Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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New IP Fees Rules: Simples?

0434 Brown lemur2

With little more than benign overviews of the new fees rules out there, I thought I would examine them a bit closer.  What are the practical implications of the rules and do they contain any risky trap-doors?

My overriding thoughts are similar to those I have on the pre-pack changes: in an apparent effort to improve transparency, is the whole process becoming so unwieldy that it will turn IPs off altogether?  Maybe that’s the plan: make it so difficult to seek time costs that IPs switch to fixed/% fees.

As you know, the new rules take effect from 1 October 2015.  They can be found at: http://goo.gl/mekR5j.

Stephen Leslie, for Lexis Nexis, has produced a good basic summary of what they contain at: http://goo.gl/eqs9Aq.  R3’s Technical Bulletin 109 and Dear IP 65 also cover the subject.

S98s: same problem, different solutions

For CVLs, when should the liquidator set out his fees estimate?

R4.127(2A) will state that “the liquidator must prior to the determination of” the fee basis give the fees estimate (and details of expenses) to each creditor.  It seems to me that reference to “liquidator” requires the IP to be in office – so the fees estimate cannot be provided, say, along with notice of the S98 meeting.

But am I reading too much into this?  After all, R2.33 currently refers to pre-administration costs incurred by the “administrator”, when clearly the IP isn’t in office as administrator when the costs are incurred.  Therefore, maybe reference in the new rules to “liquidator” similarly is sloppy-hand to include “the person who would become liquidator”.  If that is the case, then maybe the expectation is that IPs will provide fees estimates along with S98 notices with a view to running S98 meetings along the same lines as they are at present.

Of course, then there’s the argument about how an IP is supposed to come up with a sensible estimate before he knows anything about the case.  Ok, he will have a better idea – but still not a great one – when the Statement of Affairs is drafted, but that’s little more than a few scribbles on a page, if that, at the stage when the S98 notices are issued.  So how long “prior” to the resolution should the liquidator “give” the information?  Given that S98s are pretty swift events anyway, would it be acceptable to send estimates the day before the S98 meeting..?

A confabulation of compliance consultants, especially with nothing more to guide us than a handful of new rules, is bound to generate a variety of proposed solutions.  Here are just three of them:

(i)         The return of the Centrebind

A Centrebind would overcome the problem of the IP being in office at the time of issuing the estimate and 14 days or thereabouts would seem sufficient to provide creditors with a reasonable estimate before the S98 meeting.

Of course, Centrebinds went out of fashion because of the limited powers the members’ liquidator has before the S98 meeting is held.  It’s not a great place to be as an office holder.  Do we really want to return to that practice wholesale?  And given the Cork Committee’s dissatisfaction over Centrebinds, would the regulators take a dim view if the practice were taken up again just to ensure that the IP could get his fees approved at the S98 meeting?  Some might argue that it’s the most practical way of working with the rules, but are there alternative solutions..?

(ii)        A second creditors’ meeting

This was my first thought when I read the rules: why seek a fees resolution at the S98 meeting?  Would it really be such a chore to convene another creditors’ meeting soon after appointment?

True, it would add another chunk of costs to the estate, but would IPs be criticised for taking this approach?  After all, how much of a solid estimate can an IP give before he truly knows what is involved in the case?  In my view, the costs of convening a second meeting would be entirely justifiable, as it seems to be the way the rules are pushing IPs.  Indeed, the rules as a whole are hardly cost-saving, given the additional work IPs will need to undertake to provide estimates and seek increases, if necessary later on.

Of course, in having a second meeting, IPs run the risk that the creditors already will have lost interest and they’re left with inquorate meetings and no resolution.  Also, as the liquidator (or an associate) will be chairman of the second meeting, they won’t be able to rely on the director-chairman’s vote or his use of general proxies.  However, the practice of looking to the director to approve the liquidator’s fees is viewed with scepticism anyway – many observers don’t recognise that, with so little creditor engagement, it’s sometimes the only practical way – so maybe it is a practice that we should be distancing ourselves from in any event.

