Insolvency Oracle

Developments in UK insolvency by Michelle Butler


Leave a comment

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.


Leave a comment

ACCA and Insolvency Service monitoring: poles apart?

IMGP5338

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

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

 

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

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

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

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

Catching up on overdue monitoring visits

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

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

“Independent” decision-making

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

 

The Insolvency Service’s report on ACCA

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

Early-day monitoring visits

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

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

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

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

Extensive monitoring reports

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

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

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

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

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

“Independent” decision-making

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

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

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

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

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

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

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

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

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

Complaints-handling

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

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

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

 

Single regulator?

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

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

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

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


Leave a comment

The Insolvency Service’s labours for transparency produce fruits

IMGP3472

The Insolvency Service has been busy over the past months producing plenty of documents other than the consultations. Here, I review the following:

  • First newsletter;
  • Report on its visit to the SoS-IP monitoring unit;
  • Summary of its oversight function of the RPBs;
  • IVA Standing Committee minutes; and
  • Complaints Gateway report.

The Insolvency Service’s first newsletter

http://content.govdelivery.com/accounts/UKIS/bulletins/d469cc

Although this is a bit of a PR statement, a couple of crafty comments have been slipped in.

The newsletter explains that the Service’s “IP regulation function has been strengthened and we have raised the bar on our expectations of authorising bodies”. I started off sceptical but to be fair the Service’s summary of how it carries out its oversight function of the authorising bodies – https://www.gov.uk/government/publications/insolvency-practitioner-regulation-oversight-and-monitoring-of-authorising-bodies – does convey a more intensive Big Brother sense than the Principles for Monitoring alone had done previously.  This document puts more emphasis on their risk-based assessments, desk-top monitoring and themed reviews, as well as targeting topical areas of concern, which can only help to provide a better framework in which their physical monitoring visits to the RPBs can sit.

I commend the Service for establishing more intelligent regulatory processes, but two sentences of the newsletter stick in the throat: “We saw the impact that our changing expectations had in a few areas. Things deemed acceptable a few years ago were now being picked up as areas for improvement.” This is a reference to its report on the visit to its own people who monitor SoS-authorised IPs, the Insolvency Practitioner Services (“IPS”): https://www.gov.uk/government/publications/monitoring-activity-reports-of-insolvency-practitioner-authorising-bodies.  Having worked in the IPA’s regulatory department from 2005 to 2012, I would like to assure readers that many of the items identified in the Service’s report on IPS have been unacceptable for many years – at least to the IPA during my time and most probably to the other RPBs (I am as certain as I can be of that without having worked at the RPBs myself).

I am aghast at the Service’s apparent suggestion that the following recent discoveries at the IPS were acceptable a few years ago:

  • A 5-year visit cycle with insufficient risk assessment to justify a gap longer than 3 years;
  • Visits to new appointment-takers not carried out within 12 months and no evidence of risk assessment to justify this;
  • No evidence that one IP’s receipt of more than 1,000 complaints in the previous year (as disclosed in the pre-visit questionnaire) was raised during the visit, nor was it considered in any detail in the report;
  • No evidence of website checks (which the Service demanded of the RPBs many years ago);
  • “Little evidence that compliance with SIP16 is being considered”;
  • “No evidence that relevant ethical checklists and initial meeting notes from cases had been considered”; and
  • “Once a final report has been sent to the IP, there does not appear to be any process whereby the findings of the report are considered further by IPS”.

Still, that’s enough of the past. The Service has now thrown down the gauntlet.  I shall be pleased if they now prove they can parry and thrust with intelligence and effectiveness.

Worthy of note is that the newsletter explains that, in future, sanctions handed down to IPs by the RPBs will be published on the Service’s website (presumably more contemporaneously than within its annual reviews).

IVA Standing Committee Minutes 17 July 2014

https://www.gov.uk/government/publications/minutes-from-the-iva-standing-committee-july-2014

“Standardised Format”

The minutes report that the IPA will have a final version – of what? Presumably a statutory annual report template? – within “a couple of weeks” and that two Committee members will draft a Dear IP article (there’s a novelty!) to explain that use of the standard is not mandatory.

Income and Expenditure Assessments

The minutes recorded that Money Advice Service had been preparing for consultation a draft I&E statement – which seems to be an amalgam of the CFS and the StepChange budget with the plan that it will be used for all/a number of debt solutions. The consultation was opened on 16 October: https://www.moneyadviceservice.org.uk/en/static/standard-financial-statement-consultation

IVA Protocol Equity Clause

As a consequence of concerns raised by an adviser about the equity clause, DRF has agreed to “draft a response” – it seems this is only intended to go to the adviser who had written in, although it would seem to me to have wider interest – “to clarify the position, which is that a person will not be expected to go to a subprime lender and the importance of independent financial advice”. It is good to have that assurance, but what exactly does the IVA Protocol require debtors to do in relation to equity?  Does the Protocol clause need revising, I wonder.

Resistance to refunding dividends when set-off applied

I see the issue: a creditor receives dividends and then sets off mis-sold PPI compensation against their remaining debt. Consequently, it could be argued that the creditor has been overpaid a dividend and should return (some of) it.  The minutes state that “it is a complicated issue and different opinions prevail” (well, there’s a revelation!), although it has been raised with the FCA.

Variations

It seems that the Committee has only just cottoned on to the fact that the Protocol does not allow the supervisor to decide whether a variation meeting should be called, so they are to look at re-wording the standard terms to “give supervisor discretion as to whether variation is appropriate so when one is called it is genuine and in these instances the supervisor will be entitled to get paid”.

I’m sorry if I sound a little despairing at this, not least because of course the cynic may see this as yet another avenue for IPs to make some easy money! It was something that I’d heard about when I was at the IPA – that some IPs were struggling with IVA debtors who wanted, say, to offer a full and final settlement to the creditors that the IP was confident would be rejected by creditors, but under the Protocol terms it seemed that they had no choice but to pass the offer to creditors.  I’m just surprised that this issue has not yet been resolved.

Recent pension changes

The minutes simply state: “InsS to enquire with colleagues as to how it is planned to treat these in bankruptcy and feed back”. About time too!  Shortly after the April proposals had been first announced, I’d read articles questioning whether the government had thought about how any lump sum – which from next April could be the whole pension pot – would be treated in a bankruptcy.  Presumably, legislation will be drafted to protect this pot from a Trustee’s hands, but that depends on the drafter getting it right.  The lesson of Raithatha v Williamson comes to mind…

Well, I’m assuming that this is what the Committee minutes refer to, anyway.

Report on the First Year of the Complaints Gateway

https://www.gov.uk/government/publications/insolvency-practitioner-complaints-gateway-report-august-2014

Aha, so Dr Judge has been able to spin an increased number of complaints as evidence that the gateway “is meeting the aim of making the complaints process easier to understand and use”! I wonder if, had the number of complaints decreased, his message might have been that insolvency regulation had played a part in raising standards so that there were fewer causes for complaint.

The report mentions that the Service is “continuing dialogue” with the SRA and Law Society of Scotland to try to get them to adopt the gateway.

The Service still seems to be hung up about the effectiveness of the Insolvency Code of Ethics (as I’d mentioned in an earlier post, http://wp.me/p2FU2Z-6I) and have reported their “findings” to the JIC “to assist with its review into this area”.

The Service also seems to have got heavy with the RPBs about complaints on delayed IVA closures due to ongoing PPI refunds. The ICAEW and the IPA “have agreed to take forward all cases for investigation” – because, of course, some complaints are closed at assessment stage on the basis that the complaints reviewer has concluded that there is no case to answer (i.e. it is not that these complaints do not get considered at all) – “where the delay in closing the IVA exceeds six months from the debtor’s final payment”.  Does this mean that the general regulator view is that any delay under 6 months is acceptable?  Hopefully, this typical Service measure of setting unprincipled boundaries will not result in a formulaic approach to dealing with all complaints about delayed closure of IVAs.  And, although the other RPBs may license a smaller proportion of IVA-providing IPs, I wonder what their practices are…

The report also explains that the Service has persuaded the ICAEW to modify its approach a little in relation to complaints resolved by conciliation. Now, such a complaint will still be considered in the context of any regulatory breaches committed by the IP.  Years ago, the Service urged the RPBs to consider whether they could make greater use of financial compensation (or even simply requiring an IP to write an apology) in their complaints processes, but there was some resistance because it seemed that the key objective of the regulatory complaints process – to pick up IPs failing to meet standards – was at risk of getting lost: might some IPs be persuaded to agree a swift end to a complaint, if it meant that less attention would be paid to it?  To be fair, this has always been an IP’s option: he can always satisfy the complainant before they ever approach the regulator.  However, now settling a complaint after it has started on the Gateway path may not be the end of it for the IP, whichever RPB licenses him.

The Statistics

I think that the stats have been more than adequately covered by other commentaries. In any event, I found it difficult to draw any real conclusions from them in isolation, but they also don’t add much to the picture presented in the Insolvency Service’s 2013 annual review.  That’s not to say, however, that this report has no use; at the very least, it will serve as a reference point for the future.

Ok, the complaints number has increased, but it does seem that the delayed IVA closure due to PPI refunds is an exceptional issue at the moment. Given that the IPA licenses the majority of IPs who carry out IVAs, it is not surprising therefore that the IPA has the largest referred-complaint per IP figure: 0.63, compared to 0.54 over all the authorising bodies (although the SoS is barely a whisker behind at 0.62).  My personal expectation, however, is that the Insolvency Service’s being seen as being more involved in the complaints process via the Gateway alone may sustain slightly higher levels of complaints in the longer term, as perceived victims may not be so quick to assume that the RPB/IP relationship stacks the odds so heavily against them receiving a fair hearing.


Leave a comment

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.


1 Comment

IP Fees & Regulation Consultation: Have Turkeys Voted for Christmas?

1037 EW2

Faced with an apparent government vision of heavy-handed oversight over the RPBs and some peculiar restrictions on the time cost basis for IP fees, how have the RPBs and R3 responded? Have they resisted the pressure to offer some kind of compromise? Have they offered anything that might “solve the problems”? Here I have attempted to compare and contrast the responses of ACCA, ICAEW, ICAS, IPA and R3 to the key proposals of the recent consultation.

