Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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Compliance Hot Topics

I think we all need a break from new legislation and threats of more changes, don’t we?  How about settling back into something more familiar and, I think, strangely comforting: common non-compliances.

Usually, late spring brings us the Insolvency Service’s annual review of regulation, but there’s no sign of it this year.  But we do have the ICAEW’s reports, which are well worth a read for any IP, as they highlight common issues that I think we’re all seeing.  This year, there are three ICAEW reports, although this blog only looks at their Insolvency Monitoring Report at: www.icaew.com/-/media/corporate/files/technical/insolvency/regulations-and-standards/annual-return-and-monitoring/insolvency-monitoring-report.ashx

In the report, the ICAEW highlights the following areas that have brought IPs to the Committee’s attention:

  1. Remuneration
  2. Ethics
  3. Investigations
  4. Statutory Deadlines
  5. Insolvency Compliance Reviews
  6. Information to Debtors

The ICAEW report identifies several other areas of concern as well as providing some useful tips on conducting SIP11 reviews.

 

Issues that have led to Committee-referral

The ICAEW reports that the following have led IPs to face the Insolvency Licensing Committee (“ILC”):

1. Remuneration

The ICAEW reported instances of:

  • Drawing fees without proper authority

The issues that I have seen include: drawing pre-CVL fees that do not meet the R6.7 definition; getting in a muddle with who is required to approve Administrators’ fees (and failing to make sure that this tallies with the Proposals); and accepting shareholders’ informal approval of MVL fees, rather than getting a proper resolution.

  • Fees (or proposed fees) appearing excessive or unreasonable

When I have spoken with monitors (ICAEW and IPA), I have been given examples of excessive/unreasonable fees that truly are toe-curling, although I have seen other cases that do not appear particularly damning.  I understand that both RPBs have a number of cases working through their disciplinary procedures, but I have yet to see any sanction published under this heading.  It may be a difficult allegation to make stick, but for some time I have felt that the RPBs and the InsS have been looking for a worthy scalp.

  • Failing to follow the decision procedure rules

This one frustrates me: despite the comprehensive checklists and templates that many firms have, somehow several people still manage to overlook a key component in fee proposal packs.  Often, the missing piece is a Notice of Decision Procedure when seeking a vote by correspondence.  Sometimes, it is an Invitation to Nominate Committee Members and/or a failure to seek a decision on the formation of a Committee.  In some other cases, fee proposal packs have not been circulated to all the relevant creditors, sometimes because a bunch of creditors (usually the employees) have not been provided previously with a R1.50 website notice and sometimes because IPs have assumed that, as the RPO is the major preferential creditor, it is the only one who needs to be asked to approve an Administrator’s fees in a relevant Para 52(1)(b) case.

  • Failing to provide fee estimates, where required

This is scary, considering that the Rules changed in 2015!  Personally, I haven’t seen this in a few years now.  I do still see, however, fee proposal packs lacking details of expenses, which is a necessary statutory component of all ADM, CVL, WUC and BKY fee proposal packs (and a SIP9 expectation in all case types).

The ICAEW’s tips to improve in this area are:

  • Consider using a billing authority form so that evidence of statutory approval is provided whenever a bill is raised/paid from the estate

I agree that this is valuable, although it will not ensure that valid approval has been achieved unless minutes of meetings/records of decision are signed off with similarly rigorous checks.

  • Critically review fee proposal packs: does the pack explain clearly the work done or to be done and, in light of the explanation, do the costs seem reasonable?

Yep, I agree with this too.  When considering fee estimates, I find it useful to consider the hours being proposed.  For example, it might look like good value to estimate time costs of £5,000 to recover £30,000, but if this means you’re expecting to spend three whole days to collect one book debt, then without more explanation this will look unreasonable.

 

2. Ethics

The ICAEW reported three instances where:

  • Prior relationships had not been considered

I see this so often that it makes me want to weep.  In these cases, the reviewer’s view was that the IP should have concluded that it was unethical to accept the appointment: now, that will get you into hot water.

Unsurprisingly, the ICAEW’s tips are:

  • Simply do proper ethics reviews and write them down before appointment

I wonder if this goes wrong because people independent from the case (and/or people who don’t really understand ethics) are tasked with completing the ethics review… and then the prospective office holder signs it off without thinking.  IPs, please think before you sign off an ethics review: does it disclose all prior relationships and are they well explained and evaluated?