(iii)       Fixed fees

This wasn’t my idea, but I see the attraction of it, particularly for “burial jobs”.

Given all the hassle of providing a detailed estimate of time costs, why bother, especially on jobs where in all likelihood the time costs incurred will outstrip the asset realisations net of other costs?  If liquidators were to seek a fixed fee, they would still need to provide, prior to the fees resolution, “details of the work the liquidator proposes to undertake and the expenses the liquidator considers will, or are likely to be, incurred”, but they could avoid providing the full estimated time costs breakdown.

Thus (provided that the IP doesn’t need to be in office as liquidator at the time), along with the S98 notices or just before the meeting, the IP can provide a pretty standard summary of tasks to undertake in any liquidation and set out the proposal to seek fees of £X.  If the SoA shows assets of, say, £15,000, the SoA/S98 fee is £7,500 of this and there are a few £hundreds of standard expenses, a fixed fee of £10,000 would seem reasonable to cover everything that a liquidator needs to do and, 9 times out of 10, there would be no need to seek an increase.

I guess that the proxy forms should list the proposed fee resolution in full, which would suggest that the IP knows what he wants to charge at the point of issuing the S98 notices.  As mentioned above, this would involve a degree of uncertainty, but for IPs working in the burial market, I can see that the risk is outweighed by the simplicity of this approach.  With Reg 13 ditched, IPs might not need to maintain time records* – what could be simpler?! – and they wouldn’t suffer the closure Catch 22 of billing time costs at a point when they haven’t yet spent the time closing the case.

But does this solution have legs for anything other than the simplest of jobs, where the IP would always be looking at a time costs write-off from the word go?  On its own, I don’t think so.  However, I don’t think it would be beyond the realms of possibility to devise a fairly standard formula for seeking fees on a combination of a fixed sum and a percentage basis.  This might help address any unexpected asset realisations, for example antecedent transactions or hidden directors’ loans.  Seeking percentage fees of such asset realisations would also deal with the concerns that it may be both impractical and indiscrete to propose fees estimates detailing what investigatory work is anticipated and how much that is likely to cost.

With several possibilities available, evidently S98s will require some thought and planning in readiness for 1 October.

* Although the Insolvency Practitioners (Amendment) Regulations 2015 are removing the Regulation 13 IP Case Record and thus, with it, the specific requirement to maintain “records of the amount of time spent on the case”, I do wonder whether an IP will be expected to continue to be prepared to meet the requirements of R1.55, R5.66 and Reg 36A of the 1994 Regs as regards providing time cost information to pretty-much any interested party who asks.  I know that no one asks, but with the continued existence of these Rules and Reg, does the abolition of Reg 13 really mean the abolition of time cost records in fixed/percentage fee cases?

Administrations: confusing

Of course, when tinkering with fee approval, it was always going to prove confusing for Administrations!  Here are a few reasons why:

Para 52(1)(b) cases

The current Act & Rules do not prescribe the process for seeking fee approval from secured (and preferential) creditors in Para 52(1)(b) cases.  Therefore, particularly where the Administrator has been appointed by a secured creditor and so will be reporting to his appointor outside of the statutory process, often a request is made very early on for approval for fees.

In future, if the Administrator is looking for time costs, he will need to “give to each creditor” the fees and expenses estimates before “determination” of the fee basis.  This indicates to me that an Administrator will not be able to seek approval for fees from a secured creditor before he has issued his Proposals to all creditors… unless he sends the estimates to all creditors in something other than his Proposals (unlikely)… or unless approval rests with other creditors in addition to his appointor – i.e. another secured creditor or also the preferential creditors – because it would seem to me that the basis of his fees is not “determined” until all necessary creditors have approved it.

