Ten Years of the Insolvency Practices Council
2010 marked the tenth anniversary of the IPC’s formation. It grew in status during the period and, according to one of its lay members it now “punches above its weight”. It has, as is required by its remit, expressed an opinion about aspects of the insolvency profession in the public interest. It has made annual recommendations for change, particularly concerning the ethics and professional standards of licensed insolvency practitioners (IPs). As you would expect, some of its views have not been welcomed by them, indeed they have argued quite strongly against certain actions recommended by the IPC, but more of that later.
This note outlines the thought process behind the establishment of an IPC in the UK, its composition, recommendations made within its ten annual reports and an assessment of its worth. But before examining these issues it may be helpful to describe the UK insolvency scene with its, today at least, somewhat confusing number of different bodies. The government’s Insolvency Service (IS) has overall control of insolvency practitioner regulation although it delegates this to seven recognised professional bodies (RPBs) apart from those practitioners licensed directly by the Secretary of State. The law societies and accountancy institutes of England & Wales, Scotland and Ireland (and Northern Ireland) are the RPBs plus the Insolvency Practitioners Association (IPA). The Association of Business Recovery Professionals, known as R3, acts as the main trade association for all IPs.
Insolvency regulation is co-ordinated by the Joint Insolvency Committee (JIC) which, like the IPC, was also formed in 2000 from an existing best practice liaison committee. All practitioners, in order to gain an insolvency licence, have to pass the Joint Insolvency Examination which is run by its own board (the JIEB). Other than these bodies there are currently no joint licensing, disciplinary or complaints handling organisations; these matters are handled by the seven RPBs and the IS. The Official Receivers (ORs) are, of course, a separate branch of the IS.
The IPC is independent. Its only power is the influence it can bring to bear on the government, the IS, the RPBs (directly and via the JIC) and IPs (often through R3) by the recommendations it makes in its annual reports and by follow-up meetings it has with representatives of these organisations. Given its limited budget and resources it has arguably been remarkably effective. We will, at the end of this article, draw some conclusions and also look at how the process might be improved in the future.
The Insolvency Regulation Working Party
“Its (an IPC’s) task would be to ensure that public interest concerns were reflected in the devising of professional and ethical standards.”- Para 14.3 of the Review of Insolvency Practitioner Regulation report dated February 1999.
Some ten years after the Insolvency Act 1986 came into force, the insolvency regulators formed a working party to review insolvency regulation and consider future changes. One such change was the provision of more public interest involvement in the profession’s regulation – particularly concerning ethical and professional standards. Although most RPBs were increasingly involving lay people in their affairs, noticeably on disciplinary panels, it was still felt appropriate to form a new, independent group that could provide further input to the insolvency profession from the public’s point of view.
Several options were considered, but it was eventually decided to form an IPC of six lay members, including a lay chairman, with three other members who would be licensed IPs. The latter were to be appointed by the profession in order to assist lay members in understanding the often complex insolvency rules and regulations. A limited company by guarantee was formed, called IPR Services Limited, in order to obtain the necessary funding for the IPC from IPs (by annual levy with their licence fees) and to ensure that IPC members were recruited. The lay members were selected by a panel consisting of the IPC Chairman and members of IPR Services Limited following advertisements in the national press. Lay members each received an annual honorarium. The IPC’s affairs were deliberately somewhat limited by its annual budget which was equivalent to around £50 per IP. This would also cover a salary for the IPC’s part-time secretary and expenses to cover the IPC’s office in his home. The IPC would hold around half a dozen meetings a year and make recommendations to the profession in its annual reports. It would have no powers, simply the opportunity to influence the government and the insolvency regulators by persuasion.
Although the IPC would have direct contact with government departments and, in particular, the Insolvency Service, it would use the JIC as its main forum for obtaining an industry wide view on insolvency regulation. The IS and JIC, plus the regulators, were all obliged to acknowledge the IPC’s existence and to give due consideration to its recommendations.
