Consultation on reforming the regulation of IPs
CONSULTATION ON REFORMING THE REGULATORY FRAMEWORK FOR INSOLVENCY PRACTITIONERS - THE RESPONSE OF THE INSOLVENCY PRACTICES COUNCIL
Chapter 1: General Information
Q.1 Do you have any comments or evidence on the costs and benefits set out in the attached Impact Assessment (Annex B)?
Yes; we have comments on both the estimated benefits and the costs assumed for the single-tier independent complaints body.
We believe that the estimate that benefits of £8 million p.a. will be achieved through improved returns of £15 million to unsecured creditors is likely to prove over optimistic for two reasons. First, if some of the measures to strengthen creditors’ oversight of IPs’ fees proposed in Chapter 5 are adopted, it is plausible to assume that IPs will be willing to negotiate a compromise with the creditors’ committee at some intermediate level below £15 million. Second, the impact assessment assumes that the complaints body will automatically accept that the whole of the £15 million estimated by the OFT represents excess profits for IPs and that the unsecured creditors should receive the same discounts as the secured creditors require from IPs on their panels. This is far from obvious. When fees issues come before the courts, the decisions usually turn on whether the work done by the IP was justified and represents value for money. It is plausible that any complaints body may adopt a similar approach and arrive at compromise decisions. The assumption that £15 million of higher returns to unsecured creditors will lead to increased trade credit of £8 million a year is also highly speculative.
The impact assessment states, without evidence, that there will be large (unquantified) financial benefits from bringing personal debtors’ complaints to an independent complaints body. This seems very doubtful. Many complaints from personal debtors relate to misunderstandings of the IP’s role or to the latter’s failure to communicate. While we are in favour of personal debtors having a proper channel to complain about bad advice or other forms of poor service and, where successful to receive redress, these are likely to remain a minority of cases. Any redress paid to personal debtors would be a pure transfer; there would be no efficiency gains.
We believe the impact assessment of the single-tier independent complaints body may substantially underestimate the costs.
First, for the reasons explained in our answer to Q.3, we regard it as unacceptable that any appeals by IPs against decisions or penalties taken against them in disciplinary cases would have to be taken to the courts, since this would deprive them of their existing right to a hearing (which may be oral) by the appeal panel or tribunal in their existing RPB system. The single tier option should be rejected for this reason alone. If an appeals system is added back to the single tier body, it becomes option 3 or 4, both of which are significantly more expensive.
Second, the single tier option assumes that all complaints are decided by the staff of the new body without any panel or committee. It is at least arguable that outside complainants will only have confidence in the new body if they know that the decision on their case will be taken by a trained lawyer or someone with experience as an Ombudsman or tribunal member. In any event a trained lawyer and in our view a panel would certainly be needed for all disciplinary cases (as opposed to complaints cases about, eg, poor service, which fall below the threshold for disciplinary action – see our Answer to Q.2 below). Under the RPBs’ procedures an IP has a right, which should certainly not be removed, to ask for an oral hearing at the first stage of any disciplinary action. For either or both of these reasons the single tier option will need to have a panel of outside lawyers, which does not seem to be allowed for in the costings. We note that the costing of the second option of an independent appeals body includes an annual cost of around £180,500 for its appeals panel. The cost of providing lawyers to decide complaints and chair oral disciplinary hearings at the first stage would clearly be higher, because the number of cases would be higher.
Third, while the impact assessment provides for the cost of legal advice, it does not seem to make any provision for expert advice on how insolvency procedures and IPs work in practice. (In the RPBs’ existing complaints systems this expertise is provided by the presence of IPs on the disciplinary committees; and the impact assessment of the RPBs’ existing arrangements puts a resource cost value on them). In our view such expertise would be needed by a new complaints body in relation to many corporate insolvency cases and would be certainly be needed in all fee disputes cases.
If the second and third of these criticisms are correct, they also apply to Models 3 and 4, both of which adopt the single tier model’s impact cost assessment unchanged for the first-tier stage of their integrated first-tier plus appeals stage systems. To that extent these models too may be significantly more expensive than the figures given in the impact assessment.
Chapter 2: Overview/Regulatory Framework
Q.2 Is the current structure of IP regulation the right one? How could it be improved?
The current regulatory structure with seven primary regulators licensing and monitoring around 1,330 appointment taking Insolvency Practitioners (IPs) is unwieldy and needlessly complex. There is scope for improvements in the way the RPBs operate (see paragraph 5 of this answer and our answer to Q.18 below). But there is no evidence of major regulatory failures in the current arrangements; (the fees question identified in the OFT Report is certainly not the result of regulatory failure). The UK’s corporate insolvency regime was highly rated by the OECD both for its speed and success in recovering moneys for creditors. The IPC is more concerned by the risk that personal debtors are not getting appropriate advice from IPs and other debt advisers.