This also means that an Administrator’s Proposals will have to include the fees and expenses estimates even for Para 52(1)(b) cases.  I can see some sense in this, as unsecured creditors can always requisition a meeting to form a committee that will override the secureds’/prefs’ approval of fees.  However, it seems quite a leap in policy, given that the full SIP9 information is not currently required in Proposals in these cases.

Changed outcomes

I am not surprised that the Service has introduced a new rule to deal with some Administrations where the prospective outcome has changed so that a different class of creditors is now in the frame for a recovery.  The Enterprise Act’s dual mechanism for obtaining fee approval depending on the anticipated outcome was always meant to have ensured that fees were approved by the party whose recovery was reduced because of the fees.  It’s true that the Act & Rules often do not deliver that consequence (not least because Para 52(1)(c) cases aren’t dealt with at all properly), but that has always been touted as the policy objective.

Sure enough, Dear IP 65 repeats this objective: “the new provision revises to whom the office holder must make a request or application in such circumstances [as described below] to make sure that such matters are determined by parties with the appropriate economic interest”.  Yes, but does it..?

In future, if fees have been approved on a Para 52(1)(b) case by secureds/prefs and the Administrator wants to draw fees in excess of the previous estimate, but he now thinks that a (non-p part) unsecured dividend will be made, he will need to seek approval from the unsecured creditors.  Fine.

However, there is no new provision to deal with outcomes changing in the other direction.  For example, if an Administrator originally thought that there would be a (non-p part) unsecured dividend – so he sought approval for fees by a resolution of the unsecured creditors – but now he thinks that there won’t be a dividend and maybe even that the secureds/prefs will suffer a shortfall, to whom does he look for approval of fees in excess of the previous estimate?  From what I can see, he will still go to the unsecured creditors.

[Theoretically, he might be able to issue revised Proposals in which he makes a Para 52(1)(b) statement, so that the secureds/prefs have authority to approve his fees.  In any event, the changed outcome might make revised Proposals appropriate.  But then what?  Would that result in the basis of his fees not being “determined” with the consequence that he has to issue fees and expenses estimates again to every creditor before he can seek the secureds’/prefs’ approval to the basis of his fees?]

Given that the OFT study concluded that secured creditors are so much better at controlling fees than unsecureds are, why not hand the power to secured creditors automatically by means of the new rules when the outcome deteriorates, in the same way that they shift the power automatically from the secureds to the unsecureds when the outcome improves?

Transitional provisions

This is more just a headache than confusing: one more permutation to accommodate in systems.

In general, the transitional provisions are designed so that, if an IP takes office after 1 October 2015, he will need to go through the new process to get his fees approved.  In effect, they treat Para 83 CVLs as new appointments, so the new rules disapply R4.127(5A) for Para 83 CVLs beginning after October in relation to Administrations that began before October.  Thus, Para 83 CVL Liquidators will not be able to rely on any fee approvals in the Administration.  Instead, they will have to go through the new process.

However, R4.127(5A) kicks back in for Para 83 CVLs following Administrations that begin after 1 October.  This is because, in these cases, the Administrator will have already gone through the new process in order to get fee approval, so it seems reasonable that the Liquidator can continue to rely on this approval.  Of course, the Liquidator will be subject to the Administrator’s fee estimate, so if he wants to draw fees in excess of the estimate, he will need to go through the new process for approval.

It might seem a bit much to expect an Administrator to be able to estimate a subsequent Liquidator’s fees.  For once, I think that the Insolvency Service has been sensible: the rules state that the Administrator’s estimates may include any subsequent Liquidator’s fees and expenses, not must – it’s good to see office holders left with a choice for a change!  Thus, where the Administrator’s estimates have not provided anything for the Liquidator, an increase in the estimate is probably going to be one of his first tasks.

I wonder if an Administrator’s estimate might be devised so that, if he has not used up his estimate in full, then it can be treated as the Liquidator’s estimate..?  I suspect the regulators might take a dim view of that…

Compulsory Liquidations: inconsistent treatment?