 

3. Investigations

The ICAEW reported:

  • A systemic failure to record sufficient SIP2 work

Over recent years, there has been a trend away from lengthy checklists.  While I can understand this for routine case administration not least as checklists are often completed after-the-event, this approach simply does not work for SIP2 investigations.  The RPBs expect to see contemporaneous evidence of what work has been done and the office-holder’s thinking on whether anything is worth looking into further.

  • Failure to pursue antecedent transactions

I have seen SIP2 investigations fail to pick up weird goings-on like money moving out of accounts after the company had apparently stopping trading.  I have also seen SIP2 checklists identify a potential action and then the trail goes cold.  Both are just not acceptable and, I think, usually stem from an overflowing caseload or disorganised case administration.

The ICAEW’s tips are:

  • Do the work at an early stage and then follow up; and
  • Document decisions not to continue pursuit

The ICAEW reminds us that litigation funders may be able to help.  Some IPs screw their noses up at this suggestion based on rejections they received many years’ ago.  Times have changed, so I would recommend trying again.  And if you still get a rejection, at least this can form part of your decision.  Of course, your decision will also be based on your target’s wealth: it may be a no-brainer decision, but always write it down.

 

4. Statutory Deadlines

The ICAEW reported:

  • An increasing number of systemic failures to meet deadlines

This isn’t an issue I have seen.  Perhaps it derives from poor diary/task templates?  I have seen some sub-standard designs since the 2016 Rules were introduced, but I think those issues have largely been ironed out now.  Could the problem be overwhelming caseloads?  Firms weren’t exactly working at full pelt last year, so if this is your problem, then heaven help you in 2020/21!  Also, try not to get into the habit of running off progress reports at the very end of the deadline (and remember that ADM deadlines are one month, not two): if you do that, then there is no wriggle-room when you have a flurry of new work.

The ICAEW’s tips are:

  • Have robust diary prompts and case-specific checklists; and
  • Consider appointing a staff member to oversee/chase compliance

If diaries are very detailed, sometimes it is difficult to see the wood for the trees.  Having this as one person’s duty (or requiring, say, all managers to monitor/chase) can help sift out the vital diary prompts from the not-so-important ones.  It also helps more junior staff to learn which diary lines are non-negotiable.

 

5. Insolvency Compliance Reviews

 The ICAEW reported:

  • Weak or non-existence ICRs

It is worth remembering that the ICAEW does take this seriously, so please do give ICRs a great deal of attention.

  • Failure to implement changes

Sometimes actually conducting the ICR is the easy bit.  The time required to make the necessary changes can be substantial.

The ICAEW’s tips are:

  • Use a robust checklist to carry out the ICR

The ICAEW provides a checklist (note: this works for corporate and personal cases): www.icaew.com/regulation/insolvency/support-for-insolvency-practitioners/corporate-insolvency-casework.  Some questions are subjective, e.g. re case progression, but if used critically with no preconceptions it covers all the major statutory bases.  The ICR also needs to consider key areas on a firm-wide basis.  The ICAEW’s Review of Internal Controls and Systems Helpsheet – at www.icaew.com/regulation/insolvency/support-for-insolvency-practitioners/insolvency-compliance-review-helpsheets – is a good start, but remember that, aside from the ICR itself, SIP11, client money and the Money Laundering Regs require more thorough individual attention.

  • Make the necessary changes

I recommend getting the easy wins, e.g. fixing document templates and diary lines, out of the way quickly.  Meatier tasks may take months to resolve, especially if they involve changing procedures, training staff and making sure that they have adapted to new requirements.  Plan to tackle these tasks methodically, assign the tasks to appropriate staff and follow up with chasers/meetings to make sure that progress continues to be made.  Then, review the effectiveness of the changes ideally before the next ICR is due and keep going until the issue is resolved.

 

6. Information to Debtors

The ICAEW reported:

  • Delivery of poor information to debtors presumably in a pre-IVA context

…including: omitting relevant options; rushing calls; leading the debtor; and not sufficiently explaining the pros and cons of options.

The ICAEW’s tips are:

  • Train staff;
  • Review and update scripts regularly;
  • Regularly review calls for quality; and
  • Ensure that calls are tailored to the individual and give them time to consider their options

Nothing more needs to be said, really.  Quality-controlling advice calls is a never-ending job and one that needs to be well-resourced.