The government consultation page is at: https://www.gov.uk/government/consultations/insolvency-practitioner-regulation-and-fee-structure

The bodies’ responses are located at:

• ACCA: http://www.accaglobal.com/content/accaglobal/zw/en/technical-activities/technical-resources-search/2014/march/cdr1267.html
• ICAEW: http://www.icaew.com/en/technical/insolvency/insolvency-reps
• ICAS: http://icas.org.uk/Technical-Knowledge/Insolvency-Technical/Submissions/
• IPA: in the members’ area>public consultations>other consultations
• R3: https://www.r3.org.uk/media/documents/policy/consultation_subs/R3_response_-_Strengthening_the_regulatory_regime_and_fee_structure_for_IPs.pdf

In particular, I would recommend reading the R3 response in full, as there is not the space here to do it justice and it includes some valuable member survey results.

Regulatory Objectives

The government has proposed regulatory objectives for the statute-books, “framed” as follows:

1. Protecting and promoting the public interest

2. Having a system of regulating persons acting as IPs that:
(i) delivers fair treatment for persons affected by their actions and omissions,
(ii) reflects the regulatory principles under which regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed, and any other principle considered to represent best regulatory practice, and
(iii) delivers consistent outcomes

3. Encouraging an independent and competitive IP profession whose members:
(i) deliver quality services transparently and with integrity, and
(ii) consider the interests of all creditors in any particular case

4. Promoting the maximisation of the value of returns to creditors and also promptness in making those returns

5. Ensuring that the fees charged by IPs represent value for money

ACCA seemed alone in considering most of the above to be “uncontentious”, even going so far as to suggest what it felt would be a useful addition to them. However, none of the proposed objectives avoided the other bodies’ critical eyes. Many of the comments revolved around the thought that any such objectives will need to be supported by detailed guidance so that everyone was clear on the standards by which IPs and the RPBs are being measured.

Here are some other fruitier comments:

• Why stop at “having a system of regulating IPs” that delivers fairness etc.? Aren’t some of these objectives appropriate to the insolvency regime itself? (ICAEW, IPA)
• Shouldn’t the regulation system “deliver fair treatment” also to IPs? (ICAEW)
• Fixing IP fees on a prescribed scale (reference to another of the consultation’s proposals) would not “encourage a competitive IP profession”. (ICAEW)
• Statute already sets out how office holders should consider creditors’ interests (ICAEW, R3), although not uniformly in all cases (IPA). Setting it as an objective may raise false hopes of some expecting greater weight to be given to their interests than provided by statute. (ICAEW)
• Promoting the “promptness of returns” could threaten consideration of longer term gains, thus encouraging a culture of “quick kills” rather than thorough investigation and pursuit of claims. (IPA)
• “You should recognise that to perform a ‘value for money’ assessment in a case will require a detailed audit… which will be a very time consuming (and therefore expensive) process.” (ICAEW)
• Setting “value for money” as a regulatory objective simply shifts the responsibility for finding a solution onto the RPBs, rather than helping to overcome the difficulties in ascertaining what actually represents value for money. (IPA)
• The regulatory process cannot alter the facts that creditors will suffer losses, but enshrining objectives 4 and 5 risks over-inflating creditors’ expectations and thus may have a detrimental effect on public confidence. (IPA)

R3 kicked back more robustly on the concept as a whole: “the proposals… prompt us to suggest that now is the time to look at, in a fundamental way, the role of the Insolvency Service, as presently structured, funded, resourced and whether it is the most appropriate body to direct and oversee as important a part of the UK’s financial support service sector as the insolvency profession”.

Oversight Regulator’s Statutory Powers over the RPBs

The government proposes to introduce statutory powers to enable the Insolvency Service/Secretary of State to take a variety of actions against RPBs and, in certain cases, to make their own enquiries of, and apply to court to decide sanctions on, IPs directly. Unsurprisingly, the RPBs – and perhaps a little surprisingly, R3 – expressed concerns over some of the proposals as well as questioning whether the powers were truly necessary (again with the clear exception of ACCA, which had few specific comments on the proposals).

• “The ‘oversight regulator’ should take care to avoid ‘micro-managing’ RPBs and their disciplinary processes. Effectively running a ‘shadow’ regulatory system on top of the existing established processes would be confusing and damaging for the insolvency profession and those it serves.” (R3)
• “The increased powers of sanction by the oversight body seem to be little more than window dressing to address non-existent illegal actions… In our view, the system of regulation operates at its most effective when the oversight regulator and the RPBs work together, as demonstrated through the introduction of the complaints gateway.” (ICAEW)
• “It is worrying that the Secretary of State would wish to acquire the ability to control individual enquiries, which could undermine the fairness of the procedure.” (ICAEW)
• “The fundamental problem… is that the proposed legislation does not envisage there being any stage at which a proper disciplinary hearing will be held to allow the IP to deal with and refute the findings of the Insolvency Service investigation and it is envisaged that the Secretary of State, through the good offices of the Insolvency Service would be investigator, prosecutor and judge (determining both guilt and sanction).” (ICAEW)
• “We wonder whether this process could be susceptible to challenge on the basis of human rights legislation given that there appears to be no provision for a fair trial by an independent tribunal.” (ICAEW)
• “Who picks up the likely significant costs?” If these are to be passed on to the RPBs, then licence fees will increase significantly, with the likely consequences of increased costs on insolvent estates and IPs leaving the market. (ICAEW and R3)
• “There are several proposals… that would see IPs potentially punished twice for the same transgression. It is both inequitable and a position that few other professionals could find themselves in.” (R3) The IPA also stated that such a process “would introduce a degree of double jeopardy and be contrary to principles of natural justice”. Although apparently the Service has clarified, in a meeting with the IPA, that it is not intended to subject an IP to a second disciplinary process, the IPA has questioned how, and in what circumstances, would the Service conduct such enquiries independent of the IP’s licensing body.
• “The power for the Secretary of State to sanction an IP directly calls into question the point of the regulation of the profession being delegated to RPBs in the first place.” (R3)
• As regards the proposed power to issue a direction to an RPB in the context of a disciplinary matter: “it would be wholly inappropriate for the Insolvency Service to mandate that a particular decision be reached.” (ICAS)
• Will the Service be adequately resourced – financially and with skilled staff – to exercise these new powers, particularly in regard to the proposed investigations and prosecutions? (R3 and ICAS)

A Single Regulator?

It seems that there has been a slight convergence of opinions of R3 and the RPBs on this question. Setting aside ACCA, which “endorsed” the proposal, the regulatory and trade bodies now seem united in their objection to the proposed reserve power to enable the Service to designate a single regulator.

However, whereas R3 brought attention to the “regulation gap” that would result as a single regulator got up to speed, the RPBs had other reasons for their objections:

• Whatever could be achieved by the Insolvency Service overseeing a single regulator equally should be achievable with multiple RPBs. Effective oversight is the key. (ICAS and ICAEW)
• “There seems to be a failure to recognise that many IPs are already members of bodies which operate with the best regulatory models for professionals.” (ICAS)
• “Competition between regulators has driven down licensing costs and led to improvements in RPBs’ offerings to their members. There would be no such incentive to innovate, were there to be a single regulatory body.” (IPA)
• The government is also proposing to introduce a formal process to de-recognise an RPB if it fails to perform, but how would that work with a single regulator? We could hardly be left with no regulator! (IPA)
• Providing even a reserve power “could be seen to demonstrate on the part of the Insolvency Service a lack of commitment to the changes proposed for the regulatory regime and a lack of confidence in its part in the RPBs.” (ICAEW)

R3 suggested a third way: a “Single Regulatory Process”, which “would reduce significantly the inconsistencies that currently exist in the insolvency profession’s regulation” and “would also be a chance to take a fresh look at the profession’s regulatory processes and standards”.

Restriction of Use of Time Cost Basis

I wonder if the Service had any inkling of the floodgate they were prising open with the suggestion that the option of seeking fees on a time cost basis be limited to certain cases. Even ACCA is opposed to this one!

The core objections will not come as a surprise:

• If the primary issue is lack of creditor engagement, then the solution should lie in improving creditor engagement, starting with the Crown creditors. (ACCA, ICAS, ICAEW)
• “Some IPs may feel minded for their own commercial protection to factor in more work than might in the event be necessary, in which case fees could end up being over-estimated.” (ACCA; similar comments made by R3)
• In 2013, only 2% of all complaints related to fees, so perhaps creditors’ concern is not so acute as perceived by the government, and any action taken to change the existing regime must be proportionate. (ACCA, R3, ICAEW, ICAS)
• Plenty of criticisms of the OFT study: out of date, limited scope (which is now being extrapolated far beyond its remit), confusion between fees and costs, assumption that engaged creditors are the only constraint on fees, etc… (primarily R3 and ICAEW)
• IPs will avoid small and risky cases, as a fixed/percentage fee would not be economical. (R3, ACCA) [Although I have heard this many times, personally I don’t get it (unless people have in mind a prescribed rate): for a case with assets of £10,000 (net of non-IP costs), how does an IP’s recovery differ, if he is paid on a time cost basis, a fixed fee of £10,000, or a fee of 100% of the first £10,000 (net) realised?]
• This would burden the public purse, as uneconomic cases will remain with the OR. Some IPs also would leave the market, resulting in reduced competition and fewer options for debtors seeking help, which would seem contrary to the public interest. (R3, ICAEW)
• Fixed fees do not incentivise IPs to pursue tricky assets or to carry out non-profitable tasks. What does an IP do when he reaches the limit but still has work to do; is he expected to work for no pay? (ACCA, R3, ICAS, ICAEW, IPA)
• As recommended by the Cork Report, percentage-based fees were largely dropped in the 1980s, as they were viewed as unfair and inequitable to creditors. (ACCA, R3) “There is nothing inherently fair in a basis of charging where the results depend upon the amount and quality of realisable assets, rather than the work required.” (ICAEW) Arguably, time costs are the fairest fees mechanism (ICAEW), whereas fixed/percentage fees will invariably result in an element of cross-subsidisation of cases. (IPA)
• There is no evidence – or reason – to support the assumption that adopting fixed/percentage fees will reduce fee levels (IPA) or creditors’ returns (ICAEW).