The IPC considers there are three main risks in the current regulatory structure. First, the risk that the seven RPBs may be inconsistent in the frequency and intensity of their monitoring, in their judgements as to whether IPs are satisfactorily compliant with regulatory requirements and in their criteria on whether to initiate regulatory or disciplinary action. Such inconsistencies can lead to differences in the effectiveness of regulation and to inconsistent decisions on complaints and disciplinary issues. Second, in a college of seven RPBs plus the Insolvency Service (IS) it may be unclear who should take the lead in tackling new regulatory problems, leading to delayed responses, eg, on pre-packs. Third, there is a risk of a conflict of interest, which may lead to a weakening of regulation, if RPBs compete to attract more licensees by offering “light touch” regulation.
None of the proposals put forward by the OFT and the IS address these risks directly. The proposal to give the IS greater powers to sanction the RPBs for regulatory failure might help in due course. But it is not clear that differences in regulatory approach would justify the use of sanctions.
None of the proposals for regulatory reform put forward by the OFT and the IS in Chapter 4 relate in any way to the questions raised over the impact of IPs’ fees on unsecured creditors in the former’s report. Most of the proposals concern changes in the relationship between the Insolvency Service (IS) and the IS as “oversight regulator”, none of which are particularly urgent. These proposals should therefore be considered on their own merits and not linked as a single cost-benefits package with the fees issue and the proposals on handling complaints.
On the main regulatory changes proposed in Chapter 4, we agree that the IS should cease to license and regulate IPs except as a last resort, since this can conflict with its role as “oversight regulator”. We also agree that the IS’s powers to sanction the RPBs should be strengthened. We believe (see our answer to Q.18 below) that more can and should be done immediately to get the RPBs to adopt a more consistent approach to monitoring and compliance with regulatory standards. We agree that it would be reasonable to open a dialogue on the pros and cons of a single regulator.
On standard-setting, we agree that the work of the Joint Insolvency Committee (JIC) needs to be streamlined along the lines proposed by the OFT and it should also be required to consult publicly when its proposals may affect third parties’ interests. We would support adding some lay members (but not outside interest groups) to the JIC. The RPBs should remain in charge of setting professional and ethical standards as at present (see answer to Q.21 below). The IS should not become the standard-setter, but we agree that it should be given the powers of negative and limited positive intervention proposed in the OFT report
Finally, we believe that the IPC or a similarly independent “voice organisation” has a useful role to play in the future on the basis proposed by the OFT. We do not believe it would be appropriate for the IS to take on this role (see our answer to Q.25).
Chapter 3: Independent Complaints Body
Q.3 Would the creation of an independent complaints body be the best way to improve confidence in the handling of complaints and/or appeals?
Our view is that improving confidence in the handling of complaints and/or appeals requires a range of changes to the existing complaints systems at all stages as well as greater harmonization of the monitoring, investigation and regulatory system on which the complaints system depends. The question of whether an independent complaints body is needed is a second-order question (on which we comment below).
As we have recommended in our last two Annual Reports we believe that three main changes are needed in the RPBs’ current complaints systems to remedy the defects identified by ourselves and the OFT:-
• There should be, as in the case of legal services, a separate procedure within the existing systems for dealing with complaints as distinct from requests for disciplinary action. The current disciplinary procedures apply only when an IP is charged with misconduct involving a breach of the law, the insolvency rules, SIPs or the Code of Ethics. As we understand the current systems, where a complaint from a market participant is not considered as warranting disciplinary action, eg, poor service, one-off errors or maladministration, there is no procedure or adequate remedy available even if the complaint were to be considered valid;
• The complaints system should provide for appropriate and proportionate redress, including provision to make consolatory payments for serious service failures to complainants whose complaints are upheld and who have suffered financial loss, distress or inconvenience as the result of the actions or omissions of the IP concerned (only ACCA offers this possibility at present); and
• The complainant must have the right to appeal the decision of any first tier in the complaints system to an independent reviewer, who can rehear the case afresh and grant redress if he/she upholds the complaint. (We would also favour a majority of lay panellists in the first stage of the complaints/disciplinary procedure where this is not already the case).
In principle, these reforms could be made either by setting up an
independent body responsible for the entire complaints process (including appeals) or by reforms to the RPBs’ current complaints/disciplinary procedures or by a combination of an independent body to handle appeals and the necessary reforms to the RPBs’ first-stage procedures, in particular to provide for a separate claims procedure with financial and other redress.