I didn’t spot this one, but it was passed to me by a Technical & Compliance Manager (thank you, D).

As explained above, the transitional provisions seem to be designed so that the critical date is the date of the IP’s appointment, rather than the more commonly-used insolvency event date.

It gets complicated, however, when one tries to define every way that an IP can be appointed.  For compulsory liquidations, the transitional provisions cover appointments (post-1 Oct) by: creditors’ meeting (S139(4)); contributories’ meeting (139(3)); and the court following an administration or CVA (S140).

What about appointments by the Secretary of State (S137)?

I cannot see why these appointments should be treated differently.  Does this mean that no Secretary of State appointments will be subject to the new rules?  Or does it mean that all SoS appointments will be subject to them..?

I have asked the Insolvency Service for comments.

Practical difficulties

Of course, there are practical difficulties in devising fee and expenses estimates for each case.  The Impact Assessment for the new rules (http://goo.gl/vCOsnS) state: “Based on informal discussions with IPs and internal analysis by the Insolvency Service it has been estimated that the costs of learning about the new requirements will be relatively moderate as in many cases IPs produce estimates of the work they will be undertaking for their own budgeting purposes. Therefore the industry has the pre existing infrastructure in place to produce estimates and so there will no additional set up costs for business. All the information that will be needed for the estimates is already available to IPs so there will be no additional costs of gathering information” (paragraph 34).  What nonsense!  Even if IPs do estimate fees at the start of a job, they are little more than finger-in-the-air estimates and are way less sophisticated than the new rules envisage.

The Insolvency Service followed up this nonsense with the suggestion that it would take IPs 1 hour to get their systems up to scratch for the changes!  Personally, I feel that such a fantasy-based statement is an insult to my intelligence.

In relation to generating fee and expenses estimates, the Impact Assessment states: “The work is likely to be an administrative task extended from the existing practice to produce estimates for business planning so we believe the work is likely to be completed by support staff within practices. It is estimated that the task will take around 15 minutes per case” (paragraph 36).  This is just so much nonsense!

Anyway, back to the practicalities…

The Insolvency Service has explained that it is working with the JIC to tackle “the key challenge… to present this information [the fees and expenses estimates] in a clear, concise format that the creditor, i.e. the end user, finds both useful and informative” (Dear IP 65, article 55).  I guess we are talking here about a revised SIP9.

Given that it has taken the IS/JIC ten months (and counting) to complete a revised SIP16 following Teresa Graham’s report, how close to the 1 October deadline do you think we’ll get before we see a revised SIP9?  I know that the SIP16 revision has been dependent on the pre-pack pool being set up, but I reckon it’s all going to get a bit tense towards early autumn.

The issue is: do we gamble now on what we think the regulators will want or do we sit and wait to see?  The new rules require that time costs fee estimates specify:

“details of the work the insolvency practitioner and his staff propose to undertake… [and] the time the insolvency practitioner anticipates each part of that work will take”. 

Is it a safe bet to assume that the regulators will expect a SIP9-style matrix, classifying work as Admin & Planning, Investigations, Realisation of Assets etc.?  Will they also want the estimate to list, not only the total time costs per work category, but also the time costs per staff grade, i.e. the hours plus time costs?  Will they also want a greater level of detail, say breaking down the Admin & Planning etc. categories into sub-categories, for cases where time costs are anticipated to exceed £50,000?  Conversely, what level of detail will they expect for cases with time costs estimated at less than £10,000, given that at present SIP9 requires only the number of hours and average hourly rate to be disclosed for fee-reporting purposes? Finally, will these expectations be, as they are now, set out as a Suggested Format, or will there be required disclosure points?

