isn’t it about time that the Service stopped labouring onto IPs more and more expensive burdens whilst simultaneously pursuing the agenda that IPs’ fees need to be curbed?

2.  The RPBs should consider with the Service the feasibility of a regulatory mechanism whereby compensation can be paid by the IP to the complainant where they have suffered inconvenience, loss, or distress.

The Service is recommending this measure “to ensure fair treatment for complainants”, given that some RPBs (but see below) have a compensation mechanism, but others do not. But how often do the RPBs order compensation? This information is conspicuous by its absence from the report.

From the report, it seems that the ACCA is the only RPB with a formal compensation mechanism. In view of the fact that the ACCA is handing over its complaints-handling to the IPA with effect from 1 January 2017, surely the simplest way to make things “fair” to all complainants is to have no compensation mechanism, isn’t it?

I also do not understand the Service’s logic in arguing that compensation should be offered “where minor errors or mistakes have been made”, whilst accepting that “any such mechanism would not be a substitute for any legal remedies available to individual complainants through the Courts”. Next thing we know the Service will be expecting the RPBs to decide whether fees are excessive on fairly straightforward cases, whilst accepting that decisions on really meaty fees should remain with the courts. Oh hang on a minute…

Unfortunately, the IPA is making it easy for the Service to push its agenda: the report mentions that the IPA intends to introduce a formal conciliation process in any event (which is news to me, as I suspect it is to most IPA members).

3.  RPBs experiencing particular issues progressing complaints cases should discuss their plans with the Service.

I think this is directed mainly at the ACCA, which has come in for some heavy criticism, as reported in the Insolvency Service’s monitoring reports over the last couple of years. Now that the ACCA has announced its “collaboration” with the IPA, which will investigate and decide on complaints levelled at ACCA licensed IPs (as well as conduct their monitoring visits), perhaps the Service already will be happy to tick that box.

To read the full report, go to: https://goo.gl/radZpS.

 

Action on Anti-Money Laundering

This subject really deserves a blog post of its own. The prospects for change are coming from all directions.

“Consent” SARs no more

Actually, this happened in July, but I’ve not seen it covered elsewhere, so I thought I would shoe-horn it in here. Although the Proceeds of Crime Act 2002 refers to “consent”, the NCA has issued guidance clarifying that it will no longer be granting consent, but rather a “defence to a money laundering offence”.

The NCA has taken this step to counteract the “frequent misinterpretation of the effect of ‘consent’ (e.g. assuming that it results in permission to proceed, or is a statement that the money is ‘clean’ or that the NCA condoned the activity going ahead)”.

To request a “defence”, however, you will still need to tick the “consent requested” box on the SAR submission.

For a useful reminder on the purpose and process of consent/defence SARs, including the kinds of responses you might get back from the NCA, go to https://goo.gl/c8tJzk.

Allowing “joint” SARs and other proposals

In April, the Government (via HM Treasury) issued an “Action Plan”, representing “the most significant change to our anti-money laundering and terrorist finance regime in over a decade”, and the Government sought views on the proposed actions.

Amongst other things, the Government was proposing to reform SARs, given the enormous resource demand of c.400,000 SARs submitted each year. The proposals included doing away with the SARs consent/defence process altogether, which alarmed me considerably, but I was relieved to see that the Law Society and others (including R3, although I have to say that they were not as forceful as the LawSoc) urged the Government to reconsider.

The Government’s response on the consultation was issued earlier this month at https://goo.gl/pzezpx and the conclusions are reflected in the Criminal Finances Bill, which is now making its way through Parliament.

I can only see the proposed changes affecting IPs in exceptional cases, but in brief they include:

  • some changes to the SARs regime including empowering the NCA to obtain further information from SARs reporters, but the consent process will continue at least for the moment (“the Government will keep this issue under review”);
  • “establishing a new information sharing gateway for the exchange of data on suspicions… between private sector firms with immunity from civil liability” – I am interested to discover how this will be constructed, although the Government response does include reference to…
  • enabling “joint” SARs to be submitted, which I’m sure will be good news to all IPs who have been conscious of multiple SARs being submitted on cases involving external joint office holders and legal advisers;
  • introducing Unexplained Wealth Orders;
  • strengthening powers to seize and forfeit criminal proceeds in bank accounts or “portable high value items” such as gold.

The Fourth Money Laundering Directive

I understand that Brexit is unlikely to halt the progress of the EU’s Fourth Money Laundering Directive in the UK, which is set to be transposed into national law by 26 June 2017.

In September, HM Treasury issued a consultation on how the Directive should be implemented. The consultation document can be found at https://goo.gl/5AdhQd and it closes on 10 November 2016.

Items with the potential to affect IPs include:

  • a reduction in the threshold for cash or “occasional” transactions from €15,000 to €10,000;
  • changes in the criteria triggering simplified and enhanced due diligence;
  • a potential widening of the scope of those whose AML due diligence may be relied upon (which I find interesting given that the RPBs seem to recommend avoiding reliance);
  • potential prescription surrounding requirements for certain businesses to appoint compliance officers, to conduct employee screening, and to carry out independent audits;
  • a requirement to retain AML due diligence records for 10 years (up from 5 years); and
  • a requirement for certain Supervisors (i.e. the RPBs and others) to “take necessary measures to prevent criminals convicted in relevant areas or their associates from holding a management function in, or being the beneficial owners of” AML-regulated businesses (which, personally, I think is extremely unfair – for example, is it fair to curtail someone’s career because of what their father has done?). Although the consultation refers only to accountants, solicitors and some other businesses as needing this oversight, I would be surprised if IPs escape notice when any legislation is drafted.

 

More and More Changes in Scotland

Imminent changes

As we know, the new Bankruptcy (Scotland) Act 2016 (and presumably the accompanying Regulations, which are yet to be finalised) come into force on 30 November 2016.

The AiB has headlined the Act and Regulations as “business as usual” but simply a cleaner and more straightforward reorganisation of the existing statutory instruments, the most material effect being that what was the Protected Trust Deeds (Scotland) Regulations 2013 has been written into the Act (all except from the forms, which are in the 2016 Regs).

However, inevitably the AiB has taken the opportunity to slip in a couple of changes. As drafted, the MAP asset threshold will be reduced from £5,000 to £2,000 (Regulation 14).

In its response to the AiB’s informal consultation on the draft Regulations, ICAS took the opportunity to raise a number of issues, including having another dig at the AiB’s compromising positions as both supervisor and supplier of debt management/relief services. As regards these expressions of concern and ICAS’ attempt to highlight the archaic “overly penal” use of an 8% statutory interest rate, I say: “good for them!”.

ICAS also points out apparent deficiencies in the Regulations’ treatment of money advisers, who are required under the draft Regulations to have a licence to use the Common Financial Statement, but the Money Advice Trust provides licences to organisations, not individuals. There also appears to be a flaw in the Regulations in that it does not allow a non-accountant/solicitor IP to be a money adviser if they or their employers provide other financial services.

To read ICAS’ response in full, go to: https://goo.gl/xSaKkv.

Future changes to PTDs and DAS

Earlier this year, the AiB ran consultations as part of their reviews of PTDs and DAS. The AiB published summaries of the consultation responses in July 2016 (see https://goo.gl/MW6gC5) and the AiB has promised its own responses “in the coming weeks”, although these have yet to emerge (not surprising really, given everything else going on!).