The IPC’s view is that the government’s response to the OFT’s recommendations on complaints should be proportionate to the mischiefs identified by the OFT and as economical as possible. It should also not deprive either IPs or the complainants of any of the rights they enjoy under the existing RPBs’ systems. This last test in our view rules out entirely the first option of a single tier complaints body which would take over all complaints. Under this option, appeals against the single-tier body’s decisions would have to be made to the courts. This would deprive IPs of the right they currently have to appeal to the appeals panels which exist in the RPBs’ systems. This in our view is unacceptable. All other complaints systems relating to professionals of which we are aware provide for an appeals hearing below the level of the courts. The single tier complaints body also does not appear to make adequate provision for IPs’ existing right to an oral hearing in any disciplinary procedure. If this and other flaws were corrected, even ignoring the issue of appeals, the single tier option would probably be significantly more expensive than claimed in the impact assessment (see our answer to Q.1 above). Options 3 and 4, which combine both the first tier and the appeals level in the new complaints body, are much the most expensive. However, they adopt the same assumptions about the costs of the first stage of the complaints process as are used for the single tier body and therefore underestimate the costs.
Applying our test of proportionality and costs, we therefore reject options 1, 3 and 4. We are in favour of providing all claimants access to an independent appeal, which is currently only available to IPs in disciplinary cases. We do not consider it is necessary to create a new public body for this purpose. We consider that the most economical and effective option is the internal reform ofthe RPBs’ complaints/disciplinary systems to provide for an independent appeal for both claims and disciplinary purposes. It would also be necessary either on our proposal or under Model 2 in the consultation document to amend the RPBs’ first-tier complaints procedures to incorporate the changes we recommend in the first two bullet points above.
It will be straightforward for the RPBs to appoint independent reviewers to determine appeals, as several RPBs’ already use independent reviewers, though in a more limited capacity. Under this approach it would also be feasible and sensible for the RPBs to combine their independent reviewers into a panel which would provide the reviewer for each appeal from the first stage procedure of the RPBs. In effect, this would provide an independent appeals panel without having to set up a new public body.
We make four further recommendations aimed at making the reformed system as economical as possible. First, all appeals should be conducted by a single reviewer; we see no need for a panel, though the reviewer will need support from an insolvency expert (possibly an independent IP), particularly for complex corporate cases. Second, all appeals under the complaints procedure should be paper-based (as is the case for the Financial Ombudsman Service (FOS) and other similar bodies); for disciplinary cases, there would have to be provision for a full oral hearing for reasons of natural justice
Third and fourth, we recommend fast-track procedures for both personal debtors and for complaints by creditors about IPs’ fees. Personal debtors should be able to go direct either to the RPB’s independent reviewer or to the FOS for a fresh paper-based hearing if they are dissatisfied with the IP’s handling of their complaint, without going through the RPB’s first tier complaints system. This is already the case now for IPs who hold an individual (standard) consumer credit licence. We recommend a similar fast-track scheme for dealing with fee disputes in our answers to Qs.4, 5 and 12.
We believe that our proposal for independent reviewers would make the RPBs’ systems sufficiently independent and also promote more consistent outcomes over time. However, reform of the complaints system either along the lines we propose or through any of the models offered in the consultation document will not be sufficient in itself in remove the problem of inconsistency. A holistic approach is needed to achieve a more consistent approach on monitoring, compliance standards, investigation and the decisions taken to initiate (or not to initiate) disciplinary complaints by the RPBs themselves, since all these impact both on the effectiveness of the regulatory system as a whole and on the complaints system (see also our answer to Q.18).
Q.4 Should such a body have the power to review the fees and remuneration charged by IPs?
No. Our view is that most disputes about fees will be more akin to a commercial dispute than a complaint. In our answer to Q.12 we propose that fee disputes between creditors and IPs should generally be resolved under a fast-track independent review or arbitration system. If a fee dispute is linked with allegations that the IP has acted in breach of legislation or rules or a challenge that the IP has used the wrong insolvency procedure, the case may be more suitable for a complaints/disciplinary procedure or for the courts.
Q.5 Should all fee complaints be reviewed in this manner, or should some (such as more complex cases) be reserved for the court? Who would decide the criteria in individual cases?
As indicated in our answer to Q.4, there may be cases which might have to go to the courts if the creditors are in fact challenging the IPs whole modus operandi or choice of insolvency procedure.
We suggest that the decision should be left to the independent reviewer or arbitrator to whom the case has been sent, possibly on the basis of guidelines agreed between the IS and the RPBs.
Q.6 How should the costs of a fee related complaint be paid where (i) the IP is found to have overcharged and (ii) where the IP is found not to have overcharged?