Given that the rules refer to “each part of that work”, personally I would get cracking now to devise systems and models to produce fees estimates styled on the table in the SIP9 appendix.  I might run some analyses of past cases to see if I could come up with some sensible tables for “typical” cases, maybe examine some outliers to see, for example, how much it costs to realise some difficult assets or pay dividends, depending on the class and number of creditors.  Setting up such templates and systems to capture the key elements of each case is going to take time.  We have less than six months.

Not quite so urgent, but just as systems-based, is the need to design mechanisms for monitoring fees estimates.  It would be useful to know if the major software-providers are designing tools to compare fees estimates to fees taken – much like the bond adequacy review – and whether these tools can be used to identify cases where fees are approaching estimates.

And of course, the rules provide loads more work on creating and revising standard documents and checklists *sigh*!

Finally, an obvious practical difficulty will be ensuring that creditors are still sufficiently engaged some way down the insolvency process to put pen to paper and approve additional fees.

Techies’ corner

I know that the following points are nit-picky, but, as we’re talking about fees approval, I felt that they were important to get right.

When does remuneration arise..?

We’ve had drummed into us that “remuneration is charged when the work to which it relates is done” (R13.13(19)).  This definition was introduced with the new progress reports so that IPs disclose time costs incurred, not just remuneration drawn.

But how does this definition fit with the new rules that state that “the remuneration must not exceed the total amount set out in the fees estimate without approval”?  Does this mean that we need to ask creditors to approve an excess before the time costs are incurred, i.e. before the work is done?  And what if the IP is prepared to write off the excess, does he still need to seek approval?

Yeah, I know, it’s pretty obvious what the intention of the rules is, but I asked the Insolvency Service anyway.  Their lawyer’s view was that the “court would resolve any tension” between the rules by coming to the conclusion that the new rules make it “sufficiently clear that the office holder is permitted to incur additional fees above the level of the estimate, before securing further approval”, because the same rules state that a request for approval must specify the reasons why the office holder “had exceeded” (or is likely to exceed) the fees estimate.  It’s the drawing down of additional fees that would be prohibited without approval, not the incurring of them.  Fair enough.

What “creditors” should be asked in Para 52(1)(b) Administrations..?

I have drafted the article above on the basis of the Insolvency Service’s answer to my second question, although I have to say that I think they could have done a better job at drafting the rules on this one.

New R2.109AB(2) explains which party/parties the Administrator should approach for approval of fees in excess of the estimate.  There are three choices, dependent on who fixed the fee basis in the first place:

“(a)  where the creditors’ committee fixed the basis, to the committee;

“(b)  where the creditors fixed the basis, to the creditors;

“(c)  where the court fixed the basis, by application to the court”.

My question was: if a secured creditor alone fixed the basis, who should approve the excess?  It can hardly be said that “the creditors” approved the basis.  Also, given that the OFT study had concluded that secured creditors seem to control fees quite adequately, perhaps it was felt that there was no need to add another layer of control in these cases…

The Insolvency Service’s response was: “it would be for the secured/preferential creditors to approve if the para 52(1)(b) statement held good. We think the wording of the Rules is sufficiently clear in this regard”.  Well, I’m glad I asked!

 

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The Small Business, Enterprise and Employment Bill: Part 3 – Regulation

1115 Swakop

In my final post on the Bill, I summarise the prospective changes to the IP regulatory landscape: by what standards will IPs be measured in the future? What will be the Insolvency Service’s role? And for how long will we continue with the multi-RPB model?

Regulatory Objectives

A key element of the Bill portrayed as the potential solution to several perceived problems is the introduction of regulatory objectives “as a framework against which regulatory activity can be measured and assessed”.

There has been a little refining of the objectives as originally proposed in the consultation document. They now appear (S126) as follows:

“‘Regulatory objectives’ means the objectives of:
(a) having a system of regulating persons acting as insolvency practitioners that
(i) secures fair treatment for persons affected by their acts and omissions,
(ii) reflects the regulatory principles, and
(iii) ensures consistent outcomes,
(b) encouraging an independent and competitive insolvency practitioner profession whose members:
(i) provide high quality services at a cost to the recipient which is fair and reasonable,
(ii) act transparently and with integrity, and
(iii) consider the interests of all creditors in any particular case,
(c) promoting the maximisation of the value of returns to creditors and promptness in making those returns, and
(d) protecting and promoting the public interest.”