The scope of the consultation questions was vast and the reviews have the potential to affect many aspects of the two procedures.

 

New Restructuring Moratoriums and Plans… but no changes to rescue finance priority

Although the Government has not yet provided its response to the consultation, “A Review of the Corporate Insolvency Framework”, which ended on in July 2016, it has issued a summary of responses at https://goo.gl/Cf0LWK.

The summary does hint, however, that the Government is likely to take forward some of the proposals.

The introduction of a pre/extra-insolvency moratorium

If the Government were to go with the majority (yes I know, that’s a big “if”), the new moratorium:

  • would be initiated by a simple court filing;
  • would have stronger/more safeguards to protect creditors’ interests than as originally proposed;
  • potentially would not suspend directors’ liability for wrongful trading;
  • would be shorter than the originally proposed 3 months, probably 21 days;
  • could be extended without the need to obtain the approval of all secured creditors;
  • would not affect the length of any subsequent Administration (woo hoo!);
  • would be supervised only by a licensed IP (double woo hoo!);
  • would provide for costs incurred during the moratorium to be paid during the moratorium or, failing that, to enjoy a first charge if an insolvency process follows on; and
  • would provide creditors with the power to seek information (with certain safeguards and exemptions).

Essential suppliers to be held to ransom?

In contrast, consultation responses were split on whether more should be done to bind essential suppliers to keep on supplying during a moratorium or indeed during an Administration, CVA or potentially new “alternative restructuring plan”. The only clear majority response was that providing suppliers with recourse to court to object to being designated by the company as “essential” was an inadequate safeguard for suppliers.

The reaction? “Government notes stakeholder concerns and is continuing to consider the matter.”

A new restructuring plan with “cram down”

Cheekily, the consultation actually didn’t ask whether we saw value in a proposed new restructuring plan. It just asked how we saw it working.

The majority were in favour of a court-approved cram down process with the suggested addition that the cram down provisions could also apply to shareholders.

Will the long grass welcome back the proposal for super-priority rescue finance?

The Government had revived its 2009 proposal for super-priority rescue funding. Again this time, the response was pretty overwhelming with 73% disagreeing with the proposals.

 

Further Education Insolvencies

In July 2016, BIS issued a consultation that explored whether the usual insolvency procedures – as well as a Special Administration Regime – should be introduced to deal with insolvent further education and sixth form colleges in England.

The proposed objectives of the education Special Administration include to “avoid or minimise disruption to the studies of the existing students of the further education body as a whole”. The Government envisages that this emphasis would “provide more time than normal insolvency procedures to mitigate the risk that a college is wound up quickly and in a way which, by focusing only on creditors, would be likely to damage learners.”

Although a Government response has yet to be issued (the consultation closed on 5 August 2016), my scanning of a few published responses indicates that there are some loud objections to the idea from those working in the sector. Many of those who responded to the consultation also expressed exasperation that BIS issued a 4-week consultation over the holiday period, which does seem particularly insensitive in view of the intended audience (which strangely did not include IPs!).

 

Recast EC Regulation on Insolvency Proceedings

This is another piece of legislation that is set to come into force on 26 June 2017.

I admit that my partner, Jo Harris, is far more knowledgeable on this subject than me and personally I’m waiting for her to record a webinar on it, so that I can learn all about it (no pressure, Jo! 😉 ).

 

SIP13, SIP15… and many others

The JIC’s consultations on revised drafts of SIP13 and SIP15 closed many months ago. I understand that a revised SIP13 is very near to being issued and the aim is to have a revised SIP15 also issued before the end of the year.

Given that many of the SIPs refer to the Insolvency Rules 1986 – SIP8 on S98 meetings comes immediately to mind – many will need to be reviewed over the next 5 months if they are to remain reliable and relevant (although admittedly it has not stopped SIP13 continuing to refer to S23 meetings and Rule 2.2 reports, despite the fact that they were abolished in 2003!). Well, it’s not as if we have anything else to do, is it?!


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BHS: lessons for IPs?

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Now that all the pantomiming is over, are there any lessons to glean from the Select Committees’ efforts? I think so. Allegations of “group think” and suggestions of advisers being too heavily incentivised to drive through a particular outcome could lead some to ponder “there but for the grace of God…” Whether or not mud is warranted, some stains may prove stubborn to remove.

The House of Commons Work and Pensions and BIS Committees’ report can be found at: goo.gl/Yi9eMI

 

“A remarkable level of ‘group think’”

Referring to the several advisers to Sir Philip Green and to Dominic Chappell, the Committee report states that “many of those closely involved claim to have drawn comfort from the presence of others”. Names such as Goldman Sachs and respected law firms and accountants appear to have lent credibility to the proceedings.

During the evidence sessions, some witnesses valiantly attempted to explain to the Committee members the scope of customer due diligence checks and the relatively narrow terms of their engagements. The Committees’ response may be discerned from the report (paragraph 64):

“The only constraint beyond the legally required checks is the risk that a company is willing to take that its reputation may be tarnished by association with a particular client or deal. In the case of BHS, it appears that advisory firms either did not consider the reputational risk or demonstrated a remarkable level of ‘group-think’ in relying solely on each other’s presence.”

IPs and related professionals work in a fairly small pond. Although we like to think we’re a robustly independent bunch, could we be at risk of some complacency when we encounter the same old faces?

 

“Advisers were rewarded handsomely”

It is perhaps less fair for the Committees to target the advisers on the levels of their fees. The firm that provided a financial due diligence report on BHS to the prospective purchaser, RAL, were set to be paid four times the fee if the transaction were successful than if it were aborted. The Committee also noted that “advisers were doubly dependent on a successful transaction because RAL did not have the resources to pay them otherwise” (the report does not refer to the existence of any guarantees, which was disclosed in the evidence sessions).

The firm tried to put their engagement into context by explaining the additional risks inherent in a successful purchase and by pointing out the ethical and professional standards that safeguard against such arrangements generating perverse strategies (http://goo.gl/ugfiIP).

The Committees were forced to admit that neither of the advisers “can be blamed for the decision by RAL to go ahead with the purchase”. That said, they did feel that the transaction advisers’ report “could have more clearly explained the level of risk associated with the acquisition” and, in the Committees’ typical emotive style, they stated that the advisers were (paragraph 73):

“…increasingly aware of RAL’s manifold weaknesses as purchasers of BHS. They were nonetheless content to take generous fees and lend both their names and their reputations to the deal.”

 

Countering the Self-Interest Argument

The Committees’ suggestion is that the advisers were too tied into a particular outcome, leading to doubts as to the veracity of their advice. Of course, almost everyone who gives advice – from pensions advisers to dentists – suffer this scepticism. When IPs act both as solutions advisers and implementers, accusations of acting in one’s self-interest are levelled as if they are statements of the blindingly obvious. Such perceptions of being unprofessionally influenced by self-interest are not only articulated by unregulated advisers looking to pigeon-hole IPs into creditors’ pockets, but also are reflected time and again in the Government’s/Insolvency Service’s proposals, for example on how to deal with the pre-pack “problem”, the perennial debates around IPs’ fees and the more recent moratorium proposals.

How do we counter this perception? Personally, I don’t believe the solution lies in setting thresholds on where advisers’ work should end – I was pleased that the early pre-pack suggestions of using a different administrator or a different subsequent liquidator were not taken up – as this risks the evolution of unwritten partnerships with the assumption that the self-interest and self-review arguments automatically fall away.