Where the IP is found to have overcharged or to have acted in serious breach of insolvency rules or guidance relating to remuneration, IPs should meet their own costs from their own funds. Where they are found not to have overcharged or to have committed any breach of the rules or guidance, they should be able to charge their costs to the insolvent estate. If our proposal for independent reviews/arbitration based on a paper hearing is accepted, the costs should be low.
Q.7 What are your views on the single first tier independent complaints body model? Do you agree with the benefits and disadvantages that we have set out? What are your thoughts on the relative importance of the positives and negatives?
As indicated in our answer to Q.3, a single first tier complaints system should be ruled out altogether on the grounds that it removes IPs’ current right to appeal against disciplinary decisions within the RPBs’ existing systems. Professional disciplinary cases should be kept out of the courts until all other avenues have been exhausted. IPs charged with disciplinary offences also have a right to an oral hearing at the first-tier stage, which should not be removed. Such oral hearings would need to be chaired by a lawyer or someone with tribunal experience. A single tier complaints body would also need expert advice on insolvency law and practice, particularly in corporate and fee cases, which in the RPBs’ systems is provided by the IPs on the investigation and disciplinary committees. The costings appear to make no provision for either of these two aspects. Producing agreed rules of procedure for a single tier body out of the seven models currently in operation in the RPBs would itself be time-consuming and expensive.
We believe that the necessary degree of independence in a reformed complaints system can be provided by giving complainants a full right of appeal to independent reviewers and by having a majority of lay people in the first stage decisions (in any RPBs where this is not already the case). Evidence from other professions is that their members can and do act objectively in taking single first tier decisions and that their knowledge and experience can be particularly helpful in disciplinary cases.
As indicated in our answer to Q.3 we do not believe that setting up a new complaints body either as a single first tier or as an appeals panel will be sufficient in itself to deal with the problem of inconsistent decisions in the absence of a more harmonised approach to monitoring, compliance decisions and investigations within the RPBs.
Q.8 What are your views on the independent appeals body model? Do you agree with the benefits and disadvantages that we have set out? What are your thoughts on the relative importance of the positives and negatives?
Neither a completely independent appeals body nor a panel of independent reviewers set up by the RPBs as we propose, would be sufficient in themselves to meet the OFT’s recommendations. The RPBs’ first tier system would also need to be reformed to provide (at least for cases involving IPs) a “consumer-friendly” complaints process providing for redress, which would be separate from the disciplinary process, in order to deal with complaints about poor service and other issues which fall below the threshold for disciplinary action which are not dealt with in the RPBs’ current systems. (There is little point in introducing the option of financial and other redress without making this wider change). This is one of the reasons why we propose in our answer to Q.3 that all the necessary reforms can and should be achieved through changes in existing RPBs’ systems.
Under our proposal, all the appeals cases would be heard by a single independent reviewer, selected from a panel set up by the RPBs with appropriate technical support and specialist advice. We see no need to create panels or tribunals for this purpose. All appeals coming from the complaints procedure would be dealt with in a paper-hearing, though the option of oral hearings would have to be retained for disciplinary cases.
Q.9 What are your views on the decision making body model? Do you agree with the benefits and disadvantages that we have set out? What are your thoughts on the relative importance of the positives and negatives?
Under this approach (as under our own proposal for amending the RPBs’ complaints system from within) the investigation of any complaints system would be carried out by the current staff in the RPBs. We have no reason to believe that these do not do their work objectively and thoroughly.
However, under our own proposal that all complaints should be heard afresh by one of the RPBs’ independent reviewers, we envisage that the reviewer should, if necessary, be able to ask the investigators to make further enquiries and to specify how the work should be done. We also recommend that the RPBs should create a joint pool of investigators whose functions and working methods should be harmonised and approved by the independent reviewers. The same approach could be adopted by an independent appeals body
Q.10 What are your views on the decision making body overlaid with an investigative appeals function model? Do you agree with the benefits and disadvantages that we have set out? What are your thoughts on the relative importance of the positives and negatives?
See our answer to Q.9, which we think would be cheaper and more effective than Model 4.
Q.11 Should the appeals or decision making body also act as the single point of entry for complaints?
Under our proposal for reforming the RPBs’ disciplinary system, the RPBs would maintain their own points of entry. Creating a point of contact at the appeals or decision-making body will add an extra layer of cost because, except for the IPA, all the accountancy RPBs will need to maintain their disciplinary systems. We see no benefit from a single point of contact for complainants as long as IPs clearly informs those with whom they have dealings who they should contact to make a complaint. If a central record of complaints and how they are handled is considered desirable, the RPBs could be required to send regular reports to the IS.