But here are some of the more impassioned and novel comments:

• This specific proposal has no grounding in the Kempson review nor has there been any evidence-based research. “The Insolvency Service has disclosed the rationale behind this decision is solely ‘because two methods of remuneration are simpler than three’.” (R3)
• “R3 is not aware of anywhere else in the world where fee restrictions as outlined in the consultation are in operation. In effect, the Insolvency Service proposes to introduce an untested system of IP remuneration in the UK.” (R3)
• Secured creditors have the power to negotiate discounts from IPs, but why must that mean that unsecured creditors are ‘over-charged’? If a large customer (such as the government via its own procurement policy) sought to obtain discounts, that does not mean that other buyers of the goods and services are automatically being ‘over-charged’. (R3)
• Is a 9% differential in costs (the OFT study’s conclusion) really concerning? “The differential, for instance, between prices charged for consumer goods to wholesale or retail customers could be expected to be much higher (and still not exploitative of consumers).” (ICAEW)
• Restricting fees could result in outsourcing of parts of the job to unregulated entities, shifting the cost rather than reducing it and resulting in less transparency and control. (R3)
• “It is simplistic to think that changes introduced in the personal insolvency market can be imported into the corporate sector; this view demonstrates a complete lack of understanding of corporate insolvency, This market cannot be ‘commoditised’ in the same way.” (R3)
• If creditors have difficulty assessing the reasonableness of fees based on time costs, they will have the same, if not greater, difficulty judging fixed/percentage fees, something acknowledged by Professor Kempson. (R3)
• There is no reason to believe that restricting the use of the time cost basis in this manner will impact on creditor engagement or complaints about fees. (R3)
• RICS abolished fee scales for valuations after the Monopolies and Mergers Commission concluded that “they restricted competition and worked against consumers and were against the public interest”. (ICAEW)
• It is difficult to reconcile the government’s apparent determination to improve public confidence in the insolvency regime with the World Bank’s report that shows the UK currently as one of the most effective jurisdictions for resolving insolvency. (ICAEW)
• “If the aim of the Insolvency Service is to reduce IPs’ fees in aggregate to a break-even level, it seems unlikely that a high quality profession will be sustained.” (ICAEW)
• The Impact Assessment identifies the risk that the OR might be left with more small-value cases, but the Assessment’s suggestion “that the concerns will be ‘overcome’ through regulatory objectives of RPBs and monitoring is fanciful. The consequences would result from a fee regime imposed upon the profession by the government and RPBs would not be in a position to do anything about it.” (ICAEW)
• Professor Kempson recommended greater use of mixed bases for fees, but the government is proposing to abolish this. (IPA) [Mixed bases were only introduced in 2010!]
• The government wishes RPBs to engage more actively in monitoring and assessment of fees, but this will be more difficult in non-time cost cases. (IPA)
• The 2010 reforms and revised SIP9 are still fresh, but “the Insolvency Service appears already to have concluded that those reforms failed.” (ICAEW)
• Proposals to provide different fee bases for different case types, recovery prospects, and UK jurisdictions will do nothing to clarify an already-confusing picture for creditors. (ICAEW)

The bodies’ suggestions of alternative approaches are a mixed bag (some of which, personally, I find a bit scary! But hey, a bit of brain-storming is no bad thing.):

• Greater engagement by Crown creditors (pretty-much everyone’s idea).
• Reduce the constraints on creditors’ committees, e.g. smaller quorum. (ICAS)
• Encourage committee members, e.g. small payments for attending meetings. (ICAEW)
• Introduce a Scottish-style Reporter mechanism across the UK (the consultation stated that the Scottish system’s checks and balances appeared to work reasonably well). (ICAS)
• Require IPs “to justify to creditors and regulators their use of the hourly rate, by reference to prescribed criteria”. (ACCA)
• “More targeted support… to creditors to enable them to assess the reasonableness of the amounts being claimed.” (ACCA)
• “Improved management of creditor expectations, through creditor guides, fee estimates and estimated outcome statements.” (IPA)
• “Enhanced capital requirements and/or direct financial contribution by directors to the basic costs of insolvency processes.” (IPA) [Interesting idea, but isn’t there a risk of conflict with this..?]
• Fixing a minimum fee for those statutory elements of an insolvency administration that will generally not be of direct financial benefit to creditors.” (IPA, similar suggestion by R3)
• “Data collection and benchmarking of fee data.” (IPA) [And..?]
• “Guidance and/or compulsion of IPs to make greater use of mixed fee bases for different elements of the work involved within an insolvency administration. The onus could be put on the IP to justify why the basis sought is appropriate to the nature of assets, the complexity of the task and the value that it is estimated will result.” (IPA) [But does this follow, given some of the arguments against fixed/percentage fees..?]
• Better explanation by IPs up-front of the likelihood (or not) of dividends and of the work that will need to be carried out that will not generate direct financial benefits. (IPA)
• Adjusting the requisite voting majorities so that greater creditor participation is required. (IPA) [Why penalise IPs for creditors’ inactivity?]
• Encouraging cheaper ways of conducting “meetings”, e.g. by telephone, e-meetings, or resolutions by correspondence. (ICAEW)
• Drop the Red Tape Challenge proposal to remove the requirement to hold creditors’ meetings. (R3)
• More/better guides for creditors, similar to those that the Insolvency Service already provides for debtors facing bankruptcy. (ICAEW, R3)
• More transparency/information regarding the costs to insolvent estates by the Insolvency Service, as creditors/debtors often confuse these with IPs’ fees. (R3)
• Trade bodies should help members to understand insolvency – and how to avoid it or becoming a creditor in an insolvency – better. (ICAEW)
• All relevant Insolvency Service officials should work in an IP firm for a minimum of two weeks per year as ‘on the job/CPD training’ to plug the apparent knowledge gap, given the lack of understanding of the insolvency profession evidenced by the consultation proposals. (R3) [Ooh!]
• Greater use of cost-saving measures of 2010 Rules and more time to allow them to have effect. (R3)
• “IPs should also be required to report work with more transparency, e.g. break down time-use clearly into constituent parts such as ‘communicating with x number of creditors to establish a meeting’.” (R3) [Ooer! Can we try to keep it relatively simple and proportionate..?]
• “Introducing elements of a Code of Practice for IPs (based on the model in Australia) plus changes to SIP9 could be introduced to ensure that IPs’ records of time spent (and corresponding fees on a case) are transparent and accountable.” (R3) [In what ways is the current SIP9 deficient in this area..? R3 points to the Australian part of the MF Global case report as a good example; this report provides a fee estimate of $1 million for the first month – is R3 sure this is an appropriate model for typical (non-secured creditor) cases?] R3 suggests that in this way IPs would explain the work done “in more detail” and “reporting would be clearer”.

The most widely-made suggestion as regards fee-setting is the mandatory use of fee estimates (ACCA, IPA, ICAEW, R3), with some bodies suggesting express creditor approval for exceeding an estimate could be required (IPA, R3; ACCA: “perhaps”). I’m attracted to this idea as well, but, although I agree with the idea of seeking creditors’ approval for fees in excess of an estimate, I would hope that this could be done without necessarily positive creditor response; if creditors do not respond to an invitation to vote, then is it fair to penalise the IP? It could also impact on creditors’ returns, as silence may force the IP to take further measures, perhaps by court application, to achieve approval. It might also be more likely to encourage a poor habit of over-estimating fees in the first instance, so that IPs can avoid the hassle of seeking approval to more fees later. There are many issues with this suggestion – some will complain that it is well-nigh impossible to estimate fees with any degree of confidence at an early stage – but it has to be the lesser of several suggested evils, hasn’t it? In addition, isn’t it a standard and professional way of approaching fees? After all, don’t we usually seek fees estimates – with subsequent approval for uplifts – from many suppliers, from solicitors to garage mechanics?

Regulatory Intervention in Matters of Remuneration

The consultation also sought views on proposals to have the RPBs take a greater role in assessing and deciding on fees issues, via both enhanced monitoring and dealing with complaints about the quantum of fees. Most RPBs pointed out that IP fees are already considered to a significant extent; the ICAEW described it this way: “reviewers already look in detail at the insolvency practitioner’s time records. They will question the time recorded against specific tasks, where it doesn’t appear commensurate with the work evidenced on the case files; where it appears to have been carried out by a more experienced member of staff than we would consider appropriate; or where it appears excessive.”

As regards the suggestion that RPBs should do more than look at clear regulatory breaches:

• “To suggest that RPB bodies should step into the breach – even if one exists in relation to IP remuneration – will not address the issue without a sincere attempt by the UK Government to review the legislation. Regulators should not be asked to circumvent or overrule the law and to do so will inevitably expose the regulators to legal challenge.” (ICAS; ICAEW also highlighted the risks of Court challenge of RPBs’ judgments)
• “We are unclear on what basis an RPB could interject when the fee basis has been approved by a statutory process. This would be a usurpation of Court’s powers.” (IPA)
• “If 90% of creditors have approved as IPs fees, it does not appear reasonable to allow a minority financial interest to delay the administration of an estate.” (IPA)

Whilst the IPA is “opposed to routine regulatory involvement in fee assessment”, it seems more open to the idea that more could be done practically: it suggested that, if the idea of fee estimates were taken up, it could engage in “routine monitoring of practitioner performance” against these estimates. It also stated: “we can see no reason why, in a case of apparent excessive charging, the RPB could not direct the practitioner to repay such fees as exceed the original estimate provided or else direct the IP to have their fees assessed by a Court”, although the IPA does seem to be alone in this view.

It seems clear from the responses that there is much confusion amongst the bodies as to exactly what the government is proposing; simply dropping in a “value for money” regulatory objective and telling RPBs to get on with it will not work. The IPA remarked: “The regulatory challenges presented flow from the entirely subjective nature of establishing what value for money is and in whose opinion such value should be ascertained. The government has been singularly unable to define these concepts and appears now to expect the RPBs to be able to do so on their behalf… Will a full review of time spent and how this compares to the fixed or percentage fees charged be required? Will on-site visits to review practitioners’ files be expected?” The ICAEW also stated that, if the idea is for “RPBs to effectively conclude on each file reviewed that the IP’s costs represent value for money, we would expect there to be a significant impact on our monitoring costs; potentially doubling them.” However, the ICAEW seems to have been party to a meeting with the Consultation Policy Lead that has led them to conclude that all that is envisaged of RPBs as regards “enhanced monitoring” is pretty-much what they are already doing. One would hope that the Service could do better at communicating their desires to the bodies that they directly oversee!