The perception can only really be tackled by doing a good job, by serving our clients’ interests best and being attentive to our (near-)insolvent clients’ obligations. We also need to remain alert to relationships and when we have stepped over the threshold. We must not see the Insolvency Code of Ethics only in terms of the “Specific Situations”, which I feel is very much an appendix to the real substance of the Code. The Code is by design largely non-prescriptive, but this means that we need to:

  • reflect on prior relationships, e.g. when we have acted as adviser (to the insolvent or to its creditors)
  • evaluate the relationship: is it “significant”, i.e. does it give rise to a threat to our objectivity (or any other fundamental principle)?
  • Can we reduce that threat to an acceptable level?
  • If not, we must have the strength of character to accept the conclusion that we should not take the appointment.
  • And of course, if we do think we can still take the appointment, we need to set out our reasonings and regularly review the position and effectiveness of any safeguards; ticking boxes on an ethics checklist is highly unlikely to be sufficient.

Calls continue to be made for directors to seek help early, when more doors to rescue remain open. IPs are being seen less often solely as insolvency office holders and they have augmented their insolvency skills accordingly.

R3 has just published two helpsheets for individuals and company directors with financial difficulties (at http://goo.gl/WOfCKI and http://goo.gl/eyHlia). These aim to dispel many of the misconceptions about IPs. As the falling insolvency statistics illustrate, IPs can and do help people and businesses get back on track without resorting always to formal insolvency tools.


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Monitoring the monitors: targeting consistency and transparency

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The Insolvency Service’s 2014 Review had the target of transparency at its core. This time, the Insolvency Service has added consistency.  Do the Annual Reviews reveal a picture of consistency between the RPBs?

My second post on the Insolvency Service’s 2015 Annual Review of IP regulation looks at the following:

  • Are the RPBs sticking to a 3-year visit cycle?
  • How likely is it that a monitoring visit will result in some kind of regulatory action?
  • What action are the RPBs likely to take and is there much difference between the RPBs?
  • What can we learn from 6 years of SIP16 monitoring?
  • How have the RPBs been faring in their own monitoring visits conducted by the Insolvency Service?
  • What have the Service set in their sights for 2016?

 

RPBs converge on a 3-yearly visit cycle

The graph of the percentages of IPs that had a monitoring visit last year gives me the impression that a 3-yearly visit cycle has most definitely become the norm:

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(Note: because the number of SoS IPs dropped so significantly during the year – from 40 to 28 – all the graphs in this article reflect a 2015 mid-point of SoS-authorised IPs of 34.)

Does this mean that IPs can predict the timing of their next routine visit? I’m not sure.  It seems to me that some standard text is slipping into the Insolvency Service’s reports on their monitoring visits to the RPBs.  The words: “[RPB] operates a 3-year cycle of rolling monitoring visits to its insolvency practitioners. The nature and timing of visits is determined annually on a risk-assessment basis” have appeared in more than one InsS report.

What do these words mean: that every IP is visited once in three years, but some are moved up or down the list depending on their risk profile? Personally, this doesn’t make sense to me: either visits are timed according to a risk assessment or they are carried out on a 3-year cycle, I don’t see how you can achieve both.  If visit timings are sensitive to risk, then some IPs are going to receive more than one visit in a 3-year period and, unless the RPB records >33% of their IP number as having a visit every year (which the graph above shows is generally not the case), the corollary will be that some IPs won’t be visited in a 3-year period.

My perception on the outside is that, generally, the timing of visits is pretty predictable and is now pretty-much 3-yearly. I’ve seen no early parachuting-in on the basis of risk assessments, although I accept that my field of vision is very narrow.

 

Most RPBs report reductions in negative outcomes from monitoring visits

The following illustrates the percentage of monitoring visits that resulted in a “negative outcome” (my phrase):

Graph8

As you can see, most RPBs are clocking up between c.10% and 20% of monitoring visits leading to some form of negative consequence and, although individual records have fluctuated considerably in the past, the overall trend across all the regulatory bodies has fallen from 30% in 2008 to 20%.

However, two bodies seem to be bucking the trend: CARB and the SoS.

Last year, I didn’t include CARB (the regulatory body for members of the Institute of Chartered Accountants in Ireland), because its membership was relatively small. It still licenses only 41 appointment-taking IPs – only 3% of the population – but, with the exit of SoS authorisations, I thought it was worth adding them to the mix.

I am sure that CARB’s apparent erratic history is a consequence of its small population of licensed IPs and this may well explain why it is still recording a much greater percentage of negative outcomes than the other RPBs. Nevertheless, CARB does seem to have recorded exceptionally high levels for the past few years.

The high SoS percentage is a little surprising: 50% of all 2015 visits resulted in some form of negative outcome – these were all “plans for improvement”. CARB’s were a mixture of targeted visits, undertakings and one penalty/referral for disciplinary consideration.

So what kind of negative outcomes are being recorded by the other RPBs? Are there any preferred strategies for dealing with IPs falling short of expected standards?

 

What responses are popular for unsatisfactory visits?

The following illustrates the actions taken by the top three RPBs over the last 4 years:

Graph9

* The figures for ICR/self certifications requested and further visits should be read with caution. These categories do not appear in every annual review, but, for example, it is clear that RPBs have been conducting targeted visits, so this graph probably does not show the whole picture for the 2012 and 2013 outcomes.  In addition, of course the ICAEW requires all IPs to carry out annual ICRs, so it is perhaps not surprising that this category has rarely featured.

I think that all this graph suggests is that there is no trend in outcome types!  I find this comforting: it might be difficult to predict what outcome to expect, but it suggests to me that the RPBs are flexible in their approaches, they will implement whatever tool they think is best fitted for the task.

 

Looking back on 6 years of SIP16 monitoring
We all remember how over the years so many people seemed to get hot under the collar about pre-packs and we recall some appallingly misleading headlines that suggested that around one third of IPs were failing to comply with regulations. Where have the 6 years of InsS monitoring of SIP16 Statements got us?  I will dodge that question, but I’ll simply illustrate the statistics:

Graph10

Note: several years are “estimates” because the InsS did not always review all the SIP16 Statements they received. Also, the Service ended its monitoring in October 2015.  Therefore, I have taken the stats in these cases and pro rated them up to a full year’s worth.

Does the graph above suggest that a consequence of SIP16 monitoring has been to discourage pre-packs? Well, have a look at this one…

Graph11

As you can see, the dropping number of SIP16s is more to do with the drop in Administrations. In fact, the percentage of pre-packs has not changed much: it was a peak of 31% of all Administrations in 2012 and was at its lowest in 2014 at 24%.

I guess it could still be argued that the SIP16 scrutiny has persuaded some to sell businesses/assets in the pre (or immediately post) liquidation period, rather than use Administration.  I’m not sure how to test that particular theory.

So, back to SIP16 compliance, the graph-but-one above shows that the percentage of Statements that were compliant has increased. It might be easier to see from the following:

Graph12

Unequivocal improvements in SIP16 compliance – there’s a good news story!

A hidden downside of all this focus on improving SIP16 compliance, I think, is the costs involved in drafting a SIP16 Statement and then, as often happens, in getting someone fairly senior in the practice to double-check the Statement to make sure that it ticks every last SIP16 box.  Is this effort a good use of resources and of estate funds?