Q.12 Do you think that settling fee complaints through arbitration would bring advantages over other suggested complaints models? Do you think any other alternative dispute resolution regimes may work better, i.e., conciliation?
Yes, see our answer to Q.4 above. We think that a form of binding independent review, which could if desired be set up as an arbitration, is potentially the cheapest and most informal way of settling disagreements over fees.
Our proposal is that the RPBs should first seek to mediate between the parties. If this failed, the creditors would be able to ask for a review of the IPs’ fees by one of the RPBs’ independent reviewers; the review taking the form of a paper-based hearing. It may be possible to designate this as arbitration since the Arbitration Act 1996 allows arbitrations to be purely paper-based. The reviewer/arbitrator would need the help of an independent specialist investigator (possibly an IP) to report and advise on the details of the case. The IP would have to consent to or be bound by his/her licence to the binding review/arbitration. A decision would be needed on whether a minimum threshold for the number of creditors would be required to trigger a binding arbitration.
Q.13 How many complaints (fee and non-fee related) do you expect to be made annually?
We have insufficient information on which to make an independent judgement on this. The estimates in the consultation document seem to be reasonable on the basis of the present pattern of complaints. However, if a separate procedure is introduced for dealing with complaints for poor service etc, as we recommend the total number of complaints may increase above the 700 level assumed. On the other hand, we understand that the number of complaints could be helpfully reduced if IPs responded more promptly to correspondence.
Q.14 What safeguards would be appropriate to protect against frivolous or vexatious complaints? Would requiring the support of 10% of creditors (by value) be appropriate?
We agree that safeguards may be needed. In the case of creditors’ disputes over fees a threshold of 10% of the creditors by value may be reasonable even for independent review/arbitration we propose for fee disputes. In all cases it will (on our proposal) be for the independent reviewers to decide if a complaint is frivolous or vexatious. Normally, judges have to look into the facts of the case to determine if it is frivolous or vexatious and in some cases it may be quicker to consider the whole case. This is a further argument in favour of the paper-based independent reviews we recommend.
Q.15 What are your views on the location of the body tasked with carrying out the complaints function? Is the Insolvency Service or the Adjudicator’s Office suitable to undertake the role of the appeals body? If you have chosen the creation of a new body please explain your reasons for rejecting the alternative options.
Our proposal for reforming the RPBs complaints systems by transforming the independent reviewers into an appeal level which can rehear cases afresh and award redress avoids the need to create any new public body.
However, if a new public complaints body is to be formed, we do not think the IS would be an appropriate location for it on the usual grounds of separating the executive and judicial functions of government. The IS is likely to be seen as faced with conflicting statutory objectives that could affect its judicial independence.
Our understanding is that the Adjudication Service currently deals only with complaints which relate to public sector bodies. It therefore has no expertise or experience in dealing with complaints against IP and no doubt would need to be consulted on its willingness to do this kind of work. It would presumably need to recruit and train a new team if it was to take this work on. It would also need specialist outside advice, particularly in dealing with corporate insolvencies or fee disputes.
We note that the Adjudicator’s Office could only take cases after they have been through the RPBs’ complaints systems. Unless its rules are changed, therefore, it could not act as the reviewers in the fast-track arrangements we propose for handling fee disputes and complaints from personal debtors.
Q.16 Which of the funding models (A– D) would be most appropriate for the complaint body? Can you suggest any alternative funding model? Do you agree with the suggestion to fund the establishment of the body by a levy on each RPP according to its number of IP members?
The only source of funding available to the RPBs is the body of IPs they license and regulate. In our view any system of levies on RPBs both for set-up and recurrent annual costs should be proportional to their number of IPs.
Subject to this, we would favour a variant of model D under which each RPB would, on top of a basic annual levy proportional to their number of members, fund the costs of investigating all complaints against their members.
Chapter 4: Changes to the regulatory framework
Q.17 Do you agree that it would be helpful to set objectives for the regulatory regime? What objectives would you favour?
We agree that sensibly drafted statutory objectives could be helpful. We suggest the following:-
• Promoting the maximisation of returns to creditors;
• Promoting a transparent and proportionate regulatory system which delivers the fair treatment of all parties and the protection of the rights and interests of unsecured creditors and debtors; and
• Promoting an independent and skilled IP profession that delivers a quality service with integrity.