The IPC and its initial recommendations
“The JIC should consider setting a standard of best practice concerning the disposal and realisation of the equity of the matrimonial home in bankruptcy” - IPC 2000 Annual Report
From its first meeting in May 2000, the IPC focussed largely on personal insolvency issues, such as the handling of the value of the matrimonial home by trustees in bankruptcy. This was partly because individual debtors were deemed to be more vulnerable than corporate debtors but also as the Insolvency Act 1986 had created insolvency mechanisms called voluntary arrangements – for individuals the IVA. The latter was in its formative years and the IPC was quickly able to suggest a number of improvements to the process and, particularly, in the provision of the various options to debtors rather than the most lucrative option from the IP’s point of view or that of the specialist volume providers of IVAs that were being set up. Some IVA firms were obtaining listings on the AIM and so there was perceived to be pressure on office holders to maximise fees, possibly to the detriment of other insolvency options such as bankruptcy (or sequestration in Scotland). The IPC called for appropriate, written advice to be given by IPs, outlining all the options open to the debtor.
During its first year the IPC strayed beyond its original remit as it felt the need to recommend that the JIC should consider setting a standard of best practice concerning the realisation and disposal of the equity in the matrimonial home in bankruptcy. The IPC contributed to a change in legislation in this area. Later, the IPC drew attention to the financial restrictions being put on the IS that prevented many IPs’ reports under the Company Directors Disqualification Act 1981 being investigated. Following requests for the IPC to respond to consultations on changes in both personal and corporate insolvency regulations, the IPC was clearly acknowledged to be a useful public mouthpiece and more than simply commenting on ethics and standards.
“The JIC should obtain from the RPBs details of VAs on an annual basis to enable performance tables to be completed” – IPC 2002 Annual Report
Every year since its formation the IPC addressed IVAs. In its first annual report it recommended that the JIC should strengthen SIP3 to require IPs to provide debtors with a written explanation of options plus the pros and cons of each. It went on in future years to recommend that the regulators’ monitors be more effective, that statistical information on IVAs and their outcomes should be obtained and passed on to the regulators and that IVAs as originally envisaged were too complex and, therefore, too expensive for the increasing number of personal over-indebtedness cases. The IPC promoted the case for a simplified IVA (to be known as the SIVA) from its 2005 annual report onwards.
The formation of the IVA Standing Committee in 2006 resulted in many of the IPC’s concerns being addressed, especially those concerning better statistics for the monitors. Indeed, the Chairman of the IPC became a regular observer on the Standing Committee and also attended its Management Information sub-committee. In 2007, IPs were required by the regulators to understand other non-statutory personal insolvency procedures such as debt management plans; the JIE examination adding them to its syllabus. This meant that the IPC was able to call for statistics to be gathered on DMPs as well as IVAs in order that a better understanding was achieved by everyone involved. The IVA Standing Committee became the main forum for gaining access to such information although in the case of DMPs, this had to be achieved by seeking it from the main providers within both the not-for-profit and commercial sectors.
The IPC was asked in 2009 to contribute its views to the joint Ministry of Justice, BIS, IS proposal for regulated DMPs. It remains to be seen which of the proposed options is chosen by the government and/or if the SIVA proposal is resurrected in one form or another.
“That the IS should require administrators, when reporting on pre-packs to the body of creditors, to give a prompt reasoned explanation of why they decided against putting the business up for sale on the open market even foe a short period ………” – IPC 2006 Annual Report
Pre-packaged administrations became popular following the Enterprise Act 2002. This quickly caused unsecured creditors to complain bitterly about businesses being sold back to the original directors having shed much of the company’s debt, without them being consulted. Accusations of phoenixism and conflicts of interest appeared regularly in the national press. The Business & Enterprise Select Committee grilled the Inspector General of the Insolvency Service on the matter.
The IPC had already recommended in its 2006 annual report that the IS should require administrators, when reporting on pre-packs to the body of creditors, to give prompt and reasoned explanations of why they had decided against putting the business up for sale on the open market even for a short period and why so doing would have been detrimental to obtaining a better price for the business. The IPC also recommended that the regulators draw their IPs’ attention to the potential conflict of interest in accepting an appointment as administrator having advised the company on the pre-pack. The monitoring of compliance with SIP16 and checking that wrongful or fraudulent trading had not occurred was also recommended.
Reports on directors
“That the government’s action in cancelling a substantial proportion of the planned investigation programme into IPs’ reports under the CDD Act 1986 is damaging to the public interest” – IPC 2006 Annual Report
The IPC reflected public concern when IPs began to complain that there was a back log of investigations into their reports due to lack of funds within the IS. Some delinquent company directors were therefore not being disciplined and possibly continuing to act as directors. The IPC was in a position to add its weight to the insolvency profession’s concern which resulted in an easing of the situation.