Now that the Insolvency Service has dropped SIP16 monitoring, does that mean we can all relax a bit? I think this would be unwise.  The Service’s report states that it “will review the outcome of the RPBs’ consideration of SIP16 compliance and will continue to report details in the Annual Review”, so I think we can expect SIP16 to remain a hot regulatory topic for some time to come.

 

The changing profile of pre-packs

The Service’s reports on SIP16 Statements suggest other pre-pack trends:

Graph13

Personally, I’m surprised at the number of SIP16 Statements that disclose that the business/assets were marketed by the Administrator: last year it was 56%. I’m not sure if that’s because some SIP16 Statements are explaining that the company was behind some marketing activities, but, if that’s not the reason, then 56% seems very low to me.  It would be interesting to see if the revised SIP16, which introduced the “marketing essentials”, makes a difference to this rate.

 

Have some pity for the RPBs!

The Service claimed to have delivered on their commitments in 2015 (incidentally, one of their 2014 expectations was that the new Rules would be made in the autumn of 2015 and they would come into force in April 2016 – I’m not complaining that the Rules are still being drafted, but I do think it’s a bit rich for the Executive Foreword to report pleasure in having met all the 2014 “commitments”).

The Foreword states that the reduction in authorising bodies is “a welcome step”. With now only 5 RPBs to monitor and the savings made in dropping SIP16 monitoring (which was the reported reason for the levy hike in 2009), personally I struggle to see the Service’s justification for increasing the levy this year.  The report states that it was required in view of the Service’s “enhanced role as oversight regulator”, but I thought that the Service did not expect to have to flex its new regulatory muscles as regards taking formal actions against RPBs or directly against IPs.

However, the tone of the 2015 Review does suggest a polishing of the thumb-screws. The Service refers to the power to introduce a single regulator and states that this power will “significantly shape” the Service’s work to come.

In 2015, the Service carried out full monitoring visits to the ICAEW, ICAS and CARB, and a follow-up visit to the ACCA. This is certainly more visits than previous years, but personally I question whether the visits are effective.  Of course, I am sure that the published visit reports do not tell the full stories – at least, I hope that they don’t – but it does seem to me that the Service is making mountains out of some molehills and their reports do give me the sense that they’re concerned with processes ticking the Principles for Monitoring boxes, rather than being effective and focussing on good principles of regulation.

For example, here are some of the molehill weaknesses identified in the Service’s visits that were resisted at least in part by some of the RPBs – to which I say “bravo!”:

  • Pre-visit information requested from the IPs did not include details of complaints received by the IP. The ICAEW responded that it was not convinced of the merits of asking for this on all visits but agreed to “consider whether it might be appropriate on a visit by visit basis”.
  • Closing meeting notes did not detail the scope of the visit. The ICAEW believed that it is important for the closing meeting notes to clearly set out the areas that the IP needs to address (which they do) and it did not think it was helpful to include generic information… although it seems that, by the time of the follow-up visit to the ICAEW in February 2016, this had been actioned.
  • The Service remains “concerned” that complainants are not provided with details of the independent assessor on their case. “ACCA regrets it must continue to reject this recommendation as ACCA does not believe naming assessors will add any real value to the process… There is also the risk of assessors being harassed by complainants where their decision is not favourable to them.”
  • Late bordereaux were only being chased at the start of the following month. The Service wanted procedures put in place to “ensure that cover schedules are provided within the statutory timescale of the 20th of each month and [to] follow up any outstanding returns on 21st or the next working day of each month”. Actually, CARB agreed to do this, but it’s just a personal bug-bear of mine. The Service’s report to the ICAEW went on about the “vital importance” of bonding – with which I agree, of course – but it does not follow that any bordereaux sent by IPs to their RPB “demonstrate that they have sufficient security for the performance of their functions”. It simply demonstrates that the IP can submit a schedule on time every month. I very much suspect that bordereaux are not checked on receipt by the RPBs – what are they going to do: cross-check bordereaux against Gazette notices? – so simply enforcing a zero tolerance attitude to meeting the statutory timescale is missing the point and seems a waste of valuable resources, doesn’t it?

 

Future Focus?

The Annual Review describes the following on the Insolvency Service’s to-do list:

  • Complaint-handling: in 2015, the Service explored the RPBs’ complaint-handling processes and application of the Common Sanctions Guidance. The Service has made a number of recommendations to improve the complaints process and is in discussion with the RPBs. They expect to publish a full report on this subject “shortly”.
  • Debt advice: also in 2015, they carried out a high-level review of how the RPBs are monitoring IPs’ provision of debt advice and they are currently considering recommendations for discussion with the RPBs.
  • Future themed reviews: The Service is planning themed reviews (which usually mean topic-focussed questionnaires to all RPBs) over 2016 and 2017 covering: IP monitoring; the fees rules; and pre-packs.
  • Bonding: the Service has been examining “the type and level of cover offered by bonds and considering both the legislative and regulatory arrangements to see if they remain fit for purpose”. They are cagey about the outcomes but do state that they “will work with the industry to effect any regulatory changes that may be necessary” and they refer to “any legislative change” being subject to consultation.
  • Relationship with RPBs: the Service is contemplating whether the Memorandum of Understanding (“MoU”) with the RPBs is still needed, now that there are statutory regulatory objectives in place. The MoU is a strange animal – https://goo.gl/J6wmuN. I think that it reads like a lot of the SIPs: a mixture of principles and prescription (e.g. a 10-day acknowledgement of complaints); and a mixture of important standards and apparent OTT trivia. It would be interesting to see how the Service approaches monitoring visits to the RPBs if the MoU is removed: they will have to become smarter, I think.
  • Ethics? The apparent focus on ethical issues seems to have fallen from the list this year. In 2015, breaches of ethics moved from third to second place in the list of complaints received by subject matter (21% in 2014 and 27% in 2015), but reference to the JIC’s work on revising the Ethics Code has not been repeated in this year’s Review. Presumably the work is ongoing… although there is certainly more than enough other tasks to keep the regulators busy!

 

 


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Is the IP regulation system fair?

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The Insolvency Service’s 2015 review of IP regulation was released in March and, as usual, I’ve dug around the statistics in comparison with previous years.

They indicate that complaint sanctions have increased (despite complaint numbers dropping), but monitoring sanctions have fallen. Why is this?  And why was one RPB alone responsible for 93% of all complaints sanctions?

The Insolvency Service’s report can be found at https://goo.gl/HlATlf.

I honestly had no idea that the R3 member survey issued earlier today was going to ask about the effectiveness of the regulatory system. I would encourage R3 members to respond to the survey (but don’t let this blog post influence you!).

IP number falls to 6-year low

I guess it was inevitable: no IP welcomes the hassle of switching authorising body and word on the street has always been that being authorised by the SoS is a far different experience to being licensed by an RPB. Therefore, I think that the withdrawal from authorising by the SoS (even with a run-off period) courtesy of the Deregulation Act 2015 and the Law Societies was likely to affect the IP numbers.

Here is how the landscape has shifted:

Graph1

As you can see, the remaining RPBs have not gained all that the SoS and Law Societies have lost and ACCA’s and CARB’s numbers have dropped since last year. It is also a shame to note that, not only has the IP number fallen for the first time in 4 years, it has also dropped to below the 2010 total.

Personally, I expect the number to drop further during 2016: I am sure that the prospect of having to adapt to the new Insolvency Rules 2016 along with the enduring fatigue of struggling to get in new (fee-paying) work and of taking the continual flak from regulators and government will persuade some to hang up their boots. I also don’t see that the industry is attracting sufficient new joiners who are willing and able to take up the responsibility, regardless of the government’s partial licence initiative that has finally got off the ground.