Thus, the consultation’s suggested “value for money” objective has been replaced with reference to “high quality services at a cost to the recipient which is fair and reasonable”. However, “value for money” continues to appear large in the IA, which swings wildly from, on the one hand, conveying the sense that the introduction of a “value for money” regulatory objective will cause a sea change in regulation to, on the other hand, stating that, as RPBs say that “they already carry out an assessment of fees in monitoring visits”, they “do not anticipate this objective will add additional costs to the RPBs in terms of monitoring”.

Fees Complaints

The IA also states that “the objective makes it explicit that fee related complaints should be dealt with by the regulators”, but it states it is leaving the “how” entirely in the hands of the RPBs: “it will be for the RPBs, to create a system (whether within the existing complaints process or by combining resources to create a joint system) which adjudicates on fee issues”.

The IA sets a “high scenario” of 2,000 additional fee complaints (but with a best estimate of 300): that would be an average for each appointment-taker of three complaints every two years. However, despite this doom-saying, the IA factors in zero additional costs to the Service (in managing the Complaints Gateway) and to IPs. The IA states that the changes “should have minimal impact for individual IPs, particularly for those who already act in compliance with the existing legal and regulatory framework”. The Service does not seem to appreciate how the most compliant of IPs attracts complaints – it’s in the nature of the work – and how enormously time-consuming it can be to respond to RPB investigations, even when they end in “no case to answer”. I wonder how much work will be required to satisfy one’s RPB that the fees charged are a fair and reasonable exchange for the high quality services provided.

One consultation respondent estimated that the IP licence fee could increase by £950 pa, which prompted the IA drafter to write: “given the increased confidence and credibility to the industry which will result from a strengthened regulatory framework, is a proportionate cost for an industry which generates an estimated £1bn per annum”. In addition, the IA’s assessment of costs to the RPBs (for complaints-handling alone) shows a best estimate of £1,074 per IP, which increases to £7,184 per IP under the “high scenario”. Is this still considered a proportionate cost? It continues to sicken me that the Service seems to fail to understand the spectrum of environments within which IPs work. Yes, some do make a tidy living, but I know IPs for whom an extra £1,000 bill (let alone £7,000) would be the straw that breaks their back. For a Minister who seems so intent on “reducing a little the high bar on entry to the profession” (per her speech at the Insolvency Today conference) by introducing partial licences, which, allegedly, will encourage competition in the profession, she seems all too blind to the likely impact of burdening IPs with yet more costs; I think it will certainly threaten some sole practitioners’ survival in the industry. And for those IPs who can, inevitably the cost increase will be passed onto the insolvent estates – well done, Minister!

Will this “strengthened regulatory framework” really increase confidence in, and credibility of, the industry? Does the government feel that confidence will only increase once we see a few heads resting on platters? Well, public confidence had better improve, because the Bill will result in the Service’s hand hovering over the red button of the Single Regulator.

Partial Licences

The Small Biz Bill already makes obsolete the Deregulation Bill, which has yet even to complete its journey through the House of Lords, although principally only by adding to the Deregulation Bill’s requirements for RPBs – whether recognised for full or partial IP-licensing – by referring to the need to have rules and practices designed to ensure that the regulatory objectives are met.