In summary, I don’t think the turkeys have voted for Christmas. I think they have resisted well the pressure to seek a compromise, but have endeavoured to keep their eye focussed on what truly appears to be the issue – creditor engagement – and what practically might be done to improve the situation.


Leave a comment

A Closer Look at Six Years of Insolvency Regulation

IMGP5575

Have you ever wanted evidence-based answers to the following..?

• Which RPB issues the most – and which the least – sanctions?
• What are the chances that a monitoring visit by your authorising body will result in a sanction or a targeted visit?
• How frequent are monitoring visits and is there much difference between the authorising bodies?
• Do you receive more or less than the average number of complaints?
• Are there more complaints now than in recent years?

Of course, there are lies, damned lies, and statistics, but a review of the past six years of Insolvency Service reports on IP regulation provides food for thought.

The Insolvency Service’s reports can be found at: http://www.bis.gov.uk/insolvency/insolvency-profession/Regulation/review-of-IP-regulation-annual-regulation-reports and my observations follow. Please note that I have excluded from my graphs the three RPBs with the smallest number of IPs, although their results have been included in the results for all the authorising bodies combined. In addition, when I talk about IPs, I am looking only at appointment-taking IPs.

Regrettably, I haven’t worked out how to embed my graphs within the text, so they can be found here. Alternatively, if you click on full article, you will be able to read the text along with the graphs.

Monitoring Visits

How frequently can IPs expect to be monitored and does it differ much depending on their authorising body?

The Principles for Monitoring set out a standard of once every three years, although this can stretch to up to six yearly provided there are satisfactory risk assessment processes. The stated policy of most RPBs is to make 3-yearly visits to their IPs. But what is it in reality and how has it changed over time? Take a look at graph (i) here.

This graph shows that last year all RPBs fell short of visiting one third of their IPs. However, the Secretary of State fell disastrously short, visiting only 8% of their IPs last year. I appreciate that the Secretary of State expects to relinquish all authorisations as a consequence of the Deregulation Bill, but this gives me the impression that they have given up already. Personally, I would expect the oversight regulator to set a better example!

Generally-speaking, all the RPBs are pretty-much in the same range, although the recent downward trend in monitoring visits for all of them is interesting; perhaps it illustrates that last year the RPBs’ monitoring teams’ time was diverted elsewhere. Fortunately, the longer term trend is still on the up.

What outcomes can be expected? The Insolvency Service reports detail the various sanctions ranging from recommendations for improvements to licence withdrawals. I have amalgamated the figures for all these sanctions for graph (ii) here.

Hmm… I’m not sure that helps much. How about comparing the sanctions to the number of IPs (graph (iii) here).

That’s not a lot better. Oh well.

Firstly, I notice that the IPA has bucked the recent downward trend of sanctions issued by all other licensing bodies, although the longer term trend for the bodies combined is remarkably steady. I thought it was a bit misleading for the Service report to state that “the only sanction available to the SoS is to withdraw an authorisation”, as that certainly hadn’t been the case in previous years: as this shows, in fact the SoS gave out proportionately more sanctions (mostly plans for improvements) than any of the RPBs in 2009, 2010 and 2011. Although ACCA and ICAS haven’t conducted a large number of visits (30 and 25 respectively in 2013), it is still a little surprising to see that their sanctions, like the SoS’, have dropped to nil.

However, the above graphs don’t include targeted visits. These are shown on graph (iv) here.

Ahh, so this is where those bodies’ efforts seem to be targeted. Even so, the SoS’ activities seem quite singular: are they using targeted visits as a way of compensating for the absence of power to impose other sanctions?

Complaints

The Insolvency Service’s report includes a graph illustrating that the number of complaints received has increased by 45% over the past three years, with 33% of that increase occurring over the past year. My first thought was that perhaps the Insolvency Service’s Complaints Gateway is admitting more complaints into the process, but the report had mentioned that 22% had been turned away, which I thought demonstrated that the Service’s filtering process was working reasonably well.

Therefore, I decided to look at the longer term trend (note that the number of IPs has crept up pretty insignificantly over these six years: a minimum of 1,275 in 2008 and a maximum of 1,355 in 2014). Take a look at graph (v) here.

So the current level of complaints isn’t unprecedented, although why they should be so high at present (or indeed in 2008), I’m not sure. It also appears from this that the IPA has more than its fair share, although the number of IPA-licensed IPs has been growing also. Let’s look at the spread of complaints over the authorising bodies when compared with their share of IPs (graph (vi) here).

Interesting, don’t you think? SoS IPs have consistently recorded proportionately more complaints. Given that the SoS has no power to sanction as a consequence of complaints, I wonder if this illustrates the deterrent value of sanctions. Of further interest is that the proportion of complaints against IPA-licensed IP has caught up with the SoS’ rate this last year – strange…

Moving on to complaints outcomes: how many complaints have resulted in a sanction and have the RPBs “performed” differently? Have a look at graph (vii) here.

At first glance, I thought that this peak reflected the fact that fewer complaints had been received – maybe the actual number of sanctions has remained constant? – so I thought I would look at the actual numbers (graph (viii) here).

Hmm… no, it really does look like the number of sanctions increased in years when fewer complaints were lodged. However, I’m sceptical of this apparent link, as I would suggest that, in view of the time it takes to get a complaint through the system, it may well be the case that the 2012/13 drop in sanctions flowed from the 2010/11 reduction in complaints lodged. I shall be interested to see if the number of sanctions pick up again in 2014.

Going back to the previous graph, personally I am reassured by the knowledge that in 2013 the RPBs generally reported a similar percentage of sanctions… well, at least closer than they were in 2010 when they ranged from 2% (ICAEW) to 38% (ICAS).

The ICAEW’s record of complaints sanctions seems to have kept to a consistently low level. However, let’s see what happens when we combine all sanctions – those arising from complaints and monitoring visits, as well as the ordering of targeted visits (graph (ix) here).

Hmm… that evens out some of the variation. Even the SoS now falls within the range! Of course, this doesn’t attribute any weights to the variety of sanctions, but I think it helps answer those who allege that some authorising bodies are a “lighter touch” than others, although I guess the sceptic could counter that by saying that this illustrates that IPs are still more than twice as likely to receive a sanction from the IPA than from ICAS. Ho hum.

Overview

To round things off, here is a summary of all the sanctions handed out by all the authorising bodies over the years (graph (x) here).

This suggests to me that targeted visits seem to have gone out of fashion, despite monitoring visits generally giving rise to more sanctions than complaints… but, with the hike in complaints lodged last year, perhaps I should not speak too soon.


3 Comments

Who knew the Insolvency Service had a sense of humour?

0434 Santa Fe

Well, if I didn’t laugh, I’d cry!

I am conscious that my top ten jokes below make this a fairly destructive, not constructive, post about the Insolvency Service’s “Strengthening the regulatory regime and fee structure for insolvency practitioners” consultation. In addition, I do not cover many of the common concerns about the proposals, nor do I suggest here any real solutions. Nevertheless, I do think that it’s important, not to dismiss the proposals out of hand, but to think seriously about what might work. Our own ideas may not be what the Service has in mind, but we become the joke, if we plough on claiming that we see no ships (even if, yes I know, it may look as though that’s what I’m saying below… but rarely does public opinion concern itself with facts).

I have one week left to chew over my own suggestions before setting pen to paper in my formal response. Therefore, in the meantime, here are my top ten jokes told by the Service in its consultation document and two impact assessments (“IA”), which can be found at: https://www.gov.uk/government/consultations/insolvency-practitioner-regulation-and-fee-structure.

1. “Each year IPs realise approximately £5bn worth of assets from corporate insolvency processes, and in doing so charge about £1bn in fees, distributing some £4bn to creditors” (paragraph 88 of the consultation document)

The Insolvency Service has repeated this most absurd statement from the OFT’s market study. So, I ask myself, who is paying the solicitors’ fees, the agents’ fees, all the necessary costs of insolvencies such as insurance, advertising, bond premiums etc., and finally what about the Insolvency Service’s own fees that are payable from the assets in all (bankruptcies and) compulsory liquidations in priority to everything else? This statement just cannot be true!

It also grossly distorts the position and perception of IP fees: are we really talking about £1bn of IP fees here or costs on insolvent estates? The OFT’s explanation of how they came up with the £1bn (footnote 11 at http://www.oft.gov.uk/shared_oft/reports/Insolvency/oft1245) mixes up fees and costs, so it is difficult to be sure. However, as this debate has built up momentum, few seem bothered any longer about the facts behind the fees “problem”.

2. “Cases where secured creditors will not be paid in full and so remain in control of fees. The market works well in this instance so we do not want to interfere with the ability for secured creditors to successfully negotiate down fees” (paragraph 113 of the consultation document)

Both Professor Kempson’s report and the OFT market study drew conclusions about the effectiveness of secured creditors’ control. However, the OFT’s study looked only at Administrations and Para 83 CVLs (which are so not S98s) and Professor Kempson built on this study and therefore concentrated on the effect of IPs obtaining appointments via bank panels. And, from this relatively narrow focus, we end up with the conclusion above that the Service proposes to apply to all insolvencies (except, it is proposed, for VAs and MVLs, where it is suggested other fees controls work well… so maybe those cases have a different lesson for us about the level of engagement of those responsible for authorising the fees..?).