 

The Worst of the Rest

Yes, there’s more… lots more.

The above issues will get you in front of the ILC, but the ICAEW’s report also highlights other issues that are worth double-checking:

  • Miscalculation of delivery timescales

Be careful of assuming first class delivery times and then using second class post.  Take care also to exclude the date of delivery and the date of a decision when calculating notice periods.

  • Flaws in reports and fee estimates

In addition to the issues raised above, a plethora of qualitative issues arise, e.g. does the narrative explain the WIP or fee requested; are the numbers consistent throughout the doc; and are generic statements relevant to the case in question?  Something I see missing a lot are explanations as to whether the fee and expenses estimates have been (or will be) exceeded and if so why.  In some other cases, these explanations do not stack up with the WIP analysis, e.g. it might be reported that the fee estimate has been exceeded because of difficulties pursuing a certain asset, but the WIP analysis shows the fee estimate has only been exceeded in the Admin & Planning category.  Sometimes this can point to poor time-recording practices.

  • Poor case progression and dividend practices

The ICAEW reports some delays in asset recovery and in progressing dividends, as well as miscalculation of claims, especially those of employees.  Remember that in most cases you have only 2 months after the last date for proving to declare the dividend and, if you miss that, then you will need to go through the NOID rigmarole again (and, if you don’t have a good reason for missing it, then your second attempt should be at your own cost).  The ICAEW expects payment of interim dividends in appropriate cases.  I have also seen IPs put off progressing a preferential distribution until they can see their way clear to an unsecured dividend, which is not acceptable.  The ICAEW has also highlighted an issue with IPs telling creditors that they will apply the small debt provisions and then they fail to follow this through.  I have seen some initial letters and progress reports state such an intention and, although personally I think this is not binding until the NOID is issued (R14.31), to avoid any creditor confusion, I strongly recommend removing such statements from these early circulars: if you decide later to apply the small debt rules, then you can make this clear in the NOID.

  • Inadequate annual AML tasks

The ICAEW report reminds readers about the need to review the firm-based AML risk assessment annually and to carry out a full AML review.  I’ll take a closer look at this topic in a future blog when I review the ICAEW’s other annual reports.

  • Clients’ Money Regulations: a reminder for non-ICAEW IPs

The ICAEW report highlights that its Clients’ Money Regs apply to more than just ICAEW-licensed IPs.  If you work in an ICAEW-defined firm or the ICAEW is the firm’s AML Supervisor, then you need to comply with the ICAEW’s Clients’ Money Regs whether or not you are licensed as an IP by them.  To be honest, there are few differences between the IPA’s and the ICAEW’s Regs, but one notable difference is that the ICAEW requires an annual review of the operation of a client account.

  • Inadequate GDPR checks

The ICAEW reports that some are not considering on a case-by-case basis what personal data is held by the insolvent, whether it is secure and for what purpose it is held/processed.  The ICAEW also expects IPs to check whether the entity was registered with the ICO… although it is not clear what they expect you to do subsequently.  I recall that R3 asked the ICO way back in 2018 whether IPs should be maintaining (or even initiating) insolvents’ ICO registrations, which of course would attract additional costs to the estate.  But then 2018’s problems seem so last year!

 

SIP11 Reviews

The ICAEW devotes a whole page to this topic in its report.  Noteworthy points include:

  • Make sure the financial controls and safeguards are written down in the first place

I have seen more than one firm try to carry out a SIP11 review without having taken this step.  How can you check whether the firm’s processes have been followed, if they’re not written down?  SIP11 lists nine areas in paragraph 9 to document… and then adds a tenth (insurance cover) in paragraph 11.  In effect, these areas result in a cashiering manual setting out what happens to money in, payments out, bank recs etc.

  • Then review them annually

The ICAEW report highlights that traditional ICRs will not cover everything required of a SIP11 review.  Jo and I concur: if you want us to do a SIP11 review alongside your ICR, please let us know this and expect the ICR to be longer (and more expensive).  There is no prescription as regards a SIP11 review, but the ICAEW report lists four points that could be considered:

  • Review a sample of cases to see whether procedures have been followed correctly

To some extent, this will be covered by a traditional ICR, but the reviewer may only carry out full reviews of a couple of cases, which will be insufficient for SIP11 purposes.