These are based broadly on the objectives proposed in paragraph 4.9 of the consultation document. We have prefaced each objective by “promoting” to avoid unrealistic expectations. We have omitted the reference to “consistent outcomes” in the first objective in paragraph 4.9, because we think it would make a rod for the IS’s and RPBs’ own backs and a playground for lawyers. We have avoided the words “promoting growth” in our first objective, because the solution which gives the best returns for creditors will not always necessarily be the best for the wider economy. We have also avoided using the word “vulnerable” in the second objective because we believe that it is ill-defined and clearly cannot be applied to all unsecured creditors.
We suggest instead a reference to “unsecured creditors and debtors”; a specific reference to “unsecured creditors” seems to be reasonable, given the introduction of “the prescribed part”. We have dropped the word “competitive” from the third objective, because it is ambiguous and because the need to impose tough or additional regulation will often make the IP profession as a whole less competitive. This is not intended to remove the duty on the IS and the RPBs to keep an eye on what is happening to fees.
Q.18 Do you agree that the IS should no longer act as direct regulator, except as regulator of last resort if no RPB existed? Should any other changes be made to the number of regulatory bodies?
We agree that the IS should cease to act as direct regulator, except in the last resort.
As regards other changes, it is clearly desirable that there should be greater consistency in the regulation and monitoring of IPs and in the way disciplinary and complaints cases are handled (see our answers to Q.2 and Q.3). There are various ways in which the IS could encourage such consistency, eg, by pressing the RPBs to set up a joint monitoring team using the same methods of checking IPs’ conduct and the same standards in deciding whether IPs are compliant and when regulatory or disciplinary action should be taken.
We agree that it would also be reasonable for the IS to explore the pros and cons of a move to a single regulator with the RPBs. The IS would need to consider among other things whether and how a single regulator could operate in Scotland and Northern Ireland, given that there is separate insolvency legislation in force in these two jurisdictions which, in Scotland at least, is markedly different from that in England and Wales.
Q.19 Do you agree the oversight regulator should be given increased powers to monitor and sanction? If so do you agree these powers should include the power to fine RPBs, the power to issue formal reprimand and the power to publicise enforcement action?
Yes to both questions.
Q.20 Should the cost of oversight be recovered by a combination of fixed and variable charges to the RPBs?
It may be reasonable to introduce a fixed charge element. However, this should not be so high as to lead to IPs currently licensed by one of the smaller RPBs from switching to another RPB. ICAS and ICAEW (NI) have essential expertise in the differences between insolvency law in Scotland and Northern Ireland and that in England and Wales, which cannot easily be replicated elsewhere.
Q.21 Do you agree that the oversight regulator should be given greater powers to influence the setting of standards? If so are the suggested powers of veto and a positive power to direct standards, appropriate powers to give? If not what powers would be appropriate?
Assuming (as we recommend below) that a reformed JIC, or the RPBs collectively, remain in charge of issuing SIPs and other guidance and of the ethical code, we agree that it would be appropriate to give the IS the two additional powers on the basis proposed in the OFT Report. That means that the IS would only be entitled to exercise the two powers when it had strong grounds for believing that the RPBs were or were likely to be in breach of the statutory objectives.
We are against the IS itself setting the standards, since this would blur the distinction between its role as “oversight regulator” and the role of the primary regulators. It would also put the IS in a position of legislating without Parliamentary scrutiny, which is objectionable in principle.
We suggest that the IS should also be given the power (if it does not already have it) to require the RPBs to investigate particular problems occurring in the insolvency market and to report on how they consider the RPBs should respond to them. Similarly, the IS should, if necessary, be empowered to propose priorities and time-lines to the JIC.
Q.22 Is the oversight regulator best placed to ensure the regulatory objectives are being met?
As we understand the OFT’s recommendations, the statutory objectives would apply to both the RPBs, as the primary regulators, and to the IS itself (see paragraph 7.24, first bullet of the OFT report).
The IS would certainly have the primary responsibility for assessing whether the RPBs were meeting the objectives. The OFT, however, considered that an external “voice organisation” such as the IPC should have a particular responsibility to represent the interests of “vulnerable market participants” (see paragraphs 7.39 – 7.40 of their report).
It would clearly not be appropriate for the IS to be the sole judge of whether it too was meeting the statutory objectives. No doubt the IS’s performance would be scrutinised by a Select Committee and, if necessary, in Parliamentary debate. We support the OFT’s recommendation (paragraph 7.24, last bullet point) that an external “voice organisation” such as the IPC should have the role of assessing how the regulatory objectives were met across the system as a whole. See our answer to Q.25 below on the IPC’s role.
Q.23 Do you support the proposal to establish a new standard setting board to replace the JIC? What membership should it comprise?
We do not support this proposal but agree with the OFT Report that the standard-setting arrangements need to be streamlined and that further reforms to the JIC are therefore needed.