Does this mean that the partial licensing debate over? The clause in the Deregulation Bill emerged intact from the House of Commons after a vote on a motion for its removal of 273 to 213. There has been some debate at the Bill’s second reading in the House of Lords, but it seems to me not nearly enough to turn the juggernaut. I find it quite striking how, on the one hand, there have been some very strong submissions against partial licensing primarily from R3 but also from the ICAEW* (which has stated that, through its own consultation process, it received “no indications of support at all” for partial licences), but on the other hand… Actually, who is fighting the “for” partial licensing corner? Why is it seen as such a great idea, where is the evidence that good people are being shut out of the market by the need to sit three exams (how many exams does it take to qualify as an accountant these days?), and has anyone with experience and knowledge of these things been arguing that partially licensed IPs will be just as skilful and competent as full licence-holders, only they will be cheaper?

* Responses on Clause 10 consultation, February 2014:
R3’s: http://goo.gl/vkqYvR
ICAEW’s: http://goo.gl/lhVNo8

Oversight Regulator’s Powers

The Bill introduces a range of powers, which will enable the oversight regulator (aka the Secretary of State, acting by the Insolvency Service) to influence an RPB’s actions – by means of directions, compliance orders, fines, reprimands, and ultimately the revocation of recognition – but also to leapfrog the RPB in its regulatory action against a licensed IP.

The Bill’s Explanatory Notes discloses the type of conditions that might prompt the Secretary of State to issue directions to an RPB: “if the RPB has failed to address the Insolvency Service’s concerns following a review of the way the RPB handles its complaints or a RPB’s failure to carry out a targeted monitoring visit of its IPs where the Insolvency Service has requested that it be done”. The Memorandum adds: “the Secretary of State will also be able to apply to the court to require an RPB to discipline an insolvency practitioner if disciplinary action appears to be in the public interest”.

When would the SoS apply to court directly to sanction an IP, rather than leave it to the IP’s RPB? The IA summary states: “where public confidence in the regime is undermined and could have serious consequences for the reputation of the profession. An example is where the activity undertaken impacts across all regulators and is so serious that action is required immediately, rather than wait for each regulator to investigate the case and come to potentially different findings”.

Personally, I find these moves worrying. In every Insolvency Service Annual Review of Insolvency Regulation, there is reported a clutch of complaints made to the Service about RPBs and, almost without exception, the Service’s investigations reveal nothing untoward. In addition, the Reviews disclose complaints made by the Service to the RPBs about individual IPs: these complaints appear to be processed by the RPBs adequately. Is this not the way things should be handled? It seems to me to be wholly inappropriate to side-step due process on the simple ground that public confidence appears to be undermined. Considering that the objective is to shore up public confidence in the existing regulatory regime, it seems to me that taking an issue out of the RPB’s hands is one sure way of destroying any confidence the public may have. If the Service were ever tempted to exercise such a power, it would seem to me that the nuclear option of a single regulator could become almost inevitable.

Single Regulator

What would prompt the SoS to designate a single regulator? The Bill’s Explanatory Notes state: “the power to move to a single regulator will only be used if the changes proposed by clauses 125 to 131 [i.e. including the regulatory objectives and the Service’s powers to sanction or direct the RPBs] do not succeed in improving confidence in the regulatory regime for insolvency practitioners”. The Memorandum also states: “the changes proposed by clauses 125 to 131 will be reviewed with a reasonable time of commencement. If there is still a lack of confidence in the insolvency practitioner regulatory regime, then the Secretary of State will consider whether to act to bring an end to the system of self-regulation by creating a single independent regulator which will apply consistent standards of regulation and will not be perceived to act in the interests of insolvency practitioners over creditors.”

I appreciate that often members of the public – and not a few IPs – express bemusement that the regulation of such a small industry should be shared amongst seven bodies and that there tends to be a natural scepticism towards the idea that a body funded (even in part) by IPs, some of whom also sit on regulatory committees, can be sufficiently independent to regulate its members satisfactorily (although I wonder how else anyone expects an insolvency regulator to be funded). However, whatever one’s criticisms are of the existing regulatory structure, I struggle to see how a single regulator would be certain to do a better job. But maybe it’s only the perception that’s important.


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IP Fees Consultation: a case of failing to see the wood for the trees..?