  • Review the findings of the annual client account compliance review

From a SIP11 perspective, key issues include: how quickly client account money is moved to estate accounts; whether all post-appointment transactions are reflected on the case’s cash-book; and what happens to any interest credited to the client account.

  • Run reports from IPS etc. to review money held and bank rec frequency

I would also recommend running reports on balances held in closed cases or in “suspense” accounts.

  • Review a sample of bank recs

I have seen bank recs with uncleared adjusting entries or uncleared receipts signed off month after month without any apparent thought as to what is behind these.  Understandably, uncleared payments can sit around for longer, but they do need to be resolved at some stage.

Although not included in the ICAEW’s list, the report does note that the firm’s bonding and insurance procedures also need to be reviewed as part of the SIP11 exercise.  This could include a comparison of your open case list against your bond insurer’s, which would help identify whether bonds are being released appropriately.  You could also review whether bond schedules are issued before the 20th day of the following month – look particularly at appointments occurring right at the end of the month, as they can easily fail to hit IPS etc. in time for the following month’s bordereau – and see how swiftly increases are arranged.  Of course, the firm’s insurances are reviewed annually on renewal, but you could prove SIP11 compliance by keeping a record of that renewal consideration by the IP(s) in the same location as the SIP11 review docs.

 


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The ICAEW Roadshows: A Helping Hand Through Hazards

1414 Cairns Zoo

Last autumn, Jo Harris and I enjoyed travelling with the ICAEW on their Roadshows (although it has taken us several months to recover!). If you want to know what you missed (or you feel you need a reminder in view of all that has changed in the past six months), here is my personal summary of highlights from last year’s programme.

RPB Changes

Bob Pinder, ICAEW’s Director of Professional Standards, explained to us the impacts of the two 2015 Acts primarily on the RPB environment.

As we know, the Small Business Enterprise and Employment Act 2015 introduced new powers for the Insolvency Service to sanction RPBs. However, it is worth remembering that the Secretary of State now also has the power to apply to court for a “direct sanctions order” against an IP “if it appears to the Secretary of State that it would be in the public interest for the order to be made” (S141 of the SBEE Act 2015).  Such an order could involve: loss, suspension or restriction of a licence; specific requirements to comply; and/or a contribution to creditors.

Although I am sure that this action will only be contemplated in extreme cases (not least as I’m sure the Service would prefer that the RPBs spend the time and money disciplining IPs), I found this development more than a little disconcerting given the cudgel a certain past Secretary of State swung about when some IPs appeared not to have complied with the employee consultation requirements. As commented on by R3 last November (https://goo.gl/QX6kHM), the 2015 government consultation on this particular issue offered no helpful solution and who knows what (in)action might light the next touch paper in Ministers’ minds.

Compliance Hazards

This was Jo’s and my presentation: an attempt to highlight the principal areas in which we’ve seen IPs trip up. Some of the areas we covered were:

  • Getting remuneration right: how to approach the new fees rules
  • File management: how to deal with the new Oct-15 IP Regulation on maintaining records to demonstrate administration and material decisions
  • Statutory deadlines: how misunderstanding certain rules can make all the difference
  • Anti-money laundering and bribery: how to make checklists more effective
  • SIP highlights: a quick trip through the SIP series identifying some key and some lesser-known slip-up risks
  • Ethics: how to avoid threatening compliance with the principle of professional competence and due care

If you would like to hear the full presentation, Jo has recorded it as a webinar available to all Compliance Alliance webinar subscribers (£250+VAT for firm-wide access to all our webinars for one year)*.

Legal Update

Steven Fennell, Exchange Chambers, explored with ease some key decisions, such as Jetivia SA v Bilta (UK) Limited and Re Corporate Jet Realisations Limited.

Reviewing Steven’s notes now emphasises to me how necessary it is for us to keep up to date with court decisions – so much can happen in six months! Cue plug for R3’s Technical Reviews (starting next month): https://goo.gl/jnnxUA.