But, I ask myself, what about other cases involving secured creditors? What about less significant liquidations or even bankruptcies where the mortgaged home is in negative equity? Do the secured creditors really control the level of fees in these cases? It seems highly unlikely, when you remember that the bases of liquidators’ and trustees’ fees are fixed by resolutions of the unsecured creditors. And let’s not worry too much about the effectiveness (or not) of non-bank secured creditors…

Some might react: let it lie. If the Service wants to leave well alone all cases where secured creditors will not be paid in full – regardless of whether or not, in practice, they control fees – why make a fuss? The same could be said about my next point…

3. “The basis of remuneration must be fixed in accordance with paragraph (4) where… there is likely to be property to enable a distribution to be made to unsecured creditors…” (draft Rule 17.14(2)(b))

This is supposed to be the way the objective mentioned in 2 above is achieved, i.e. that fees may only be fixed on the bases described in “paragraph (4)” (i.e. percentage or set amount, but not time costs) where secured creditors are not in control of fees (plus in some other circumstances).

I am sure it has taken you less than a millisecond to work it out: “where a distribution to unsecured creditors is likely” is patently not the same as “where secured creditors do not remain in control of fees”. What about the vast majority of liquidations, which must represent by far the greatest proportion in number of insolvencies, where the asset realisations are not enough to cover all the costs (including IPs’ time costs)? In these cases, the Service’s proposal is that they would like the IP’s fees to be on a percentage or set amount, but in fact the draft Rules would entitle the liquidator to seek approval on a time cost basis. That must be a joke!

The problem for me in leaving these flaws alone is that IPs could be lumbered with Rules that do not implement the Government’s policy objectives, which may result in the Service/RPBs pressing for behaviours and approaches that are not supported by the statutory framework, which will do no one any good.

4. The use of the Schedule 6 scale rate for fees “ensures that there are funds available for distribution and not all realisations are swallowed up in fees and remuneration” (paragraph 117 of the consultation document)

Firstly, I object to “swallowed up”. It seems to me an emotive phrase, generating the image of an enormous whale greedily scooping up trillions of helpless krill in its distended maw. In fact, this image – and the reference to “excessive” fees/fee-charging, even though the consultation document acknowledges at one point that Professor Kempson did not interpret over-charging as deliberate but as largely related to inefficiencies – seems a constant throughout.

Secondly, and more fundamentally, as explained in (1) above, simply reverting to office holder fees being charged as a percentage, even the relatively low percentages of Schedule 6, will not ensure there are funds available for distribution. But this objective seems to be the raison d’etre of the fees proposals (and not just the Schedule 6 default), as Ms Willott MP explains in her foreword: “[The consultation document] also includes proposals to amend the way in which an insolvency practitioner can charge fees for his or her services, which should ensure that there will be funds available to make a payment to creditors” (page 2). This can only feed into some creditors’ misconceived expectations, not only about the post-new Rules world, but also about the insolvency process in general. If every insolvency were required to result in a distribution, there would be far more work for the OR and far fewer IPs in the country.

5. “The transfer of returns from IPs to unsecured creditors has the potential to deliver a more efficient dynamic economic allocation of resources as these creditors are more likely to reinvest these resources in growth driving activities” (paragraph 17 of the IP fees IA)

Actually, this isn’t funny; it’s just insulting. Even if you imagined a typical IP as a beer-bellied pin-striped man smoking a cigar of £50 notes, with more spilling out unnoticed from his pockets (which was the image in an Insolvency Service presentation to IPs last year), his ill-gotten gains are still going be passed on to the home sauna builders or the Michelin Star restaurants, aren’t they? But, of course, that’s beside the point; as someone who has worked decades in the insolvency profession, I take exception to the suggestion that the UK would be better off if my wages were paid to unsecured creditors.

6. “The OFT report states that some unsecured creditors say that if their recovery rate from insolvency increased, they would extend more credit. While this effect is likely to be slight, even a small increase in the £80bn of unsecured credit extended by SME’s will amount to many millions of pounds” (paragraph 56 of the IP fees IA)

How much better-off does the IA suggest unsecured creditors will be if the alleged “excessive fee charging” is passed to them? At the top end, 0.1p in the £ (paragraph 52) – will they even feel it..? Talk about a “slight” effect!

7. “We would estimate that familiarisation would take up to 1.5 hours of an IP’s time based on the assumption that this change is not complex to understand and would only need to be understood once before being applied… IPs are already required to seek the approval of creditors for the basis on which their remuneration is taken and it is anticipated that at the same time they will seek agreement to the percentage they are proposing to take. We do not therefore anticipate any additional costs associated with this” (paragraphs 35 and 43 of the IP fees IA)

1.5 hours once and nothing more? Ha ha!

For IPs to switch to a percentage basis (but only in certain circumstances/cases) will require days – weeks, perhaps months – of organising changes to systems, procedures and templates and a greater time burden per case. The challenges for systems, procedures and staff will include:

• Assessing a fair percentage of estimated future realisations to reflect the value of work done. This seems an almost impossible task on Day One. For example, book debts: will the money just fall in or will it be a tough job, involving scrutinising and collating records and re-buffing objections and procrastinations? How much do you allow for the SIP2 investigations, what if you need to follow a lead? So many questions…

• Ongoing monitoring to check if/when fees can no longer be fixed on a time cost basis. You’d think this would be relatively easy, until you read how the draft Rules deal with the tipping point for a dividend: a time cost basis falls away when “the office holder becomes aware or ought to have become aware that there is likely to be property to enable a distribution to be made to unsecured creditors” (draft R17.19(1)(b)). Hours of fun!

• Reverting to creditors when a revised fee basis needs to be sought, whether that be because the time costs basis is no longer available or because the case hasn’t progressed as originally anticipated or potential new assets are identified during a case, thus warranting a change in the percentage or set amount, with the potential for court applications if creditors don’t approve the revision.

• Calculating fees on a percentage basis. Again, it sounds easy, but… what about VAT refunds (will the use (or not) of VAT control accounts make it easier or more difficult?), trading-on sales (which are excluded under the draft Rules’ statutory scale), “the value of the property with which the administrator has to deal” (per the draft Rules)?

• Dealing with creditors’ committees, which the consultation document suggests will be encouraged under the proposed regime.

• More complex practice management to ensure that percentages are pitched correctly and potentially greater lock-up issues where IPs do not have the security of realisations in hand to fund ongoing efforts.

But these measures are intended to reduce IPs’ fees..?

8. Professor Kempson “highlights that the starting point for reforms in this area should be on providing greater oversight, therefore reducing the numbers of complaints and challenges relating to fees… Currently there are very few fee related complaints handled by the RPBs… Complaints about the insolvency profession are relatively low given the nature of insolvency, the number of creditors (and other stakeholders) involved in cases and the extent of financial losses that can be incurred” (paragraphs 29 and 46 of the IP fees IA and 1.60 of the regulation IA).

To be fair, I should put paragraph 46 in context: “Currently there are very few fee related complaints handled by the RPBs, but this is likely to be a result of RPBs stating publicly that they do not consider fee-related complaints and does not reflect the current level of concern around fees. In the past 6 months 23% of all IP related ministerial correspondence has been in relation to fees”, which admittedly does put a different colour on things.

The difficulty as I see it is: if an aim is to reduce the number of fees complaints and challenges, but the IA estimates 300 (new) fee complaints per annum and 50 appeals post-implementation of the proposals. Would such an outcome mean that the measures are hailed as a success or a failure?

9. Not taking the steps proposed by the Insolvency Service as regards regulatory objectives and oversight powers proposals “would not address concerns around an ineffective tick-box prescriptive type of regulation… The same prescriptive type of regulation would continue to exist whereas the intention is to move to a principles and objectives based regulatory system as suggested by the OFT report” (paragraphs 1.49 and 1.51 of the regulation IA)

Ooh, I could relate some stories from my time at the IPA about who was usually at the forefront in driving tick-box regulation! There were times when I had to be dragged kicking and screaming down that road. Still I should stay positive: maybe this signifies a new commitment to Better Regulation – after all, the draft regulatory objectives do not refer to ensuring that IPs meet prescriptive statutory requirements that do not contribute to delivering a quality service or maximising returns to creditors, and if value for money is an objective..?

The Service puts it this way: “As an example, rather than targeting regulatory activity to where there may be only potentially small losses to creditors from any regulatory breach, the regulators will focus attention on areas where creditors are likely to suffer larger losses” (paragraph 1.71). Oh well, that’ll put me out of a job! 🙂

10. “We do recognise that giving the RPBs a regulatory role in monitoring fees will increase the burden on them when dealing with complaints around the quantum of fees and have therefore included the estimated cost of this” (paragraph 100 of the consultation document)

Since when was “monitoring” all about dealing with complaints? The IAs provide nothing for the additional costs to RPBs of dealing with anything but complaints.

It would seem that a typical monitoring visit in the eyes of the Service would have the objective of aiming “to ensure that fees charged by IPs represent value for money and are ‘fair’ and valid for the work undertaken, by requiring the RPBs to provide a check and balance against the level of fees charged… The regulators will be expected to take a full role in assessing the fairness of an IP’s fees, including the way in which they are set, the manner in which they are drawn and that they represent value for money for the work done. This would be done via the usual monitoring visits and complaint handling processes” (paragraph 101). The Service believes that this is possible as the RPBs have “access to panels with the relevant experience, to adjudicate on fees” (paragraph 102).

Are they serious?! Do they have any idea how impossible it would be to achieve this practically, not least within the confines of the current visit timetable? And how are the “panels”, presumably the Service means committee members, going to engage in this process: is the Service really expecting them to adjudicate on fees? You might as well forget about the rest of the Act/Rules, SIPs and Ethics Code: the inspectors’/monitors’ time will be spent entirely looking at fees and RPBs’ committees/secretariat will be hard-pushed to make any adverse findings stick.

Oh, it’s alright for the Service, though; they’ve incorporated the cost of two new people in-house to handle their enhanced RPB supervisory functions. But they don’t think that this will add to RPBs’ costs in dealing with the Service’s queries, monitoring visits, demands for information on regulatory actions in general and in specific cases (apparently)?

The biggest joke of all is: where will all these costs land? In IPs’ laps, when their levies and licence fees increase. Remind me, what was the key objective of these proposals..?

Although the Service doesn’t mince words about its/the Government’s sincerity on these issues – e.g. “given the clear evidence of harm suffered by unsecured creditors, the Government feels strongly that reforms are required in order to address the market failure” (paragraph 93 of the consultation document) – I can’t help but hope that I’ll wake up a couple of days after the consultation has closed to a new announcement from the Insolvency Service: “April fool!”