In our view, the RPBs, as the primary regulators, are the right bodies to set professional and ethical standards where these are needed to give IPs further guidance on how they should meet the obligations laid down in primary and secondary legislation. This is reinforced by the fact that breaches of SIPs or of the ethical guidance can provide grounds for a complaint or disciplinary action. The RPBs therefore need to satisfy themselves that compliance with any new SIP requirements can be properly monitored and are clear enough to be enforced.
We therefore consider that the JIC should continue as the standard-setting body, subject to three safeguards:-
• The override powers for the IS covered in Q.21 above;
• A move to a weighted voting system for the RPBs, along the lines suggested by the OFT; and
• A requirement to consult outside interests at least in all cases where a new SIP may affect the interests of IPs’ clients or other interested parties or the IP’s dealing with them.
As regards membership of the JIC, we favour the introduction of independent lay members into the JIC; the voting arrangements would need careful consideration. We are opposed to the introduction of particular interest groups. The latter’ views can be ascertained through consultation, but their presence in the standard setting body could make it extremely difficult to reach consensus.
Q.24 Do you support the proposal to establish a new standard setting board to act as an advisory board to the oversight regulator? What membership should it comprise?
As indicated in our answer to Q.23, we do not support the establishment of a new standard setting board along the lines proposed.
However, should a standard setting board be set up, we would be opposed to the advisory board version. For the reasons given in our answer to Q.23, we believe that the RPBs need to play the central role in the setting of professional and ethical standards, which are not set in legislation, but which may be relevant to the RPBs’ disciplinary processes. We do not think it is appropriate for the IS to become the standard-setter for the reasons given in our answer to Q.21.
Q.25 Do you agree with the recommendation to fold the Insolvency Practices Council?
No. However we support the OFT’s view that an independent “voice organisation” such as the IPC should additionally have oversight over how effectively the regulatory system as a whole, including the IS, meets the proposed statutory objectives and that it could, in particular, represent the interests of market participants such as personal debtors and smaller unsecured creditors.
Similar “voice organisations” exist in other regulated markets for professional services including financial and legal services. The case for a “voice organisation” in these two sectors is that there are large asymmetries of knowledge and understanding between the consumers and the professional providers. This applies to the insolvency sector just as strongly. We are not persuaded that it would be appropriate to transfer the IPC’s role, leaving it to the IS on its own to look after the wider public interest in the insolvency market for the following reasons:-
• First, the IS should not be left as the sole judge of whether it is satisfactorily meeting its statutory objectives (see our answer to Q.21);
• Second, the statutory objectives proposed contain, as the OFT recognises, inherent conflicts between the objective of maximising returns to creditors and the interests of both vulnerable personal debtors and the interests of IPs. An independent “voice organisation” helps to ensure that the debate on how to balance these conflicting objectives takes place in public rather than behind closed doors; and
• Third, a regulator such as the IS, linked to a government department, can be subject to pressures from elsewhere in government to shift the balance of interest one way rather than another or to shifts of fashion in how regulation should be conducted, eg, the recent damaging emphasis on “light-touch” regulation in financial services.
The argument has been put to us that the insolvency sector is too small to warrant a “voice organisation”. We do not accept this. Although the numbers affected by corporate insolvencies is relatively small, the numbers of distressed personal debtors needing debt advice is now substantial. MAT recently estimated that it expected 2.6 million adults to seek debt advice in 2011. Though not all of these will enter immediately into statutory debt solutions, many of them will need to be advised about these options. The IPC has always sought to represent the interests of all those seeking debt advice and believes that this is in line with the OFT’s recommendation. Both the RPBs and the IS have accepted that the personal debt market has to be looked at as a whole. IPs are now required by the JIEB to have a thorough knowledge of all types of debt solution and the IS has published a helpful Debtors’ Guide, which also covers all types of debt solution.
In relation to the size of the insolvency profession, the IPC operates on a modest budget (currently just under £100,000) compared with IPs’ fees estimated by the OFT at around £1 billion a year.
We believe that the IPC has made helpful contributions to the development of policy, regulation and professional standards over the last ten years, both to help protect personal debtors and their families and recently, in relation to “pre-packs”, at a very low cost and that it would be able to continue usefully in the role envisaged by the OFT under a reformed regulatory system.
Chapter 5: Detailed suggestions for changes to insolvency legislation
Q.26 Do you think that increasing the level of the prescribed part would help to constrain IP fees for unsecured creditors? If so how do you propose this should be achieved?
We have no statistical evidence to support our view, but we doubt that the fees of an IP are influenced by the size of the percentage of the company’s net property that is to be assigned to the prescribed part. In many small cases (say assets <£100,000) the prescribed part is insufficient to cover the cost of agreeing the claims of unsecured creditors but recent court cases have held that a distribution, however small, should be made.