1525 Sequoia

Unfortunately, my case law reviews have become a bit log-jammed, so I’m afraid all I can offer at present is my response to the Insolvency Service’s IP fees and regulation consultation: MB IP fees response Mar-14

Normal service will be resumed as soon as possible.


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No summer holidays for the Insolvency Service?

0828 Noosa

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

Funding models

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..?

CDDA work

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).

Pre-packs

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!


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Anticipated Changes to the Insolvency Regulatory Landscape in 2013 and Beyond

We seem to have avoided major changes in 2012: no new/revised SIPs, no significant changes to legislation… does that mean it is all being stored up for 2013?

Here are a few developments that I’ll be looking out for next year:

• A Ministerial review on IPs’ fees – preliminary report expected in April 2013 with final recommendations in June 2013: http://bis.gov.uk/insolvency/insolvency-profession/review-of-ip-fees

• Changes to the RPBs’ complaints systems, including common sanctions guidance and an Insolvency Service-hosted site for lodging complaints and for publicising sanctions: http://insolvency.presscentre.com/Press-Releases/Jo-Swinson-announces-insolvency-fees-review-and-single-complaints-gateway-6853e.aspx

• HM Treasury’s review of the Special Administration regime for investment banks – report to the Treasury by the end of January 2013 with a fuller report expected by end of June 2013: http://www.hm-treasury.gov.uk/press_124_12.htm

• Changes to collective redundancy legislation… will there be any reference to any insolvency exemptions? Draft regulations expected in the New Year, to come into effect on 6 April 2013: http://news.bis.gov.uk/Press-Releases/Boost-for-business-as-government-sets-out-plans-to-update-employment-legislation-68512.aspx

• Progression of the Enterprise & Regulatory Reform Bill – currently at the House of Lord Committee stage: http://discuss.bis.gov.uk/enterprise-bill/

• Outcome of the Red Tape Challenge on insolvency – Insolvency Service to set out proposals to be considered by Ministers in early 2013: Dear IP 56 (not yet posted to the Service’s website)

• Revised SIP3 and SIP16 to be issued for consultation (per IPA autumn roadshows)?

• Development of the Scottish Government’s plans for bankruptcy law reform: http://www.aib.gov.uk/news/releases/2012/11/scottish-government%E2%80%99s-response-consultation-bankruptcy-law-reform

• The Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012 come into force on 2 January 2013 (thanks to Jo Harris for pointing these out) – I guess they are what they are, but I would like to see a user-friendly summary of them: http://www.legislation.gov.uk/uksi/2012/3013/pdfs/uksi_20123013_en.pdf

• The Financial Services Act comes into force on 1 April 2013… with what direct impact on IPs? I confess that it is not something that I know a lot about, but I do know that from it is created the Financial Conduct Authority, which (from 1 April 2014) will take on consumer credit regulation from the OFT so it may well affect IPs’ (and RPBs’ group) consumer credit licences: http://www.hm-treasury.gov.uk/press_126_12.htm

• And further afield, changes to the EC’s 2000 Insolvency Regulations (although perhaps further away than 2013?): http://ec.europa.eu/justice/newsroom/civil/news/121212_en.htm

Have I missed anything, do you think..?

I’ll also take this opportunity to mention that I reproduce my blog posts into pdfs every couple of months or so – I have added these to a new page on this blog, but I email them direct to those who have asked. If you would like to be added to this emailing list, please drop me a line at insolvencyoracle@pobox.com. I have also started on twitter (@mbmoving); I am a complete novice, but I am hoping to use it to make immediate reference to news items on subjects such as those above (but I’ll continue to blog). Finally, I have given my blog a new look for the New Year – a photos from my trip to Patagonia in January 2012.

Have a lovely few days/weeks off, everyone, and I hope I get to meet up with some of you again sometime in the next year, when I emerge finally from all my unpleasant experiences of 2012.