“That the IS and the regulators require all their IPs to ensure that their firms’ complaints handling systems include an option for making redress” - IPC 2007 Annual Report
A lay member of the IPC noticed that the complaints handling by IPs, their firms and regulators seemed to compare unfavourably to other professions and that, in many cases, redress did not seem to be possible other than through the courts. The IPC therefore obtained a grant from the Barbican Trustees to commission two pieces of research by Nottingham Trent University: the first to establish the procedures being used in the insolvency profession and the second comparing it with procedures used in several other professions, eg, the medical profession.
The researchers found that the insolvency profession had not kept pace with the other professions in some respects although insolvency was a special case as there would most likely be grounds for complaint from someone involved. Office holders are required by law to recover assets for creditors in a strict order of precedence. Separation of disciplinary and complaints systems was not always apparent, as was now the case in the comparator professions, and access to redress by the Financial Ombudsman Service was only possible for complainants whose IP worked for a firm with a standard Consumer Credit Licence, mainly the IVA volume providers.
Many IPs worked under a group CCL: which was held by their licensing body. The IPC sought to achieve a “level playing field” for all complainants, regardless of how their IP was licensed. Meetings between the IPC, the OFT, the FOS and the insolvency regulators sought to achieve this end or, at least, a suitable compromise.
“The JIC should set a standard of best practice that correspondence should be answered within at least 10 working days” - IPC 2000 Annual Report
From its first annual report in 2000, the IPC recommended that the JIC should set a standard of best practice that correspondence should be answered within at least 10-days. This recommendation was not well received by the insolvency regulators who argued that IPs were in a unique position and, in any event, their PI insurance mitigated against them being required to do this.
By definition, there would not be agreement between the IPC and the insolvency profession on some matters; this appearing to be one. Although understanding the argument against a rule on the subject, nevertheless the IPC continued throughout the period to believe that it was not an unreasonable recommendation. It was also one that might help IPs to prevent some of the bad press and feelings they generated by often appearing aloof to the feelings of many parties involved in cases.
Regulation and monitoring
“That the RPBs give urgent consideration to seeing what can be done to simplify and speed up the regulatory process” – IPC 2001 Annual Report
The IPC spent time to understand the system of insolvency regulation in the UK as this had a direct bearing on its remit to watch over and comment on the ethics and professional standards of IPs. Like many people, it was somewhat incredulous that such a small profession of around 1,700 licensed IPs should have such a complex structure. Clearly it would make sense, and probably be cheaper, to have one licence provider and regulator. Indeed the IPC from time to time considered the need for firms to be licensed as is effectively the case now with volume IVA providers.
However, the IPC has concluded thus far that the current system appears to work and it would require political will or voluntary agreement between the RPBs to create a single regulator. No specific study has been undertaken on the issue although the IPC noted that Nottingham Trent University’s first report on complaints handling in the insolvency profession remarked in similar vein. But the UK has one of the best, if not the best, insolvency regimes in the world, and there does not therefore appear to be a compelling need to change it. That said, the IPC has regularly encouraged improvements such as the creation of a joint disciplinary body (in its 2003 Annual Report) and that the IS cease to licence IPs directly as this role appears to be inconsistent with its role as regulator of regulators (IPC 2001 Annual Report).
In the IPC’s 2003 Annual Report it was suggested that the RPBs needed to adopt a more pro-active approach to regulation and not just react when a complaint is made. Since that time, the monitoring has indeed improved. The volume IVA providers, a source of concern in their early years, are now visited at least annually and a regular meeting of monitors takes place to co-ordinate visits as much as is possible and to share information. The IPC’s consistent pressure for more and better statistics on IVAs is also beginning to pay off with more and better targeted visits.
An assessment after 10 years
“The IPC has a unique role and I urge the profession to pay careful attention to it and heed IPC feedback. It is a most valuable channel.” – Stephen Speed, Inspector General of the Insolvency Service at the IPA annual lecture on 28 January 2009.
Even after ten years it is probably too soon to form a view of the value of the IPC. It is also difficult to attribute successes to it as others will have been involved in bringing about change. But it can be said that the IPC has tried very hard to make sensible recommendations to improve matters related to the insolvency profession on behalf of the general public whether they be debtors or creditors.