Regulatory Hot Topics

Allison Broad, Senior Manager of ICAEW QAD, ran through some regulatory developments and issues seen by the monitoring team. The main points that stood out to me were:

  • ICR reminders: as we know, all appointment-taking ICAEW-licensed IPs need to have an ICR each year. Don’t forget that this includes retiring IPs even if they are merely running off their remaining few cases. IPs who move practices also need to make sure that this requirement is not overlooked, which is easily done if their new colleagues have already carried out an ICR earlier in the year.
  • Ethics reminders: make sure that ethics checks are carried out and signed off before appointment; initial ethics checks signed off months (or even years!) after appointment are not acceptable. Ethics checks should be signed off by the appointment-taking IP personally, not delegated. Make sure that the ethics check is noted appropriately, e.g. if your Form 2.2B (Statement of Proposed Administrator) discloses a prior relationship, is this noted on the ethics review?
  • Anti-Money Laundering reminders: ensure that the files demonstrate the risk-based approach; it is not sufficient simply to state that you consider a subject as “normal” risk, you should be setting out how you reached this conclusion. Also don’t forget to carry out a risk assessment even on court appointments and take appropriate steps consequent to that risk assessment.
  • Bonding reminders: make sure that forms calculate the bond correctly, taking into consideration charged assets and prescribed parts. Also, be consistent in calculating the bond level in VAs: you may have difficulty in justifying why you have bonded assets for less than their realisable values as set out in the VA Proposal’s EOS.
  • SIP8 reminders: Allison described a surprising flurry of SIP8 breaches as regards S98 reports, e.g. lack of detail in trading history and company accounts and inaccurate deficiency accounts. Therefore, perhaps it would be valuable to refresh your staff’s/template’s treatment of SIP8 disclosures in S98 reports.

The Pre Pack Pool

At a time when we were all awaiting the revised SIP16, Stuart Hopewell, a Director of Pre Pack Pool Limited, gave us a welcome insight into the Pool’s vision… and valiantly tackled a number of enthusiastically-delivered questions from the floor.

Back in December, Allison’s webinar http://goo.gl/ZCzzxR reported that the Pool had received two applications over its first month of operation.  I wonder if that number has reached double figures yet…

Valuable CPD

In conclusion, I would just like to say to those of you who have never attended an ICAEW Roadshow before: please do consider it this year. I found it a valuable overview of core developments – both past and prospective – affecting insolvency, together with several heads-up warnings on how some IPs are getting things wrong and carefully-worded insights into the RPB’s perspective on some serious challenges for IPs, balancing well the ICAEW’s roles as both a regulator and a membership body.

* For more information on the Compliance Alliance’s Compliance Hazards webinar, please email info@thecompliancealliance.co.uk


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Ethics hits the headlines again: should we be worried?

Peru163

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?

IMGP0147 closeup

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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The Value of RPB Roadshows: Forewarned is Forearmed

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Having just returned from a fantastic trip to Vietnam and Cambodia, I have yet to catch up on domestic news, so I thought I’d plug the silence gap with some tips that I picked up from the RPBs’ autumn roadshows.

Ethical issues featured heavily at the ICAEW roadshow, whilst the IPA roadshow raised some controversial Administration points, and both RPBs had much to say about handling complaints in the wake of the Insolvency Service’s Complaints Gateway.

Ethical Issues (ICAEW Roadshow, Birmingham, 9 October 2014)

Allison Broad of the ICAEW described the following ethical dos and don’ts:

• In order to identify any prior relationships before deciding whether to take an appointment, do not rely solely on the company director signing off confirmation that s/he is not aware of any conflicts/relationships; internal checks are still required.

• Ensure that relationships are evaluated, not merely identified. Allison gave the example of an IP who had noted on his ethics checklist that the director of the prospective appointment had been a director of eight other companies that had gone insolvent with the IP acting, but the checklist evidenced no evaluation of the threat to the ethical principles that these prior relationships presented. Personally, I have also seen cases – although not quite as striking as this – where a prior relationship existed but it was not noted on the ethics checklist. Even though an IP may have concluded that a relationship is not sufficiently significant to require the introduction of safeguards or to raise concerns about the appropriateness of taking the appointment, files should disclose the relationship and evidence the IP’s consideration of its significance. In my view, failure to do so, not only could constitute a breach of the Ethics Code (paragraphs 74 and 75), but is also bound to raise suspicions that checklists are completed on auto-pilot and insufficient thought is given to ethics matters.

• Ensure that the IP signs off the ethics checklist, if not before the appointment, then as close to it as possible in order to demonstrate that consideration of ethical matters had been considered before appointment.

• Keep ethical threats under review throughout the life of the case, e.g. by including on case reviews a question – not a simple tick-box – as regards how any safeguards employed to manage a threat have been working.