1 Comment

The Kempson Review of IP Fees – a case of Aussie Rules?

5436 Sydney

Whilst this atypical British weather may have brought out the Aussie in many of us, as we settle down to sipping a stubby over the barbie, Professor Kempson seems to be gazing at the Southern Cross a little more completely.

Kempson’s report to the Insolvency Service was tagged quite unceremoniously to the foot of the page, http://www.bis.gov.uk/insolvency/news/news-stories/2013/Jul/transparency-and-trust, which headines Mr Cables’ Transparency & Trust Paper. Her report even had to follow the uninspiring terms of reference of the pre-pack review and so here I will follow the antipodean theme and blog about the bottom item of that press release first.

I’ll also start from the back of Kempson’s report and summarise her recommendations, uncontaminated by any personal opinion (for the moment):

• Consideration of the potential for limited competitive tendering (section 6.1.1)
• A radical revision or replacement of SIP9 (section 6.1.2)
• Consideration of the Australian approach of providing a costs estimate at the outset of the case with an agreed cap on fees (section 6.1.2)
• The creation and adoption of a Code on the lines of the Insolvency Practitioners Association of Australia Code of Professional Practice (section 6.1.2)
• Some contextual information from an independent body to help creditors assess the reasonableness of the remuneration and disbursements (section 6.1.2)
• Greater oversight exercised by the Crown creditors, HMRC, RPS and PPF, working together (section 6.1.3)
• Consideration of Austria’s model of creditor protection associations acting on creditors’ committees (section 6.1.3)
• Reconsideration of the circumstances in which creditors’ meetings need not be held in Administrations (section 6.1.3)
• Exploration of non-time cost bases or a mixture of bases for fees (section 6.1.4)
• Increasing the debt threshold for bankruptcy petitions (section 6.1.5)
• Extending S273 to creditors’ petitions (section 6.1.5)
• Provision of information (e.g. Insolvency Service booklet) to debtors regarding the likely costs of bankruptcy (section 6.1.5)
• Provision of generic information (e.g. Insolvency Service booklet) to directors subject to personal guarantees as well as case-specific information, e.g. by treating them on a par with creditors (section 6.1.5)
• A single regulator, perhaps the Financial Conduct Authority, for IPs (section 6.1.6)
• A simple low-cost mediation and adjudication service for disputes about low-level fees, perhaps by means of the Financial Ombudsman Service (section 6.1.7)
• Alternatively, some form of independent oversight of fees, such as that used in Scotland via court reporters and the AiB (section 6.1.8)

Charge-out rates – a surprisingly positive outcome!

Given the “how much?!” reaction often resulting from a disclosure of charge-out rates, I was ready to wince at this section, but actually I think the insolvency profession comes out of it fairly well.

The report details the charge-out rates gathered via the IP survey (which was responded to by 253 IPs):

Partner/Director: average £366; range £212-£800
Manager: average £253; range £100-460
Other senior staff: average £182; range £75-445
Assistants/support: average £103; range £25-260

Encouragingly, Kempson reports that these charge-out levels “are not, however, unusual in the accountancy and legal professions to which most IPs belong” (section 3.1). From my experience, I’d also suggest that the firms that charge the top end for partners/directors usually charge junior staff at the lower end and vice versa, i.e. I doubt that any firm charges £260 for juniors and £800 for partners/directors.

Professor Kempson also acknowledges that these “headline rates” are not always charged because IPs normally agree lower rates in order to sit on banks’ panels and, in other cases, the time costs are not recovered in full due to lack of realisations. Setting aside panel cases, Kempson suggests that fees were below headline rates “in about a half of cases, including: the great majority of compulsory liquidations, about two thirds of administrations; half of creditors’ voluntary liquidations and a third of personal bankruptcy cases” (section 3.2). Putting those two observations together, is it arguable, therefore, that IPs provide a far better value for money service than others in the accountancy and legal professions?

Panel Discounts – not so great

The report states that, at appointment stage, secured creditors negotiate discounts of between 10% and 40% on IPs’ headline rates and that some banks may achieve a further discount by entertaining tenders. “The implicit sanction underpinning all negotiations was to remove a firm from the panel. None of the banks interviewed could remember a firm choosing to leave their panel because the appointments they received were un-remunerative. From this they surmised that (individual cases aside) work was being done on a lower profit margin rather than a loss” (section 4.1.1).

Kempson does not suggest it, but I wonder if some might conclude that, notwithstanding the comments made above about charge-out rates, this indicates that IPs’ headline rates could drop by 10-40% for all cases. Personally, I do wonder if banks’ pressuring for discounts from panel firms could be un-remunerative in some cases, but that firms feel locked in to the process, unable to feed hungry mouths from the infrequent non-panel work, and perhaps there is an element of cross-subsidising going on. If Kempson had asked the question, not whether firms chose to leave a panel, but whether any chose not to re-tender when the panel was up for renewal, I wonder if she would have received a different answer.

Seedy Market?

To illustrate the apparent clout of bank panels, the report describes a service “that is marketed to IPs, offering to buy out the debts of secured creditors, thereby ensuring that an IP retains an appointment and giving them greater control over the fees that they can charge” (section 4.1.1).

Is it just me or is there something ethically questionable about an IP seeking to secure his/her appointment in this manner? Presumably someone is losing out and I’m not talking about the estate just by reason of the possibly higher charge-out rates that may have not been discounted to the degree that the bank would have managed with a panel IP. Presumably there’s an upside for the newly-introduced secured creditor? How do their interest/arrangement/termination charges compare to the original lender’s? Is the insolvent estate being hit with an increased liability from this direction? And why… because an IP wanted to secure the appointment..?

Is the problem simply creditor apathy?

Reading Kempson’s report did give me an insight – a more expansive one than I’ve read anywhere else – into an unsecured creditor’s predicament. They don’t come across insolvencies very often, so have little understanding of what is involved in the different insolvency processes (so maybe I shouldn’t get twitchy over the phrase “problems when administrations fail and a liquidation ensues”!). How can they judge whether hourly rates or the time charged are reasonable? They receive enormous progress reports that give them so much useless information (I’m pleased that one IP’s comment made it to print: “… For example saying that the prescribed part doesn’t apply. Well, if it doesn’t apply, what’s the point in confusing everybody in mentioning it?” (section 4.2.3)) and they struggle to extract from reports a clear picture of what’s gone on. Many believe that they’re a small fry in a big pond of creditors, so they’re sceptical that their vote will swing anything, and they have no contact with other creditors, so feel no solidarity. Personally, I used to think that creditors’ lack of engagement was an inevitable decision not to throw good money after bad, but this report has reminded me that their position is a consequence of far more obstacles than that.

Progress Reports – what progress?

The report majored on the apparent failure of many progress reports to inform creditors. Comments from contributors include: “Unfortunately the nature of the fee-approval regime can lead to compliance-driven reports, generated from templates by junior-level staff, which primarily focus on ensuring that all of the requirements of the statute and regulation are addressed in a somewhat tick-box-like manner. This very often means that the key argument is omitted or lost in the volume, which in turn make it difficult for us to make the objective assessment that is required of us” and from the author herself: “there were reports that clearly followed the requirements of the regulations and practice notes (including SIP9 relating to fees) slavishly and often had large amounts of text copied verbatim from previous reports. Consequently, they seemed formulaic and not a genuine attempt to communicate to creditors what they might want to know, including how the case was progressing and what work had been done, with what result and at what cost” (section 4.2.3).

To what was the unhelpful structure of progress reports attributed? Kempson highlighted the 2010 Rule changes (hear hear!) but she also mentions that IPs “criticised SIP9 as being too prescriptive”. I find this personally frustrating, because long ago I was persuaded of the value – and appropriateness – of principles-based SIPs. During my time attending meetings of the Joint Insolvency Committee and helping SIPs struggle through the creation, revision, consultation, and adoption process, I longed to see SIPs emerge as clearly-defined documents promoting laudable principles, respecting IPs to exercise their professional skills and judgment to do their job and not leaving IPs at the mercy of risk-averse box-tickers. I would be one of the first to acknowledge that even the most recent SIPs have not met this ideal of mine, but SIP9?! Personally, I feel that, particularly considering its sensitive and complex subject matter – fees – it is one of the least prescriptive SIPs we have. I believe that a fundamental problem with SIP9, however, is the Appendix: so many people – some IPs, compliance people, and RPB monitors – so frequently forget that it is a “Suggested Format”. Most of us create these pointless reports that churn out time cost matrices with little explanation or thought, produce pages of soporific script explaining the tasks of junior administrators… because we think that’s what SIP9 requires of us and because we think that this is what we’ll be strung up for the next time the inspector calls. And well it might be, but why not produce progress reports that meet the key principle of SIP9 – provide “an explanation of what has been achieved in the period under review and how it was achieved, sufficient to enable the progress of the case to be assessed [and so that creditors are] able to understand whether the remuneration charged is reasonable in the circumstances of the case” (SIP9 paragraph 14)? And if an RPB monitor or compliance person points out that you’ve not met an element of the Appendix, ask them in what way they feel that you’ve breached SIP9. Alternatively, let’s do it the Kempson way: leave the Insolvency Service to come up with a Code on how to do it!

I do wonder, however, how much it would cost to craft the perfect progress report. The comment above highlighted that reports might be produced by junior staff working to a template, but isn’t that to be expected? Whilst my personal opinion is that reports are much better produced as a free text story told by someone with all-round knowledge of the case (that’s how I used to produce them in “my day”), I recognise the desire to sausage-machine as much of the work as possible and this is the best chance of keeping costs down, which is what creditors want, right? Therefore, apart from removing some of the (statute or SIP-inspired) rubbish in reports, I am not sure that the tide can be moved successfully to more reader-friendly and useful reporting.

Inconsistent monitoring?