It is perhaps understandable that IPs found some of the IPC’s views difficult to reconcile. They, IPs, have a challenging enough job in satisfying the many demands on them as office holders and coping with the ever increasing regulatory burden, often with considerable time constraints. There will always be someone with whom they deal in a case who feels hard done by and unfairly treated. And so it is somewhat surprising how few complaints are made. The IPC has always been short of hard evidence of IPs acting outside the public interest, but where it gets a strong indication, often anecdotal, it has felt moved to remark on the possible wrong doing or a lack of regulation.
Where there is not widespread evidence of misconduct, either actual or even anecdotal, the RPBs have been somewhat reluctant to act. This may be partly due to the number of different bodies involved in regulating IPs and also a reluctance, in some cases understandable, for some of the RPBs to change their regulations for their whole membership when IP licence holders are such a small proportion of the whole. Nevertheless, the IPC has felt it necessary and its responsibility to repeat some of its annual recommendations if they do not appear to have been actioned.
The IPC has developed a relationship with the insolvency regulators over the period. It has had regular meetings with the IS and has had the full attention of its Inspector General and his staff. The IPC chairman has had annual meetings with a number of the RPBs but, more importantly, he has met with other bodies such as Citizens Advice, the Office of Fair Trading, Financial Ombudsman Service and the Money Advice Trust to gain an outside (public) view of the insolvency profession. Meetings have been held with both not-for-profit organisations such as PayPlan and commercial providers of debt solutions such as Debt Free Direct. And research was commissioned by the IPC into the insolvency profession’s complaints handling processes which has also brought another view to bear on the profession as viewed from outside.
The conclusions are that, as discussed in the IPC’s 2009 Annual Report, although the first ten years have seen progress and some notable success stories for the IPC, more needs to be done to encourage the insolvency profession to adopt several of the IPC’s earlier recommendations. Although these may not be repeated in future annual reports, they remain on the public record and are retained on the IPC’s website. The IPC reflects the public’s perception of IPs which they may, of course, choose to ignore. They are often seen as expensive, somewhat arrogant, unnecessarily commercial people within a profession that is complicated and often perceived to be lacking in transparency. None of these are generally true although the early advice about IVAs when they became a popular option for credit card debtors, slow response to some communications, the apparent lack of consumer redress for individuals and tales of phoenixism with pre-packs have all contributed to a negative perception of the profession that the IPC believes could be changed to the advantage of IPs. Admittedly, the bulk of the IPC’s work during its first ten years has addressed personal insolvency where these perceptions are much greater than in the corporate field – pre-packs excepted. But it is believed by the IPC that the profession would do well to counter these perceptions if it is to retain its reputation with its high quality practitioners in the best insolvency regime in the world.
The next 10 years
“Nobody is ever going to love insolvency practitioners. We have to be there when people are losing money. This doesn’t mean we aren’t good at our job.” – Mick McLoughlin, Global Head of Restructuring at KPMG
The IPC believes that it needs to find a way of increasing its influence so that many more of its recommendations are taken seriously and acted upon by the insolvency regulators, and more quickly. Its relationship with the JIC may be a key to such an improvement. However, the JIC has difficulties of its own in reconciling the demands of the IS and the seven RPBs.
It is not feasible for a lay dominated body that meets only six times a year to amass a large amount of evidence of activities of IPs that are contrary to the public interest. All it can do is reflect public perception and, with advice on the reality of the profession’s work by its IP members, make hopefully sensible suggestions in order to improve matters relating mainly to the ethics and professional standards of IPs – its original remit.
The new decade will see changes in the IPC. There will be a new chairman and all its members will rotate again – a total of 12 lay members having served on the IPC during the period. The profession will also appoint three different IPs to advise it on insolvency procedures. It is therefore certain that the IPC will make different recommendations in the future and it may change its modus operandi to become even more effective. The IPC will continue to make itself available for contact by everyone affected by insolvency and to reflect on the information so gained.
Finally, it should go on record that the IPC benefits greatly from the support it receives from the insolvency profession, its members and their firms as well as the grants provided by the Barbican Trustees for research and training. This all enables the IPC to continue to operate within its budget and, hopefully, to provide a valuable service in the public interest.