• Review regular introducers’ websites prior to taking the first appointment from those sources and regularly thereafter, as website contents are frequently refreshed. Allison acknowledged that pre-packs and phoenix services may be covered on websites, but she urged caution when dealing with introducers who position these items at the top of their lists or prominently.

• If an IP feels that the quality of an introducer’s advice to directors/debtors is below par, it is not sufficient to allow the relationship to continue on the basis that at least the IP can ensure that s/he provides good advice. The ICAEW expects IPs to write to the introducer with any concerns and ask that changes be made to their websites and practices. They would then expect IPs to check whether these had been actioned and, if the introducer does not do so, the IPs should terminate the introduction relationship.

Administration Technicalities (IPA Roadshow, London, 22 October 2014)

Caroline Sumner of the IPA highlighted several issues identified on monitoring visits.  However, I think I must have been in a particularly argumentative mood on the day, as my notes are fairly scant on Caroline’s comments about SIP16, SIP13, and the new SIPs 3 – from memory, I think that none of this was rocket science; Caroline just highlighted the need to get them right – but I went to town on some other points she made:

  • Caroline described the Insolvency Service’s view that Administrators’ Proposals should describe only one of the Para 3 administration objectives that the Administrators propose to achieve.

I have a problem with this: firstly, in what respect is this reflected by the statutory requirements?  R2.33(2)(m) requires Proposals to include “a statement of how it is envisaged the purpose of administration will be achieved”.  An old Dear IP (chapter 1, article 5) referred to this and also to Para 111(1) of Schedule B1, which states “’the purpose of administration’ means an objective specified in paragraph 3”, leading to the Service’s conclusion that “administrators should not simply include all three objectives with no attempt to identify which is the relevant objective”.  That’s all well and good – and I think that IPs have moved away from many early-style Proposals, which did reproduce Para 3 verbatim – but I do not see how these statutory provisions require an IP to pin to the mast only one Para 3 objective to endeavour to achieve.

Here’s an example: what would be wrong with an Administrator’s Proposals stating that the company in administration is continuing to trade with a view to completing a sale of the business as a going concern, which should generate a better result for creditors as a whole – and thus achieve administration objective (b) – but if a business sale is not possible, a break-up sale is likely to result only in a distribution to secured/preferential creditors – and thus achieve administration objective (c)?  In my mind, this is the most transparent, comprehensive, and helpful explanation to creditors and certainly is far better than that which the Insolvency Service seems to expect IPs to deliver: for Proposals simply to state that a going concern sale is being pursued to achieve objective (b) is to provide only half the story and, I would argue, would not comply with R2.33(2)(m), as the Proposals would not be explaining “how it is envisaged the purpose of administration will be achieved” in the event that a business sale is not completed.  Para 111(1) simply leads me to an interpretation that an Administration’s eventual outcome – not necessarily the Administrator’s prospective aim – is the achieving of a single objective, which is supported by the Act’s presentation of the objectives as an hierarchy notwithstanding that in practice it is easy to see how more than one objective might be achieved (e.g. rescue of the company and a better result for creditors as a whole).

At the roadshow, I asked Caroline whether she felt that, if the singly-selected objective turned out to be not achievable, the Administrator would need to go to the expense of issuing revised Proposals.  She accepted that, of course, the IP would need to consider that requirement (although I wonder how the decision in Re Brilliant Independent Media Specialists (https://insolvencyoracle.com/2014/10/07/how-risky-is-it-to-act-contrary-to-a-creditors-committees-wishes-and-other-questions/) impacts on this).  Is this really what the government intended?  What happened to the drive to eliminate unnecessary costs?

Finally, I think that this view puts a new colour on the statutory requirement to issue Administrators’ Proposals as soon as reasonably practicable.  Could it be argued that asarp is only reached once the Administrator is reasonably confident of the single objective that he/she envisages achieving?  The RPBs have tried hard to promote the asarp requirement, rather than the 8-week back-stop, but insisting on a single objective in Proposals could encourage a turn in the tide.

I have asked Caroline to clarify the Insolvency Service’s view.  However, if the Service does expect IPs to adopt this approach, I think they should set it down in a Dear IP – of course, assuming that my arguments hold no water – so that all IPs are forced to accept the same burdens.