The report states: “During 2012, visits made by RPBs identified 12.0 compliance issues relating to fees per 100 IPs. But there was a very wide variation between RPBs indeed; ranging from 0 to 44 instances per 100 IPs. Allowing for the differences in the numbers of IPs regulated by different RPBs, this suggests that there is a big variation in the rigour with which RPBs assess compliance, since it is implausible that there is that level of variation in the actual compliance of the firms they regulate” (section 4.5). I also find this quite implausible, but, having dealt with most of the RPB monitors and having attended their regular meetings to discuss monitoring issues in an effort to achieve consistency, I do struggle with Kempson’s explanation for the variation.

Although I can offer no alternative explanation, I would point to the results on SIP9 monitoring disclosed in the Insolvency Service’s 2009 Regulatory Report, which presented quite a different picture. In that year, the RPBs/IS reported an average of 10.6 SIP9 breaches per 100 IPs – interestingly close to Kempson’s 2012 figure of 12.0, particularly considering SIP9 breaches are not exactly equivalent to compliance issues relating to fees. However, the variation was a lot less – from 1.3 to 18 breaches per 100 IPs (and the next lowest-“ranking” RPB recorded 8.1). Of course, I have ignored the one RPB that recorded no SIP9 breaches in 2009, but that was probably only because that RPB had conducted no monitoring visits that year (and neither did it in 2012). Kempson similarly excluded that RPB from her calculations, didn’t she..?

Somewhat predictably, Kempson draws the conclusion (in section 6.1.6) that there is a case for fewer regulators, perhaps even one. She suggests setting a minimum threshold of the number of IPs that a body must regulate (which might at least lose the RPB that reports one monitoring visit only every three years… how can that even work for the RPB, I ask myself). In drawing a comparison with Australia, she suggests the sole RPB could be the Financial Conduct Authority – hmm…

Voluntary Arrangements: the exception?

“We have seen that the existing controls work well for secured creditors involved in larger corporate insolvencies. But they do not work as intended for unsecured creditors involved in corporate insolvencies, and this is particularly the case for small unsecured creditors with limited or no prior experience of insolvency. The exception to this is successful company voluntary arrangements” (section 5). Why does Kempson believe that the controls work in CVAs? She seems to put some weight to the fact that the requisite majority is 75% for CVAs, but she also acknowledges that unsecured creditors are incentivised to participate where there is the expectation of a dividend. If she truly believes the situation is different for CVAs – although I saw no real evidence for this in the report – then wouldn’t there be value in examining why that is? If it is down to the fact that creditors are anticipating a dividend, then there’s nothing much IPs can do to improve the situation across cases in general. But perhaps there are other reasons for it: I suspect that IPs charge up far fewer hours administering CVAs given the relative absence of statutory provisions controlling the process. I also suspect that CVA progress reports are more punchy, as they are not so bogged down by the Rules.

But I don’t think anyone would argue with Kempson’s observation that IVAs are a completely different kettle of fish and that certain creditors have acted aggressively to restrict fees in IVAs to the extent that, as IPs told Kempson, they “frequently found this work unremunerative” (section 4.2.3).

Disadvantages of Time Costs

I found this paragraph interesting: “several authoritative contributors said that, when challenged either by creditors or in the courts, IPs seldom provide an explanation of their hourly rates by reference to objective criteria, such [as] details of the overheads included and the amount they account for, and the proportion of time worked by an IP that is chargeable to cases. Instead they generally justify their fees by claiming that they are the ‘market rate’ for IPs and other professionals. Reference is invariably made to the fact that the case concerned was complex, involved a high level of risk and that the level of claims against the estate was high. More than one of the people commenting on this said that the complexity of cases was over-stated and they were rarely told that a case was a fairly standard one, but that there were things that could have been done better or more efficiently or the realisations ought to have been higher so perhaps a reduction in fees was appropriate. They believed that, by adopting this approach, IPs undermined the confidence others have in them” (section 5.2.1). It’s a shame, however, that no mention has been made of the instances – and I know that they do occur – of IPs who unilaterally accept to write-off some of their time costs so that they can pay a dividend on a case.

But this quote hints at the key disadvantage, I think, of time costs: there is a risk that it rewards inefficiency.

Kempson first suggests moving to a percentage basis as a presumed method of setting remuneration, although she acknowledges that this wouldn’t help creditors as they would still face the difficulty on knowing what a reasonable percentage looked like. She then suggests a “more promising approach” is the rarely-used mixed bases for fees that were introduced by the 2010 Rules (section 6.1.4). She states that this should be “explored further, for example fixed fees for statutory duties; a percentage of realisations for asset realisations (with a statutory sliding scale as described above); perhaps retaining time cost for investigations”. Whilst I agree that different fee bases certainly do have the potential to deliver better outcomes – I believe that it can incentivise IPs to work efficiently and effectively whilst ensuring that they still get paid for doing the necessary work that doesn’t generate realisations – it does make me wonder: if creditors already feel confused..!

Lessons from Down Under?

Kempson is clearly a fan of the Australian regime. She recommends the scrapping or radical revision of SIP9 in favour of something akin to the IPAA’s Code of Professional Practice (http://www.ipaa.com.au/docs/about-us-documents/copp-2nd-ed-18-1-11.pdf?sfvrsn=2). At first glance (I confess I have done no more than that), it doesn’t look to have much more content than SIP9, but it does seem more explanatory, more non-IP-friendly, and the fact that Kempson clearly rates it over SIP9 suggests to me that, at the very least, perhaps we could produce something like it that is targeted at the unsecured creditor audience.

She also refers to a Remuneration Request Approval Report template sheet (accessible from: http://www.ipaa.com.au/about-us/ipa-publications/code-of-professional-practice), which she acknowledges “is more detailed than SIP9” (section 6.1.2) – she’s not kidding! To me, it looks just like the SIP9 Appendix with more detailed breakdowns of every key time category, probably something akin to the information IPs provide on a >£50,000 case.

Finally, she refers to a “helpful information sheet” provided by the Australian regulator (ASIC) (http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Approving_fees_guide_for_creditors.pdf/$file/Approving_fees_guide_for_creditors.pdf), which looks much like R3’s Creditors’ Guides to Fees, although again the content does perhaps come over more readable.

Thus, whilst I can see some value in revisiting the UK documents (or producing different ones) so that they are more useful to non-IPs (although will anyone read them?), I am not sure that I see much in the argument that moving to an Aussie Code will change radically how IPs report fees matters. I am also dismayed at Kempson’s suggestion that “a detailed Code of this kind would be very difficult to compile by committee and would require a single body, almost certainly the Insolvency Service in consultation with the insolvency profession, to do it” (section 6.1.2). Wasn’t the Service behind the 2010 Rules on the content of progress reports..?

After singing Australia’s praises, she admits: “even with the additional information disclosure described above, creditor engagement remains a problem in Australia” (section 6.1.3) – hmm… so what exactly is the value of the Australian way..?

Other ideas for creditor engagement

Kempson recommends consideration of the Austrian model of creditor protection associations (section 6.1.3), which is a wild one and not a quick fix – there must be an easier way? I was interested to note that, even though creditors are paid to sit on committees in Germany, committees are only formed on 15-20% of cases – so paying creditors doesn’t work either…

The report also seems to swing in the opposite direction to the Red Tape Challenge in suggesting that the criteria for avoiding creditors’ meetings in Administrations should be reconsidered. Kempson highlights the situation where the secured creditor is paid in full yet no creditors’ meeting is held either because there are insufficient funds to pay a dividend or because the Administrator did not anticipate there would be sufficient funds at the Proposals stage. As I mentioned in an earlier post (http://wp.me/p2FU2Z-3p), in my view these Rules just do not work – something for the Insolvency Rules Committee…

However, raising these circumstances makes me think: whilst endeavours to improve creditor engagement are admirable, could we not all agree that there are some cases that are just not worth anyone getting excited about? There must be so many cases with negligible assets that barely cover the Category 1 costs plus a bit for the IP for discharging his/her statutory duties – is it really sensible to try to drag creditors kicking and screaming to show an interest in fixing, monitoring and reviewing the IP’s fees in such a case? Whatever measures are introduced, could they not restrict application to such low-value cases?

.
The fact that the release of this report seems to have made fewer ripples than the Government’s announcement of its plan to conduct the fees review makes me wonder if anyone is really listening..? However, I’m sure we all know what will happen when the next high profile case hits the headlines, when the tabloids report the apparent eye-watering sums paid to the IPs and the corresponding meagre p in the £ return to creditors. Then there will be a revived call for fees to be curbed somehow.

In the meantime, we await the Government’s response to Professor Kempson’s report, expected “later this year”.


Leave a comment

The Deregulation Bill

1228 Port Douglas

Tuesday’s announcement from the Insolvency Service reminded me that I’d buried its 2012 Annual Review of IP Regulation deep within a pile of court judgments that I’ve also not blogged about. I’ll tackle the easy job here: let’s look at the recent IS/BIS announcements…

“New Measures to Streamline Insolvency Regulation Announced” (1 July 2013)
http://insolvency.presscentre.com/Press-Releases/New-measures-to-streamline-insolvency-regulation-announced-68efa.aspx

SoS authorisations to come to an end

The Business Minister, Jo Swinson, announced proposals to transfer the regulation of SoS-authorised IPs to “independent regulators” in the interests of removing “a perceived conflict of interest” and in view of the limited powers of sanction when compared with the RPBs’.

This is not new. At the end of 2011, Ed Davey – two Ministers’ ago – described the Government’s intention to remove the Secretary of State from direct authorising, which was a conclusion of the consultation into IP Regulation. This also was a recommendation emanating from the OFT’s study into corporate insolvency, which was published in June 2010. And the idea has been bubbling along for years earlier than that.

However, perhaps I should not focus on how long it is taking the Department to progress this change; finally it has a name: the “Deregulation Bill”.

Limited Licences

The announcement also referred to proposals to allow “IPs to qualify as specialists in either corporate insolvency or personal insolvency, or both, [which] will reduce the time and money it takes to qualify for those who choose to specialise. This will open up the industry to more people and improve competition”.

This also is not new. Almost as soon as S389A was introduced via the IA2000, people have been asking for it to change. That Section sought to allow IPs to specialise by only authorising them to act as Nominee and Supervisor of (Company or Individual) Voluntary Arrangements. The regulatory structure was never put in place to allow such licences to be issued – the Secretary of State never recognised any bodies for the purpose of issuing such limited licences – but it was also soon appreciated that there would be little use in such licences: for example, if someone wanted to administer an IVA, it would also be useful for them to be able to become a Trustee in Bankruptcy, but this is not possible under S389A.