Maybe this next graph will make us feel a bit better…

Number of regulatory sanctions fall

Graph2

Although the numbers are spiky, I guess there is some comfort to be had in seeing that the regulatory bodies issued fewer sanctions against IPs in 2015. [To try to put 2010’s numbers into context, you’ll remember that 1 January 2009 was the start of the Insolvency Service’s monitoring of the revised SIP16, which led to a number of referrals to the RPBs, although I cannot be certain that this was behind the unusual 2010 peak in sanctions.]

But what interests me is that the number of sanctions in 2015 arising from complaints far outstripped those arising from monitoring visits, which seems quite a departure from the picture of previous years. What is behind this?  Is it simply a consequence of our growing complaint-focussed society?

Complaints on the decrease

Graph3

Well actually, as you can see here, it seems that fewer complaints were registered last year… by quite a margin.

I confess that some of these years are not like-for-like comparisons: before the Complaints Gateway, the RPBs were responsible for reporting to the Insolvency Service how many complaints they had received and it is very likely that they incorporated some kind of filter – as the Service does – to deal with communications received that were not truly complaints. However, it cannot be said for certain that the RPBs’ pre-Gateway filters worked in the same way as the Service’s does now.  Nevertheless, what this graph does show is that 2015’s complaints referred to the regulatory bodies were less than 2014’s (which was c.half a Gateway year – the “Gateway (adj.)” column represents a pro rata’d full 12 months of Gateway operation based on the partial 2014 Gateway number).

It is also noteworthy that the Insolvency Service is chalking up a similar year-on-year percentage of complaints filtered out: in 2014, this ran at 24.5% of the complaints received, and in 2015, it was 26.5%.

So, if there were fewer complaints lodged, then why have complaints sanctions increased?

How long does it take to process complaints?

The correlation between complaints lodged and complaint sanctions is an interesting one:

Graph4

Is it too great a stretch of the imagination to suggest that complaint sanctions take somewhere around 2 years to emerge? I suggest this because, as you can see, the 2010/11 sanction peak coincided with a complaints-lodged trough and the 2013 sanctions trough coincided with a complaints lodged peak – the pattern seems to show a 2-year shift, doesn’t it..?

I am conscious, however, that this could simply be a coincidence: why should sanctions form a constant percentage of all complaints?  Perhaps the sanctions simply have formed a bit of a random cluster in otherwise quiet years.

Could there be another reason for the increased complaints sanctions in 2015?

One RPB breaks away from the pack

Graph5

How strange! Why has the IPA issued so many complaints sanctions when compared with the other RPBs?

I have heard more than one IP suggest that the IPA licenses more than its fair share of IPs who fall short of acceptable standards of practice. Personally, I don’t buy this.  Also more sanctions don’t necessarily mean there are more sanctionable offences going on.  It reminds me of the debates that often surround the statistics on crime: does an increase in convictions mean that there are more crimes being committed or does it mean that the police are getting better at dealing with them?

Nevertheless, the suggestion that the IPA’s licensed population is different might help explain the IPA peak in sanctions, mightn’t it? To test this out, perhaps we should compare the number of complaints received by each RPB.

Graph6

Ok, so yes, IPA-licensed IPs have received more complaints than other RPBs (although SoS-authorised IPs came out on top again this past year).  If the complaints were shared evenly, then 58% of all IPA-licensed IPs would have received a complaint last year, compared to only 43% of those licensed by the other three largest RPBs.  I hasten to add that, personally, I don’t think this indicates differing standards of practice depending on an IP’s licensing body: it could indicate that IPA-licensed (and perhaps also SoS-authorised) IPs work in a more complaints-heavy environment, as I mention further below.

Nevertheless, let’s see how these complaints-received numbers would flow through to sanctions, if there were a direct correlation. For simplicity’s sake, I will assume that a complaint lodged in 2013 concluded in 2015 – although I think this is highly unlikely to be the average, I think it could well be so for the tricky complaints that lead to sanctions.  This would mean that, across all the RPBs (excluding the Insolvency Service, which has no power to sanction SoS-authorised IPs in respect of complaints), 12% of all complaints led to sanctions.  On this basis, the IPA might be expected to issue 36 complaint-led sanctions, so this doesn’t get us much closer to explaining the 76 sanctions issued by the IPA.

I can suggest some factors that might be behind the increase in the number of complaints sanctions granted by the IPA:

  • The IPA licenses the majority of IVA-specialising IPs, which do seem to have attracted more than the average number of sanctions: last year, two IPs alone were issued with seven reprimands for IVA/debtor issues.
  • The IPA’s process is that matters identified on a monitoring visit that are considered worthy of disciplinary action are passed from the Membership & Authorisation Committee to the Investigation Committee as internal complaints. Therefore, I think this may lead to some IPA “complaint” sanctions actually originating from monitoring visits. However, analysis of the sanctions arising from monitoring visits (which I will cover in another blog) indicates that the IPA sits in the middle of the RPB pack, so it doesn’t look like this is a material factor.
  • Connected to the above, the IPA’s policy is that any incidence of unauthorised remuneration spotted on monitoring visits is referred to the Investigation Committee for consideration for disciplinary action. Given that it seems that such incidences include failures that have already been rectified (as explained in the IPA’s September 2015 newsletter) and that unauthorised remuneration can arise from a vast range of seemingly inconspicuous technical faults, I would not be surprised if this practice were to result in more than a few unpublished warnings and undertakings.

But this cannot be the whole story, can it? The IPA issued 93% of all complaints sanctions last year, despite only licensing 35% of all appointment-takers.  The previous year followed a similar pattern: the IPA issued 82% of all complaints sanctions.

To put it another way, over the past two years the IPA issued 111 complaints sanctions, whilst all the other RPBs put together issued only 14 sanctions.

What is going on? It is difficult to tell from the outside, because the vast majority of the sanctions are not published.  Don’t get me wrong, I’m not complaining about that.  If the sanctions were evenly-spread, I could not believe that c.16% of all IPA-licensed IPs conducted themselves so improperly that they merited the punitive publicity that .gov.uk metes out on IPs (what other individual professionals are flogged so publicly?!).

The Regulators’ objective to ensure fairness

This incongruence, however, makes me question the fairness of the RPBs’ processes.  It cannot be fair for IPs to endure different treatment depending on their licensing body.

You might say: what’s the damage, when the majority of sanctions went unpublished? I have witnessed the anguish that IPs go through when a disciplinary committee is considering their case, especially if that process takes years to conclude.  It lingered like a Damocles Sword over many of my conversations with the IPs.  The apparent disparity in treatment also does not help those (myself included) that argue that a multiple regulator system can work well.

One of the new regulatory objectives introduced by the Small Business Enterprise & Employment Act 2015 was to secure “fair treatment for persons affected by [IPs’] acts and omissions”, but what about fair treatment for IPs?  In addition, isn’t it possible that any unfair treatment on IPs will trickle down to those affected by their acts and omissions?

The Insolvency Service has sight of all the RPBs’ activities and conducts monitoring visits on them regularly. Therefore, it seems to me that the Service is best placed to explore what’s going on and to ensure that the RPBs’ processes achieve consistent and fair outcomes.

 

In my next blog, I will examine the Service’s monitoring of the RPBs as well as take a closer look at the 2015 statistics on the RPBs’ monitoring of IPs.

