In December 2021 the Insolvency Service launched a Consultation on the future of insolvency regulation. The Consultation proposes a number of changes that will have a significant impact on the insolvency profession, including the creation of a single regulator for insolvency professionals and bringing firms providing insolvency services within the scope of insolvency regulation for the first time. The deadline for responses is 25 March 2022, although there is no specified timeline for the implementation of any reforms.
The Small Business, Enterprise and Employment Act 2015 introduced a number of reforms to insolvency regulation, including the introduction of statutory objectives for the Recognised Professional Bodies ("RPBs") that currently regulate insolvency practitioners ("IPs"). Subsequently, in 2019, the Government issued a Call for Evidence to seek views on whether the regulatory objectives had been having their intended impact. Following the responses to that Call for Evidence and monitoring visits to the RPBs by the Insolvency Service, the Government has concluded that the 2015 reforms have not achieved the "levels of consistency, independence and transparency that were envisaged" and so believe further reform is required.
The Consultation identifies five main areas for reform:
- Creation of a single regulator within the Insolvency Service for the insolvency profession to replace the existing RPBs and funded by levies on IPs and firms providing insolvency services;
- Statutory regulation of firms providing insolvency services, including enhanced regulation for firms that have the potential to cause the most 'damage' to the insolvency market;
- A single public register of IPs and firms providing insolvency services;
- A mechanism to require firms and IPs to pay compensation when things go wrong; and
- Reform of bonding arrangements.
A Single Regulator
The Government set out in the Consultation their proposal to introduce primary legislation to create a single independent government regulator. Currently, the approximately 1,570 professionally qualified IPs in the UK are regulated by four RPBs which are recognised by the Secretary of State: Chartered Accountants Ireland, the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accounts of Scotland and the Insolvency Practitioners Association.
Following the 2019 Call for Evidence and the Insolvency Service's monitoring visits, the Government concluded that there were a number of issues that undermined confidence in insolvency regulation. The Government considered that self-regulation by a number of different professional bodies led to inconsistencies, declining standards through the potential for competition between the RPBs and the perception of a lack of impartiality.
The Government considered an alternative, non-statutory, approach, including a more active role for the Insolvency Service in setting guidelines and sharing best practices. However, the Government has concluded that such an option is not viable given the perceived failure of a similar approach following the SBEE Act 2015, and the issues that would not be addressed by such an approach, such as competition between RPBs.
The Government has therefore identified its preferred option as a new single regulator created by statute to replace the RPBs with objectives to:
- Secure fair treatment for those impacted by insolvency and act impartially and transparently with regard to those regulated;
- Encourage a competitive and innovative industry, that acts with integrity, promotes the maximisation and promptness of returns to creditors, protects the public interest and offers high quality services at a fair and reasonable cost; and
- Support those regulated in complying with their responsibilities and ensure consistent and effective outcomes.
The new regulator would, amongst other things, set the requirements for authorisation to act as an IP, authorise individuals to act as IPs, regulate and monitor the activities of IPs, investigate complaints against IPs and impose sanctions. It would also oversee the regulation of firms, which is discussed in the next section.
Finally, the Government propose that, while the implementation of the new regime would be funded by the Government, the new regulator would be funded on an ongoing basis by levies on IPs and the firms that would be regulated under the new regime.
Regulation of Firms
The Consultation identifies the gap in insolvency regulation that has developed in the 35 years since the Insolvency Act 1986 was introduced, which is the shift towards IPs working for larger firms with other commercial interests rather than as sole practitioners or within small practices. This means that there be a tension between management decisions and the commercial interests of the larger practice on the one hand and IP's statutory responsibilities on the other. The Government specifically cite the development of 'volume provider' firms which advise on individual voluntary arrangements as an example of this issue.
The Government therefore proposes to introduce regulation for firms offering insolvency services for the first time, requiring such firms to be authorised and meet certain minimum requirements.
As part of the regulation of firms, the Government propose to introduce additional regulatory requirements and monitoring targeted at firms that have the potential to cause the most 'damage' to the insolvency market. The Government has not set out specific requirements for the purposes of the Consultation, but by reference to regulatory regimes in other industries, identified a number of possibilities, including a requirement to appoint a senior responsible person, to demonstrate the firm's suitability to conduct its business and to provide confirmation that appropriate controls and governance are in place.
The Government is proposing, alongside single regulator, to introduce a single public register of IPs and firms authorised to provide insolvency services. The Consultation doesn't specify precise requirements, but in general terms propose that to be entered onto the register:
- An IP would need to meet minimum requirements as to training and expertise and demonstrate that they meet requirements for continuing professional development; and
- A firm would need to minimum requirements such as having a registered office in Great Britain, being solvent, having relevant insurance cover, and having sufficient IPs and administrative staff to manage the number of appointments taken by IPs at the time.
In the Consultation, the Government considers a number of alternative mechanisms for the payment of compensation. They consider expanding the scope of an existing ombudsman scheme (such as the Financial Ombudsman Scheme) to cover complaints by users of insolvency services, but concludes that it would not be appropriate given the lack of specialist expertise within the scheme.
As an alternative, the Government is seeking views on a proposal for the new regulator to have powers to direct that an IP or regulated firm compensate a user of insolvency services where an act or omission by the IP or firm has either had an adverse impact and/or caused some form of loss to a complainant. The powers could include requiring IPs or regulated firms to:
- Pay compensation of up to an amount of £250 where there has been a service failure which has caused undue inconvenience, anxiety or distress to an individual. For example, where a practitioner has failed to address a question from a debtor about the future of the family home, which has caused the debtor and their family excessive anxiety.
- Restore a party or parties to the position they would have been in had a wrongdoing not occurred, which could be non-monetary, but could also include repayment of financial loss to an estate incurred as a result of the action of an Insolvency Practitioner or a firm offering insolvency services.
- Repay or waive fees.
The Government is seeking views specifically on whether there should be a cap on the amount that the regulator could require an IP or firm to pay.
The funding of any such scheme would also need to be considered, and so the Government is seeking views on the alternative sources of funding including the ability to direct the IP or firm to make the payment themselves, or the creation of a fund to which IPs and regulated firms would contribute.
Currently, before IPs can take appointments they must have certain security in place, being an 'Enabling bond' of £250,000 which provides cover if the IP fails to obtain cover for a specific insolvency appointment, and then specific cover for each appointment that the IP takes covering at least the estimated value of the insolvent estate's assets up to a maximum of £5 million. This is in addition to any professional indemnity insurance policies that are required to be put in place to varying degrees by the RPBs.
The Government's review of the current arrangements and responses to the 2019 Call for Evidence concluded that the current arrangements were inflexible, prescriptive and failed to adequately protect creditors. In the Consultation the Government put forward a number of technical proposals including the extension of the bond wording to cover creditors' reasonable costs of a bond claim, a period of run-off cover of two years from when the IP leaves office, and for interest to be payable on claimed amounts. The Government are also seeking views on whether to increase the Enabling bond cover to £750,000 and to increase the minimum requirement for specific estate cover to £20,000 from £5,000.
Finally, the Government is seeing views on introducing further requirements to improve transparency by requiring IPs to declare the level of coverage to creditors as part of their usual reporting.
Next Steps and Comment
The deadline for responses to the Consultation is 25 March 2022.
The proposed forms raise some complicated issues and would, if introduced, constitute a significant overhaul of the way in which the insolvency market is regulated.
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