However, there was also much clamour from many IPs who felt that it was dangerous to allow IPs to specialise only in one field of insolvency. Many felt that the knowledge of someone who has passed only the personal insolvency JIEB paper was insufficient to enable them to deal successfully with the range of debtor circumstances that likely they would encounter even if they only took formal appointments on IVAs and Bankruptcies.

It certainly seems that the current Government proposals, which highlight the benefit of a fast track to a licence – 1-2 years for “the new qualifications” – will lead to limited-licence IPs narrowing their field of vision at the JIEB-stage.

Although there are many IPs who only take appointments in either the personal or corporate insolvency arena, I doubt that many would have chosen a limited licence route, even if that had been available. The corporate specialists tend to have got where they are either through a relatively many-runged large firm ladder or by having begun as a jack-of-all-trades, albeit with a corporate emphasis, in a smaller firm. Of course, the IPs who have lived and breathed IVAs for much of their professional life may have taken advantage of a limited licence route and they are unlikely to be taking on the complex bespoke IVA cases for which knowledge of corporate insolvency might be valuable, so personally I don’t feel too strongly about this being a bad idea… although I’m reluctant to call it a good idea, and I am not convinced that the profession needs to be opened up to more people and competition improved, does it?

Other aspects of the Deregulation Bill

The press release mentions a couple of other planned changes regarding the SoS’s and OR’s access to information on directors’ misconduct and the choice of interim receivers. Also hidden in the small print is reference to the Government’s proposals “to strengthen the powers of the Secretary of State as oversight regulator” – I’m not quite sure what they are, though…

“Consumers benefit and business to save over £30m per year from insolvency reforms” (5 June 2013)
http://insolvency.presscentre.com/Press-Releases/Consumers-benefit-and-business-to-save-over-30m-per-year-from-insolvency-reforms-68db0.aspx

Complaints Gateway

Business Minister, Jo Swinson, said: “An easy route to complain is important for consumers… This new Complaints Gateway will help consumers dealing with the insolvency industry to get speedier resolution of problems and easier access to the right information”.

“An easy route”? Firstly, the Complaints Gateway does not include complaints about Northern Ireland insolvencies. Nor does it include complaints against IPs licensed by the SRA/Law Societies. Nor does it, presumably, cover complaints about an IP’s conduct in relation to Consumer Credit Licensable activities..? Or at least it won’t if the IP/firm has their own Consumer Credit Licence… I’m not certain about IPs covered by a group licence… clear as mud!

“Speedier resolution”? Well the Service’s Complaints FAQs admit that complainants will normally be informed whether or not their complaint is being passed to the relevant authorising body within 15 working days of the Gateway receiving the complaint”. That’s a 3-week delay that would not have occurred under the old system.

Having said that, if the Complaints Gateway at least makes the public perceive IP regulation as more joined up and less self-serving than has been the perception to date, then that’s great!

Red Tape Challenge Outcomes

The press release details other proposed changes, although I do wonder at the “savings of over £30m per year” tagline:

• “Removing the requirement for IPs to hold meetings with creditors where they are not necessary”. Final meetings, presumably? With the exception of S98s, meetings are never actually held, are they, so I can’t see this measure resulting in less work/costs for IPs?
• “Enabling IPs to make greater use of electronic communications, for example making it easier to place notices on websites instead of sending individual letters to creditors”. So perhaps moving away from an opt out of the snail mail process to a default of website-only communication..? Anything less than that is pretty-much what we have already, isn’t it?
• “Allowing creditors to opt out of receiving further communications where they no longer have an interest in the insolvency.” Hmm… personally I can’t see creditors bothering to put “pen” to “paper” and opt out…
• “Streamlining the process by which IPs report misconduct by directors of insolvent companies to the Secretary of State, enabling investigations to be commenced earlier.” Well, yes, a much-reduced wishlist from the Service would be welcome, although that doesn’t require legislation, just re-revised Guidance Notes. Not sure how else you can “streamline” the process unless you make in online… but is that really going to make much difference..?
• “Removing the requirements on IPs to record time spent on cases, where their fees have not been fixed on a time cost basis, and to maintain a separate record of certain case events.” – good, about time too! No more Reg 13s..? What will the RPB monitors find to have a gripe about now?!
• “Removing the requirement for trustees in bankruptcy and liquidators in court winding-ups to apply to creditor committees before undertaking certain functions, to achieve consistency with powers in administrations”
• Radically reducing the prescriptive content required for progress and final progress reports – sorry, this one is a fiction; it’s my own suggestion of how a huge chunk of unnecessary regulation might be removed in an instant!

2012 Annual Review of Insolvency Practitioner Regulation (June 2013)
http://www.bis.gov.uk/insolvency/insolvency-profession/Regulation/review-of-IP-regulation-annual-regulation-reports

This was released without a murmur, slipped into the notes of the press release above. It’s not really surprising that it created little noise – has everyone had enough of pre-pack bashing for now? – but I thought I’d try to extract some items of interest.

Monitoring of SIP16 Compliance

Given that only 51% of SIP16 statements were reviewed by the Service during the first six months of 2012, it would seem to me that the decision to move away from box-ticking SIP16 compliance was made some time before it was abandoned half way through 2012, but at least the Service could report that their work was “in line with [their] previous commitments”. Consequently, I really can’t get excited about the Service’s findings on their SIP16 compliance monitoring, although it still irritates me to read that the Service considers IPs have not complied with SIP16 because they have not provided information “as to the nature of the business undertaken by the company”, which is not a SIP16 requirement (and I cannot see that this is essential to explaining every pre-pack) but only appears in Dear IP 42.

Monitoring of pre-packs using SIP16 disclosures

In the second half of the year, the Service reports that they “moved to sample monitoring of the pre-pack itself in order to identify whether there is any evidence of abuse of pre-packs”.

The statistics are interesting. Out of 42 cases referred to the authorising bodies, over 80% of them, 34, related to IPs authorised by the Secretary of State. Given that the SoS authorised less than 5% of all appointment-taking IPs in 2012, that’s a fair old hit-rate. It has to be mentioned, however, that the 34 referrals involved only six IPs, so perhaps they are zoning in on particular IPs who seem to attract a disproportionate amount of criticism. It is a shame that, although the report describes the outcome of referrals to the RPBs, nothing is mentioned about the outcome of these 34 referrals to the SoS. Perhaps we will read it in next year’s regulatory report… or perhaps the Service hopes that the plans to drop their authorisation role will intervene…

It is also a shame that the Service does not report on the outcome of the 23 complaints on pre-packs/SIP16 received in the year from external parties; it mentions only that six were referred to the RPBs. The report’s Executive Summary states that “pre-pack administrations continue to cause concern amongst the unsecured creditor community”, but it would be very interesting to learn exactly what kinds of concerns are being reported. In view of the fact that 17 complaints did not make it past the starting post after the Service had only “considered the nature of the complaint”, it would seem to me that there is still a lot of dissatisfaction out there about the process itself, which unfortunately is sometimes translated into suspicions of IP misconduct. I will give the Service some credit, though, as their website now includes some FAQs on pre-packs that do attempt to counter the “it just cannot be right!” reaction.

A good news point to take away from the report is: “we have not found evidence of any widespread abuse of the pre-pack procedure”.

Themed Review on Introducers

It is good to see the Service taking action to tackle websites that misrepresent professional insolvency services, although the limit of the Service’s powers appears evident. The report indicates that five websites, which were not identified as being connected with an IP, were changed as a consequence of the Service’s requests, but it seems that several more likely made no changes. The report mentions recourse available to the Advertising Standards Authority and recent coverage of an ASA ruling (www.insolvencynews.com/article/15416/corporate/insolvency-ad-banned-after-r3-complaint), albeit on the back of an R3 complaint, does show that this can generate results.

The report indicates that IPs can expect the RPB monitors/inspectors to be more inquisitive in this area: the Service believes that RPB monitors should be “robustly questioning insolvency practitioners as to their sources of work and testing the veracity of answers to ensure confidence that insolvency practitioners are complying with the Insolvency Code of Ethics”.

Regulatory and disciplinary outcomes

Let’s look at the visit stats for 2012: IS stats 2012

Hmm… does this hint at perhaps another reason why the SoS might think the time is right to drop authorising..? I’m referring to the average number of years between visits – 5.82 years for SoS-authorised IPs compared to an average of 2.92 for the RPBs as a whole – not the percentage of IPs subject to targeted visits, as I think that’s a two-edged sword for authorising bodies: it could mean that you have more than the average number of problem cases or it could mean that you are tougher than the rest.

The only other points I gleaned from this section were:

• The ICAEW clearly takes its requirement for IPs to carry out compliance reviews very seriously: three out of its four regulatory penalties were for failures to undertake compliance reviews.
• The heftiest fines/costs resulting from the complaints process were generated as follows:
o £10,000 fine for failure to register 884 IVAs with the Insolvency Service
o £10,000 fine for failure to comply with the Ethics Code by reason of an affiliation with a third party website that contained misleading and disparaging statements about IPs and the profession
o £4,000 penalty and £30,000 costs for taking fees from a bankrupt as well as being paid by the AiB as agent
• According to the Executive Summary, apparently there have been concerns about “the relatively low number of complaints that are upheld and result in a sanction”… so can we expect the RPBs to “please” the Service by issuing more sanctions in future or will the RPBs satisfy the Service that their complaints-handling is just and that it is simply that there is nothing in the majority of complaints?

The future

The Service intends to look further at the “considerable concern in relation to ensuring that insolvency practitioners consult employees as fully as is required by law in an insolvency situation”. I think the case of AEI Cables v GMB (http://wp.me/p2FU2Z-3i) demonstrates the issues facing a company in an insolvency situation – something has to give: which statutory duty takes precedence? – and I cannot believe that the position for IPs is any easier. It will be interesting to learn what the Service discovers.

And of course, we’re all waiting expectantly for the outcome of the Kempson review on fees; the Service’s regulatory report states: “A report is expected by July”…