 

 

 

 

 

 


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Ethics hits the headlines again: should we be worried?

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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.

 

Journalistic fog

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.


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Are regulators reacting to the Insolvency Service’s gaze?

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In this post, I analyse the Insolvency Service’s annual review of IP regulation, asking the following questions:

  • Are the regulators visiting their IPs once every three years?
  • How likely is it that a monitoring visit will result in some kind of negative outcome?
  • How likely is a targeted visit?
  • Has the Complaints Gateway led to more complaints?
  • What are the chances of an IP receiving a complaint?
  • How likely is it that a complaint will result in a sanction?

The Insolvency Service’s reports can be found at: http://goo.gl/MZHeHK.  As I did last year (http://wp.me/p2FU2Z-6C), I have only focussed attention on the authorising bodies with the largest number of IPs (but included stats for the others in the figures for “all”) and only in relation to appointment-taking IPs.  Again, regrettably, I don’t see how I can embed the graphs into this page, so they can be found at: Graphs 23-04-15.  You might find it easier to read the full article along with the graphs here(2).

 

Monitoring Visits

  • Are the regulators visiting their IPs once every three years?

Graph (i) (here(2)) looks at how much of each regulator’s population has been visited each year:

Is it a coincidence that the two regulators that were visited by the Service last year – the ACCA and the Service’s own monitoring team – have both reported huge changes in monitoring visit numbers?  Of course, this graph also shows that those two regulators carried out significantly less monitoring visits in 2013, so perhaps they were already conscious that they had some catching-up to do.

I’m not convinced that it was the Service’s visit that prompted ACCA’s increase in inspections: the Service’s February 2015 report on its 2014 visits to the ACCA did not disclose any concerns regarding the visit cycle and I think it is noteworthy that ACCA had a lull in visits in 2010, so perhaps the 2013 trough simply reflects the natural cycle.  Good on the Insolvency Service, though, for exerting real efforts, it seems, to get through lots of monitoring visits in 2014!

The trend line is interesting and reflects, I think, the shifting expectations.  The Service’s Principles for Monitoring continue to set the standard of a monitoring visit once every three years with a long-stop date of six years if the regulator employs satisfactory risk assessment processes.  However, I think most regulators now profess to carry out 3-yearly visits as the norm and most seem to be achieving something near this.

The ICAEW seems a little out-of-step with the other regulators, though.  At their 2014 rate, it would take 4½ years to get around all their IPs.  The report does explain, however, that the ICAEW also carried out 32 other reviews, most of which were “phone reviews” to new appointment-taking IPs.  The Service hasn’t counted these in the stats as true visits, so neither have I.

 

  • How likely is it that a monitoring visit will result in some kind of negative outcome?

Graph (ii) (here(2)) lumps together all the negative outcomes arising from monitoring visits: further visits ordered; undertakings and confirmations; penalties, referrals for disciplinary consideration; plans for improvement; compliance/self-certification reviews requested; and licence withdrawals (3 in 2014).

It’s spiky, but you can see that, overall around 1 in 4 visits in 2014 ended up with some kind of action needed.

Above this line, ACCA and ICAEW reported the most negative outcomes.  Most of the ACCA’s negative outcomes related to the ordering of a further visit (20% of their visits).  The majority of ICAEW’s negative outcomes related to the request for a compliance review (16% of their visits).  Of course, ICAEW IPs are required to carry out compliance reviews every year in any event.  I understand that this category involves the ICAEW specifically asking to see and consider the following year’s compliance review and/or requiring that the review be carried out by an external provider, where weaknesses in the IP’s internal review system have been identified.

I find ICAS’ flat-line rather interesting: for two years now, they have not reported any negative outcome from monitoring visits.  The Service had scheduled a visit to ICAS in April this year, so I’ll be interested to see the results of that.

 

  • How likely is a targeted visit?

Let’s take a closer look at ACCA’s ordering of further visits (graph (iii) here(2)): is this a new behaviour?

The 2015 estimated figures are based on the outcomes reported for the 2014 visits, although of course some could already have occurred in 2014.

ACCA seems to be treading a path all its own: the other RPBs – and now even the Service – don’t seem to favour targeted visits.

 

Complaints

 

  •  Has the Complaints Gateway led to more complaints?

It’s hard to tell.  The Service’s first-year report on the Complaints Gateway said that, as it had received 941 complaints in its first 12 months – and by comparison, 748 and 578 complaints were made direct to the regulators in 2013 and 2012 respectively – “it may be that this increase in complaints reflects the improvement in accessibility and increased confidence in the simplification of the complaints process”.

However, did the pre-Gateway figures reflect all complaints received by each regulator or only those that made it through the front-line filter?  If it is the latter, then the Gateway comparison figure is 699, not 941, which means that fewer complaints were received via the Gateway than previously (or at least for 2013), as this graph (iv) (here(2)) demonstrates.

The stats for 2013 are a mixture: for half of the year, the regulators were receiving the complaints direct and for the second half of the year the Gateway was in operation.  It seems to me that the Service has changed it reporting methodology: for the 2013 report, the stats were the total complaints made per regulator, but in 2014 the report refers to the complaints referred to each regulator.

Therefore, I don’t think we can draw any conclusions, as we don’t know on what basis the regulators were reporting complaints before the Gateway.  We cannot even say with confidence that the number of complaints received in 2013/14 is significantly higher than in 2012 and earlier, as this graph suggests, because it may be that the regulators were filtering out more complaints than the Gateway is currently.

About all we can say is that marginally fewer complaints were referred from the Gateway for the second half of 2014 than for the first half.

 

  • What are the chances of an IP receiving a complaint?

Of course, complaints aren’t something that can be spread evenly across the IP population: some IPs work in a more contentious field, others in high profile work, which may attract more attention than others.  The Service’s report mentioned that the IPA is still dealing with 34 complaints from 2012/2013 that relate to the same IVA practice.

However, graph (v) (here(2)) may give you an idea of where you sit.

This illustrates that, if complaints were spread evenly, half of all IPs would receive one complaint each year – and this figure hasn’t changed a great deal over the past few years.

As I mentioned last year, I do wonder if this graph illustrates the deterrent value of RPB sanctions: given that the Service has no power to order disciplinary sanctions on the back of complaints, perhaps it is not surprising that, year after year, SoS-authorised IPs have clocked up the most complaints.  I believe that the IPA’s 2013 peak may have had something to do with the delayed IVA completion issue (as I understand that the IPA licenses the majority of IPs specialising in IVAs).  It’s good to see that this is on the way down.

I am also interested in the low number of complaints recorded by ICAS-licensed IPs: maybe this justifies their flat-lined actions on monitoring visits explained above: maybe their IPs are just more well-behaved!  Or does it reflect that individuals involved in Scottish insolvency procedures may have somewhere else to go with their complaints: the Accountant in Bankruptcy?  Although the AiB website refers complainants to the RPB (shouldn’t this be to the Gateway?), it also states that they can write to the AiB and it seems to me that the AiB’s statutory supervisory role could create a fuzzy line.

 

  • How likely is it that a complaint will result in a sanction?

Although at first glance, this graph (vi) (here(2)) appears to show that the RPBs “perform” similarly when it comes to deciding on sanctions, it does show that, on average, the IPA issues sanctions on almost twice as many complaints when compared with the average over the RPBs as a whole.  Also, it seems that IPA-licensed IPs are seven times more likely to be sanctioned on the back of a complaint than ICAEW-licensed IPs.  The ACCA figure seems odd: no sanctions at all were reported for 2014.

