Yesterday, the Government published its response to the House of Commons BIS Committee’s February 2013 report on the Insolvency Service. My immediate reaction is: it looks like the Service is going to be very busy over the summer!
The report describes plans in the areas of:
• Funding models
• CDDA work
• SIP16 – and now potential pre-pack abuse – monitoring
• Interaction with the RPBs and complaints about IPs
• S233 continuation of supply changes
• Review of IPs’ fees
In addition, the response includes reference to the Service’s ongoing plans in relation to “estate rationalisation”, which was picked up by Insolvency Today: (http://www.insolvencynews.com/article/15147/corporate/government-responds-to-insolvency-service-concerns).
The Government’s full response can be found at: http://www.publications.parliament.uk/pa/cm201213/cmselect/cmbis/1115/1115.pdf
There is a BIS/Insolvency Service joint project to review potential funding models, which is also considering fee structures. The response states that they are also exploring “the possibility of fees being paid by instalments and/or linked to the discharge of the bankrupt” (paragraph 33). I thought that was an interesting addition to the mix of ideas: so instead of an automatic 1-year discharge, it could be extended until the bankrupt has paid his/her instalments? It would mean fewer recoveries via IPOs/IPAs, wouldn’t it, so the OR would have to write off more administration fees..?
Reference is made to the efforts of R3, the RPBs, IPs and the Insolvency Service “to simplify reporting processes, enhance guidance and ensure improved feedback on the outcomes of ‘possible misconduct’ reports provided by IPs” (paragraph 36). Personally, I feel that the efforts to put D-forms online are one step forward compared to the two steps back of the Service’s revised guidance on CDDA reporting, which adds yet more to the document/information wish-list when submitting D-reports. However, I think the Service’s presentations at courses and conferences on what they are looking for in D-reports and what IPs can dismiss as immaterial are useful – I would recommend them – albeit in some respects the points are difficult for IPs to apply in practice for fear of being criticised for using their professional judgment too liberally.
As an aside, I was interested to note the proportion of D1 reports to non-compulsory corporate cases: 35% in 2010-11 and 28% in 2011-12 (paragraph 42) – perhaps useful benchmarks for IPs, although of course every IP has his/her own make-up of appointments that will lead to more or less D1s in his/her particular case.
I found the Service’s confession of staff turnovers quite alarming. Within its Investigation and Enforcement teams in recent years, they reported a 38% internal turnover of employees, with over 60% in front-line investigation roles (paragraph 40). It is not surprising that, along with the impact of austerity measures on resources, “investigation and enforcement outputs have dipped since 2010”. The report sounds positive, however, that perhaps a corner has been turned with the agency “delivering closer to expectations” in the second half of this year (paragraph 41).
Despite these positive sounds, the response includes: “given the concerns raised by the Committee and feedback from insolvency practitioners on the numbers of ‘possible misconduct’ reports being taken forward, the Insolvency Service intends to look again at how it assesses and prioritises cases. This will be done during 2013/14, with the goal of ensuring greater transparency on its processes and shared expectations on its investigation and enforcement outputs” (paragraph 48).
It seems to me that there is a shift away from focussing, excessively in my view, on SIP16 compliance towards investigating potential abuse of the pre-pack process – personally, I welcome this shift.
However, I feel that the response unsatisfactorily addresses the Committee’s recommendation that the Service’s SIP16 monitoring should include “feedback to each insolvency practitioner… where SIP16 reports have been judged to be non-compliant”. The response simply refers to: (i) the Service’s education programme “including a webinar” to ensure that the requirements of the SIP are understood; (ii) reporting significant issues to the relevant RPB; (iii) revising SIP16; and (iv) Dear IP 42 issued in October 2009. It seems nonsensical to me that the Service would spend time reviewing the SIP16s, deciding whether they are compliant or not including, as acknowledged in the report “minor and technical” non-compliances, and then do not inform the IPs direct of their conclusion. Fine, report the serious cases to the relevant RPB, but how does the Service expect IPs to learn by their mistakes if they are not told about them?!
The Government response highlights proposed changes to SIP16, which “will require IPs to move faster in informing creditors about pre-packs. It will also require a specific and explicit statement by the IP to confirm that a pre-pack was the most appropriate method of producing the best return for creditors” (paragraph 58). Personally, those proposed changes to the SIP, as appearing in recent RPB consultation, do not concern me, but does that mean that the rejection of the lengthening of the SIP16 bullet point information list (as per the consultation draft SIP16) will not be a deal-breaker with the Service? The Government doesn’t seem too concerned about adding to the list. I think I know what my consultation response will be…
As I mentioned, I am pleased to see the Service’s apparent new focus on cases “where there is evidence of material detriment to creditors as a result of IP behaviours” (paragraph 60) and “targeted investigation… going beyond simply reviewing SIP compliance to assess potential abuse of the pre-pack procedure” (paragraph 63). The Service “has been investigating, on a risk assessed basis, the use of pre-packs by small to medium sized IP firms where there have been a number of previous instances of breaches of SIP16 [and] monitoring the relationship between IPs and online introducers to see whether the pre-pack process is being abused through misleading advertising” (paragraph 52). I hope that this monitoring moves on to getting under the skin of the cases, so that it doesn’t just turn into a statistical review black-marking IPs simply working in a particular market irrespective whether there is any real abuse – and for that, perhaps we should look to the RPBs dealing with the Service’s referrals – but overall I say “Hurrah!”
The Government response also confirms that a review into pre-packs “will be launched in the summer after the Service has reported on its current monitoring of pre-packs… and the new SIP 16 controls on pre-packs have been put in place” (paragraph 51).
Interaction with the RPBs and complaints about IPs
Nestled within the pre-pack comments is this: “The Insolvency Service is strengthening its role as the oversight regulator of the IP profession. A new senior post to lead related activities will be filled shortly. This will include working with the insolvency regulators to drive action on commitments that will enhance enforcement and improve confidence in the proper use of insolvency frameworks” (paragraph 57).
The response also states that “common sanction guidance is close to implementation. This is expected to be in place over coming months” (paragraph 58). It also refers to a summer implementation of the new complaints gateway, which will mean that “in future virtually all complaints about IPs will come first to the Insolvency Service, where they will be subject to an initial assessment before being forwarded, as appropriate, to the relevant RPB for action” (paragraph 73). We also await the Insolvency Service’s Annual Review of IP Regulation.
S233 continuation of supply changes
A short one this: the Enterprise and Regulatory Reform Bill – now “Act”, as the Bill received Royal Assent on 24 April 2013 (see https://www.gov.uk/government/news/enterprise-and-regulatory-reform-bill-receives-royal-assent – although that’s another story entirely) – includes the power to create of secondary legislation to extend the scope of S233. However, we still await the consultation before the Government decides “how and in what terms to exercise the new powers” (paragraph 70).
Review of IPs’ fees
Another short one: Professor Kempson’s review “is expected to produce final recommendations for consideration by the Secretary of State and the Minister with responsibility for insolvency issues by the end of June 2013” (paragraph 77).
Goodness, what a busy summer it will be!