  • Caroline repeated the Dear IP article that extensions should be sought at the outset only in exceptional cases where it is clear that more than 12 months will be required to complete the Administration.

Although Caroline didn’t go into the technicalities of how an extension might be agreed at an early stage, it gave me cause to revisit the Dear IP article (chapter 1 article 12).  It describes the “questionable” practice of seeking consent for an extension “with the administrator’s proposals including a conditional resolution regarding the extension of the administration, along the lines that if the administrator should think it desirable, then the administration would be extended by an additional six months”.  Over the years I have seen this done, but I have not seen it done properly, i.e. compliant with the Rules.

R2.112(2) requires requests to be accompanied by a progress report, but Proposals are not a progress report.  I guess that a Proposals circular could be fudged to fit the prescription for a progress report as set out in R2.47, but this would have consequences, such as the need to file the Proposals/report with a form 2.24B (as well as filing the Proposals individually) and the clock would be re-set so that the next progress report would be due 6 months afterwards.  Also, how does an Administrator meet the statutory requirement to issue a notice of extension as soon as reasonably practicable after consent has been granted, if s/he has obtained such a “conditional” resolution?

My recommendation would be to avoid seeking extensions in the Proposals altogether, but instead leave them until the first progress report is due.  Of course, if an Administrator has to convene a general meeting (or deal with business by correspondence) at a time other than the Para 51 meeting, this will attract some additional costs, but if the request is made at the time of the statutorily-required 6-month progress report, those additional costs are relatively small, aren’t they?

Complaints-Handling

Complaints-handling was covered at both the ICAEW and the IPA roadshow, which I suspect has as much, if not more, to do with the likely pressure from the Insolvency Service on RPBs as it has with any perceived extent of failings on the part of IPs.

Both Allison and Caroline covered the need to explain how complaints can be made to the Complaints Gateway, although I do feel that generally RPBs have not done much to publicise their “requirements”.  The only guidance I’ve seen is on the ICAEW’s blog – http://www.ion.icaew.com/insolvencyblog/post/Launch-of-the-insolvency-complaints-gateway – that refers to the need to disclose the Gateway to anyone who wants to complain and in engagement terms, if they refer to the firm’s complaints procedure.  This blog also stated that there was no need to inform creditors of existing cases, which leaves me wondering what the expectation is to communicate with creditors generally on post-Gateway cases.  Given the Insolvency Service’s emphasis on the Gateway, I am a little surprised that the RPBs seem to be relying on some kind of process of osmosis to get the message of their expectations out to IPs.

From the two roadshows that I attended, I sense that there is a general expectation that IPs’ websites will display details of the Gateway (although I hope that the RPBs will take a proportionate approach, given that some smaller practices’ websites are little more than a homepage).  I do not get the sense that the RPBs expect the Gateway’s details to be added to circulars to creditors generally, but only that they should be included in any correspondence with (potential) complainants.

Allison also highlighted that, whilst the ICAEW’s bye-laws (paragraph 1.2 at http://goo.gl/1frWQo) include a requirement that all new clients be informed of their right to complain to the ICAEW and be provided with the name of the firm’s principal to whom they should complain, when writing as an insolvency office-holder the need to refer parties to the Complaints Gateway takes precedence over this requirement.

Caroline commented that IPA monitoring visits will include a review of the practice’s internal complaints process to see how these are handled before the complainant resorts to the Gateway.  If complaints are not handled by the IP, the monitors will also be exploring how the IP is confident that complaints are dealt with appropriately.

Why Attend the Roadshows?

I hope that the above illustrates the value of attending an RPB roadshow.  However, I think it also illustrates the risk that we learn about previously unknown and not altogether satisfying views on regulatory matters.  I realise that I am not blameless in this regard: when I worked at the IPA, I also used the roadshows as a medium to convey my thoughts on issues identified in visits and self certifications, so I should not be surprised that this practice is continuing (or indeed that others hold views different to my own!).  I and many of my colleagues were ever conscious that there was no other medium for Regulation Teams to deliver such messages and forewarn IPs of hot topics and evolving regulatory expectations.  Dear IP was the only other method that came close, but as this is controlled by the Insolvency Service, I could only hope that the RPB perspective would not become lost in translation.

The Advantage of Written Guidance?