Of the 43 complaints sanctions reported in 2014, 35 were issued by the IPA: that’s 82% of all sanctions.  That’s a hefty proportion, considering that the IPA licenses only 34% of all appointment-taking IPs.  It is no wonder that, at last week’s IPA conference, David Kerr commented on the complaints sanction stats and stressed the need for the RPBs to be working, and disclosing, consistently on complaints-handling.

 

Overview

Finally, let’s look at the negative outcomes from monitoring visits and complaints sanctions together (graph (vii) here(2)).

Of course, this doesn’t reflect the severity of the outcomes: included here is anything from an unpublicised warning (when the RPB discloses them to the Service) to a licence withdrawal. And, despite what I said earlier about the timing of the Service’s visit to the ACCA, I am still tempted to suggest that perhaps the Service’s visits have pushed the regulators – the Insolvency Service’s monitoring team and ACCA – into action, as those two regulators have recorded significant jumps in activity over the past year.

The Service has a busy year planned: full monitoring visits to ICAEW, ICAS, CARB, LSS and SRA (although that may be scaled back given the decision for the SRA to pull out of IP-licensing), and a follow up visit to ACCA.  No visit planned to the IPA?  Perhaps that suggests that the Service is looking as closely at these stats as I am.


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ACCA and Insolvency Service monitoring: poles apart?

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The Insolvency Service has released two reports on its own IP-monitoring team and one on ACCA’s monitoring, but is the Insolvency Service playing fair?  Is it applying double standards and how sensible are its demands of authorising bodies?

The reports can be found at: http://goo.gl/A7mXxJ

 

The Insolvency Service’s monitoring of the Insolvency Service’s monitoring

No, I’ve not copied-and-pasted by mistake: in April/May 2014, the Insolvency Service carried out a monitoring visit of its own monitoring team, i.e. the team that deals with Secretary of State-authorised IPs (“IPS”).

The report issued on 29 August 2014 identified some “serious weaknesses”, leading to a decision to make a follow-up visit three months later.  This occurred in January 2015 – not seriously tardy, I guess (although not a great example to the Team, given that late monitoring visits on IPs was the most serious weakness identified in the first visit) – and the report on the follow-up visit has now been released.

The recent report makes no reference to any further visits or follow-up actions, although the summary discloses a number of wriggle-phrases: “IPS has implemented, or made progress against, all the recommendations…  IPS has moved towards…  IPS has plans in place to address this…”  Would the Insolvency Service be satisfied if an RPB had made such “progress” towards goals?  Or would the Service be content for an RPB to accept such assurances from an IP who had only “moved towards” rectifying matters?

Catching up on overdue monitoring visits

To be fair, there did seem to be significant progress with the key issue – that as at May 2014 over half of their IPs had not had a visit in the past three years.  The report disclosed that, of the 28 IPs that had been identified from the 2014 review as overdue a visit, most had been visited or would be visited by May 2015.  The remaining five IPs had been asked to complete a pre-visit questionnaire, and the IPS planned to consider these on a risk basis and “if appropriate, schedule a prompt monitoring visit”.

It is evident from the report, however, that the only visits carried out by the Team since their 2014 review had been to IPs who were already overdue a visit.  Thus, I’m wondering, how many more IPs’ three years were up between April/May 2014 and now and is the Team constantly chasing their tails?  Of course, we expect SoS-authorisations to go in the future (although the De-regulation Bill provides a run-down period of another year), so is this really something to get excited about?  My issue is with the consistency of standards that I expect the Insolvency Service to apply to all licensing/authorising bodies.

“Independent” decision-making

The report makes reference to the introduction of “a layer of independence to its authorisation and monitoring process”.  This refers to the fact that the Section Head now decides on actions following monitoring visits and reauthorisations – with the benefit of a copy of the last monitoring report (which seems pointless to me: if the monitor’s findings were not such that they merited withdrawal of the IP’s authorisation, on what basis would they merit withholding reauthorisation up to a year later?).  Is the Section Head really independent?  I accept that the Insolvency Service structure (and budget) does not provide for the levels of independence possible for RPBs, but, again, I do feel that the Service is applying double standards here, especially given its report on ACCA below.

 

The Insolvency Service’s report on ACCA

The Service’s review of ACCA revealed “some weaknesses” and it is planning a follow-up visit within three to six months.  ACCA has rejected two of the Service’s recommendations.

Early-day monitoring visits

I was surprised to read the Service write so negatively about early monitoring visits.  About monitoring visits occurring within the first 12 months of the IP’s licence, it writes: “There is no evidence of these initial visits being conducted in accordance with the PfM [Principles for Monitoring]; instead, these appear to be conducted as courtesy visits”.  ACCA has asked the Service to clarify what is intended by the recommendation, given that a full scope visit is always completed within the IP’s first three years.  ACCA points to the PfM’s risk-based approach to early visits and states that it “will consider whether it should discontinue introductory visits in the future, given the Insolvency Service’s comments which suggest they are of little value.”

I know that ACCA is not the only RPB that carries out less-than-full-scope early visits, so I am wondering if we will see a shift from all those RPBs.

Personally, I feel that the Insolvency Service is taking the wrong tack here.  When I was at the IPA, I monitored new IPs’ caseloads to see when their first inspection visit looked appropriate.  I also took into consideration other factors: were they working in an office with other IPs?  If so, what were their track records?  Were they hitting the radar of the Complaints Department?  What did their self certifications look like?  But often a key question was: was their caseload building at such a rate that a visit would be useful?  Very often, new IPs take on very few cases and, on the basis of caseload alone, it is usually around 18 months before a proper visit can be conducted.

Nevertheless, I think that there is value in conducting an early visit.  Calling it a “courtesy visit” is a little unfair, I’m sure.  ACCA responded that “the purpose of these visits is to assist insolvency practitioners to ensure they have adequate procedures in place to carry out their work”.  And that’s the point, isn’t it?  It may be too early to see how the IP is really going to perform, but early-days are a good opportunity to see how geared-up the IP is, explore their attitude towards compliance and ethics versus profit, and perhaps even help them.  Is it sensible to criticise ACCA for not evidencing that an early-day visit has been conducted in the same way as a full visit?  If RPBs are discouraged – or prohibited – from carrying out introductory visits, compliance with the PfM would indicate that the RPB simply needs to record the decision that a full visit in the first 12 months is not necessary and then bump the IP to the 3-year point.  Is that better regulation?

Extensive monitoring reports

I have sympathy with ACCA as regards the Insolvency Service’s next criticism.  The report explains that ACCA’s monitoring reports describe the main areas of concern, but not the areas examined where no concerns were generated.  The Service recommended that “ACCA consider expanding their monitoring reports to include all information obtained during the monitoring process, including areas of no concern to provide a clear audit trail”.

Interestingly, the Insolvency Service’s 2014 report on its own monitoring came up with a similar recommendation, although in 2014 the Service’s recommendation appeared more dogmatic: “Ensuring that monitoring reports include all of the information obtained during the monitoring process, not just in relation to areas of concern; any areas where there are no concerns may be summarised.  The reports should also include the bonding information on each case.”  My original notes in the margin of that report expressed “Why?!”  I certainly don’t see why bonding information always needs to be recorded and I struggle to see how all information obtained could be sensibly written down.  When I review cases, I scribble pages of notes, summarising key facts and events in the case’s lifecycle, such as key Proposal terms and modifications, mainly so that I can see if these points are followed through over time.  As my review questions are answered satisfactorily, I move on; if I had to summarise all this information in my reports, they would double in length but I don’t believe they would be any more revealing or helpful to the reader.