The principal reason for increasing the applicable percentage would be to significantly increase the size of the prescribed part in smaller cases but further research would be necessary to determine whether this would be worthwhile, and if so, at what level.
Q.27 Would you welcome greater transparency in the remuneration of IPs? Should the provision of further details be mandatory or upon request?
Yes. We believe that the proposal in paragraph 5.21, that the information now required to be provided to creditors on request should automatically be made available in the IP’s periodic reports to creditors, would meet little resistance as many firms do this anyway.
If the hourly rates charged in a preceding administration are to be disclosed also, the same requirement could apply when a supervisor in a CVA or IVA is subsequently appointed liquidator or trustee in bankruptcy, or a liquidator in a CVL who is appointed liquidator in a subsequent Winding Up by the Court.
Q.28 Do you favour hourly rates being agreed by creditors at the time of the resolution either specifically or subject t a maximum amount?
Hourly rates can be provided easily, and for those firms adopting best practice, usually are in their periodic reports to creditors. At the end of the day it is the overall cost which is relevant for creditors and for which creditor approval is required. We think it would be reasonable for creditors to have the opportunity to agree hourly rates at the time of the resolution provided that the administrator is allowed to propose an increase at agreed intervals (of probably not less than one year).
Q.29 Do you have any evidence that the administration process is being used when a CVL would be more appropriate?
As the consultation paper states, the practice of using administration when a CVL would be most appropriate is now thought to be less widespread. (The IPC has heard this view expressed from its contacts with the RPBs and from its own IP members). There may be a case for asking the RPBs or an outside researcher to conduct an intensive study of recent administrations and of those currently in the pipe-line. We note that best practice requires the advising IP to write to the directors setting out the reasons why administration is the appropriate procedure.
Q.30 Do you agree with the proposed approach of restricting paragraph 22 appointments and paragraph 14 appointments? If not do you have any alternative suggestions?
We do not believe a restriction on appointments under para 22 in the terms expressed in para 5.32 is sensible as it is not reasonable to ask an IP to give an undertaking that the relevant objective could be achieved. The present requirement that the IP believes there is a reasonable prospect of achievement is fair.
Again we do not think a blanket ban on paragraph 14 appointments by a holder of a floating charge who is a connected party is right. However, we suggest this should be allowed only with court approval, if it appears that the floating charge holder is likely to be paid in full.
Q.31 Should creditors be given an opportunity to review the choice of an IP to act as liquidator, prior to the company converting from administration to CVL?
This seems a reasonable suggestion.
Q.32 Does Rule 2.106 need further clarification?
Q.33 Should IPs be required to provide an estimate of the duration and cost of the
insolvency process at the outset? If Yes, should they publish the amount to which these estimates were exceeded?
In theory this is possible, but inevitably any estimate is going to very heavily caveated by the IP to allow for factors either outside the IP’s control or which are unknown. Subsequent explanations may increase costs and as creditors will receive periodic reports we doubt whether there is a tangible benefit? As extreme examples, we wonder what meaningful estimates could have provided in the Lehman Brothers and Nortel cases?
Q.34 Should any discounted hourly rates negotiated in an administration be applied to a subsequent CVL? If so, should this be mandated, and if so, how?
Our view would be that the transparency of remuneration would be a more effective way of enabling creditors to understand the basis of an IP’s remuneration in different proceedings and make an informed judgement on what hourly rates are acceptable in these circumstances.
The tasks in administration may well be different from those in liquidation, i.e., being focussed more on selling a business and assets as opposed to investigation and agreeing creditor claims in liquidation, and hence different staff will be used. Each process should be judged on its own merits.
We note that the OFT’s report shows that many administrations are undertaken by non-panel firms, but with the bank’s consent. Our understanding is that they do not have to work at the agreed discounted panel rates so the issue does not arise.
Q.35 If an IP is unsuccessful in defending a challenge to his fees, should the costs be borne by the IP?
We agree in principle that this will often be reasonable, but suggest that there should be some discretion for the court to depart from this, for example, when an IP has been transparent in his/her remuneration applications which have been properly approved either by a creditors committee or a meeting of creditors.
Q.36 Is there a need for clearer and more consistent information to be (a) provided to creditors and (b) filed at Companies House? How could this be achieved?
The IPC has no direct knowledge of this. If the problem is that the information provided under the SIPs is too voluminous or complex, then the JIC should revisit the relevant SIPs in consultation with the creditors and other directly affected parties. If there are similar problems with the Companies House requirements, presumably the IS or BIS can take the issues up with them.