I hope that, if I’ve got the wrong end of any stick waved at either of the two roadshows, someone will shout – please?  Given the limited audience at roadshows and the risk of Chinese Whispers, it must be better for the RPBs to convey their messages in written form, mustn’t it?

“The 18 month Rule”

A recent example, however, illustrates that even written communications can be unsettling.  At http://www.ion.icaew.com/insolvencyblog/post/The-18-month-rule—it-s-for-real, a QAD reviewer’s blog starts by stating that “there is a suggestion from some compliance providers and trainers that the 18 month rule for fixing fees may not be definitive, and that you still have the option of applying to creditors after the expiry of the 18 month period”.  I shall start by confessing that it’s not me, honest: I’ve never had cause to scrutinise these provisions.  However, now that I do, I have to say that I am struggling to see how the Rules can be interpreted in the way that the Service and the ICAEW are promulgating.

The blog states: “Our interpretation is that if fees haven’t been fixed within 18 months it will be scale rate in bankruptcies or compulsories or a court application. We recently raised the issue with the Insolvency Service and their view is: ‘. . . after 18 months the liquidator is only entitled to fix fees in accordance with rule 4.127(6) unless the stated exceptions apply’.  Clearly this relates to liquidators in compulsory liquidations, but the principal extends.”

I have long thought that this indeed was what the Service had intended by the Rules amendments, but on closer inspection I’m afraid I really can’t see that this is what the Rules state.  R4.127(6) states: “Where the liquidator is not the official receiver and the basis of his remuneration is not fixed as above within 18 months… the liquidator shall be entitled to remuneration fixed in accordance with the provisions of Rule 4.127A.”

“Shall be entitled…”  When I reach state-pensioner age, I shall be entitled to travel on buses free of charge, but that does not mean that the only way I will be able to get to town is by taking a bus.  Similarly, after 18 months, the liquidator shall be entitled to remuneration on the scale rate, but does this mean that the liquidator is only entitled to fees on this basis?  What statutory provision actually prohibits the liquidator from seeking creditors’ approval of fees on another R4.127(2) basis after 18 months?

And how do the Rules “extend” this compulsory liquidation principle to CVLs?  R4.127(7-CVL) states: “If not fixed as above, the basis of the liquidator’s remuneration shall… be fixed by the court… but such an application may not be made by the liquidator unless the liquidator has first sought fixing of the basis in accordance with paragraph (3C) or (5) and in any event may not be made more than 18 months after the date of the liquidator’s appointment.”  Given that the construction of this rule is so different from R4.127(6), it is difficult to see how both rules can be considered as reflecting the same principle.  And in any event, this simply states that a court application may not be made after 18 months (which seems to be precisely the opposite of the ICAEW’s blog post!).  How can this rule be interpreted to the effect that the liquidator cannot seek creditors’ approval for fees after 18 months?  The Rule starts: “If not fixed as above…”, so the rest of the Rule is irrelevant if the fees are fixed as above, e.g. as specified in R4.127(5) by a resolution of a meeting of creditors; I see no provision “above” prohibiting the seeking of a creditors’ resolution after 18 months.

I shall be interested to see how this matter gets handled in a future Dear IP.  In the meantime, what should IPs do?  I reckon that the only certain approach is: seek approval for fees before the 18 months are ended!

(UPDATE 12/01/2015: for another view of the 18-month rule, take a look at Bill Burch’s blog, which to be fair pre-dated mine by some months: http://goo.gl/4ucKaF.  Bill posted another article today at http://goo.gl/jL3WNu, reminding IPs that the wisest course is to seek early fee approval whether or not we agree with the regulators’ interpretation.)

This blog illustrates to me that there must be a better way for the regulatory bodies to convey – considered and sound – explanations of certain Rules and their expectations to IPs.  As a compliance consultant, I suffer many a sleepless night worrying about whether my interpretation and understanding of current regulatory standards are aligned with my clients’ authorising bodies’ stance.  I do value my former colleagues’ openness and I do try to keep my ear to the ground with many of the authorising bodies – I’ll take this opportunity to make a quick plug for the R3 webinar on regulatory hot topics that I shall be presenting with Matthew Peat of ACCA in February 2015.  However, I believe there is a need and a desire in all quarters for the creation of a better kind of forum/medium for ensuring that we all – regulators, IPs, and compliance specialists – are singing from the same hymn sheet.

Have a lovely long break from work, everyone.  I’ll catch up again in the New Year.