The 2015 follow-up report on the Insolvency Service’s own monitoring states: “IPS had significantly expanded its monitoring reports.  These now contain sufficient detail to enable an informed decision to be made on appropriate action following the issue of the report.”  Hmm… that doesn’t exactly confirm that the reports now contain “all” information or indeed the bonding information on each case.  Does this, along with the Service’s recommendation that ACCA “consider” expanding reports, reflect that they themselves are moderating their original opinion of what should be in reports?

I cheered at ACCA’s response to the recommendation: “ACCA believes that including in the monitoring report areas where there are no concerns risks: expanding the report unnecessarily with no perceived benefit; diluting the overall outcome and reducing focus on the significant weaknesses in the insolvency practitioner’s procedures and the need to make appropriate improvements.”  Good for you, ACCA!

I think it’s a bit of a shame that, despite explaining this opinion, ACCA then states that it has amended its standard report template in an attempt to satisfy the Insolvency Service, although I am sure that many of us appreciate the wisdom in meeting our regulators’ demands even if we don’t agree with them.

“Independent” decision-making

Remembering that the IPS had satisfied the Insolvency Service on this matter by passing all monitoring reports through their Section Head, I sucked my teeth at the Service’s next recommendation to ACCA: “That any monitoring report with unsatisfactory findings be considered independently, for example by the Admissions and Licensing Committee, to assess what regulatory action may be necessary”.

Firstly, no IP is perfect; I have not seen a report with no “unsatisfactory findings”, so this suggests that effectively all monitoring reports would need to go through the Committee.  To be fair, I come from an IPA background where all reports did go through the Committee – and I thought it was valuable that the Committee see the good with the bad – but it’s a big ask for any Committee (especially if reports become far longer seemingly as required by the Service) and I am not surprised that some RPBs have sought to make the process more efficient.  After all, the majority of IPs visited are so obviously way above the threshold where some action is deserved that it makes perfect sense to fast-track these, doesn’t it?

The report stated that “ACCA regrets that it must reject this recommendation as it believes it is an impractical and disproportionate response to the vast majority of visit outcomes”.  ACCA’s response makes clear that each report is considered at least by the monitor and a reviewer, who I think can decide on certain actions such as scheduling a follow-up visit: is this not sufficient for at least the top 50% of IPs?

Admittedly, the devil is in deciding what to do with the reports at the margins: at what stage is an issue serious enough to warrant Committee attention?  Unfortunately for ACCA, the case that led to this recommendation was not a great example.  Although ACCA has done a good job in putting into context each of the breaches identified at this IP visit that ACCA decided fell below the threshold for Committee attention, I have to say that the fees issue alone – even though it was a one-off unusual circumstance (the IP had taken a £5,000 deposit for the costs of liquidating a company, but it was actually placed in administration and the IP drew the deposit for pre-admin costs without complying “fully” with R2.67A) – would have meant, in an IPA context, that it would not only have been considered at length by the Membership & Authorisation Committee, but it would have been an automatic referral also to the Investigation Committee for consideration for disciplinary action.

I am also not persuaded by ACCA’s defence that the IP’s repeat breaches of legislation and/or SIPs resulted in “no actual harm” to the debtor (in one case) or creditors “such that, given the function of the Admissions and Licensing Committee, a referral to it would not have been justified”.  In my experience, it is very rare that breaches of statute or SIPs actually result in harm, but is that the only criterion for deciding whether an issue is sufficiently serious to warrant action?  You could throw out half the rules and SIPs, if all IPs needed to do was avoid harming stakeholders.

I think that ACCA is on stronger ground as regards another issue that the IP had already rectified.  What would be the point of referring this to the Committee?  “Withdrawal or suspension of the licence would be disproportionate and it is not clear what conditions would be appropriate to protect the public, particularly as the breach had already been rectified.”

I think that ACCA’s final comments put it nicely: “To recommend that such cases should routinely be referred to the Admissions and Licensing Committee to decide on any regulatory action and timing of the next visit is a poor use of Committee resources, clearly disproportionate to the findings and, in ACCA’s view, contrary to the guidance contained in the Insolvency Service Regulators’ Code.”

Surely the Insolvency Service should be concentrating on outcomes, shouldn’t they?  After all, that is what Nick Howard said (in the podcast at http://goo.gl/WUst5M) was his objective as regards the Service’s monitoring of all the RPBs: to ensure that they act consistently in reaching the same outcomes.  Admittedly, in this case it does look to me like the IPA (for one) would have put the IP through the ringer, made him sweat a bit more, than ACCA appears to have done, but would it have affected the outcome?  If the IP took on board all of the ACCA monitor’s points and made the necessary changes (some which appear to have taken place prior to the visit in any event), does it matter how his report was processed?

And I would add: how does the IPS’ process – of referring reports to the Section Head – meet the Service’s apparent requirement for independence any better?

Complaints-handling

ACCA has evidently had some difficulties in the past in resourcing their complaints-handling adequately, although they do seem to have cracked it more recently.  I did smile, though, at the Service’s recommendation that “it would be helpful in future for the Insolvency Service to be kept informed of any significant changes in staffing and resources” – ACCA had increased their staffing for complaints from one member to two.  Can you imagine if authorising bodies took such a keen interest in IPs’ staff numbers?!

One of the Service’s other recommendations was that the name of the independent assessor be given to the complainant and the IP “to ensure transparency and openness throughout the process”.  This was the second recommendation that ACCA had rejected: “ACCA does not believe naming assessors will add any real value to the process…  If assessors are named, there is a danger that they may be passed extraneous material, which risks delays in progressing complaints.  There is also the risk of assessors being harassed by members and complainants where their decision is not favourable to them”.

My personal view is that this is another example of the Service trying to meddle with the processes instead of concerning itself with the outcomes.  I can see how they might feel that transparency in this matter might help “improve confidence” in the complaints regime, but is it that material?

 

Single regulator?

What worries me about all this is that the Service appears to be seeking to achieve consistency by ensuring that all authorising bodies’ processes are the same.  This is particularly unhelpful if the Service starts with what they think an authorising body should look like and then exerts pressure on every body to squeeze them into that mould, instead of looking objectively at how the body performs before looking to criticise its processes.

There are a Memorandum of Understanding and Principles for Monitoring.  The Service should be measuring the bodies against these standards.  The Service’s “Oversight regulation and monitoring in the insolvency profession” document (http://goo.gl/jipcWs) confirms that assessing compliance with the MoU and PfM is fundamental.  Thankfully, the MoU and PfM are not so prescriptive that they describe, for example, how much detail should go into monitoring reports.

In this document, the Service also claims to use “an outcomes and principles based approach” in carrying out its oversight role.  I’m afraid that its monitoring reports do not do much to support this claim.  If the Service wants to be effective in its oversight role, personally I think it needs to be thinking and acting smarter.

The clock is ticking for the reserve power to introduce a single regulator.  My problem is that not all that the Service is doing seems to be helping RPBs to achieve their objectives in the best way they think they can.  I ask myself: does the Service really want to support better delegated regulation?