Insolvency regulation: R3’s view

10 October 2019

• For R3's full response to the Government's consultation, Regulation of Insolvency Practitioners - Review of the Current Regulatory Landscape, click here.

The insolvency and restructuring profession occupies a position of significant importance and responsibility within the UK's economy. Great trust is placed in the profession to uphold the law, act ethically, and protect and restore economic value. The profession needs to repay this trust. A lack of trust and confidence in the profession will lead to a lack of trust and confidence in the insolvency and restructuring framework, which will ultimately weaken the UK's economy.

At the same time, the profession is able to carry out its duties effectively because it has the public's trust and confidence, partly thanks to an effective and trusted regulatory framework which polices and promotes high standards. From the profession's perspective, it is vital for an effective regulatory regime to underpin, and be seen to underpin, the profession's work, meaning that good regulation is essential.

In July, the Government published a call for evidence on insolvency practitioner regulation, which closed in early October. This article summarises the themes of R3's response, which you can read in full here.

A highly regulated profession

The insolvency and restructuring profession is highly regulated, and every insolvency practitioner is required to hold a licence issued by a 'recognised professional body' (RPB). At the time of writing, there are five RPBs in the UK: the Association of Chartered Certified Accountants (ACCA); Chartered Accountants Ireland (CAI); the Insolvency Practitioners Association (IPA); the Institute of Chartered Accountants in England and Wales (ICAEW); and the Institute of Chartered Accountants of Scotland (ICAS). The RPBs undertake monitoring visits, to ensure members' compliance with the rules, and are the initial arbiters of complaints made against licence holders. Above the RPBs sits the Insolvency Service, a government office which acts as the 'regulator of regulators', tasked with seeing that the disciplinary processes and monitoring carried out by the RPBs is consistent, transparent, and fair.

Members of the insolvency and restructuring profession often operate in highly pressurised situations. They are personally responsible for protecting the interests of creditors, employees, consumers, and individuals in debt, and for dealing with the aftermath of governance and financial wrongdoings. When taking appointments, the profession will often step into the unknown, and will have to deal with the poor governance, faulty record-keeping, and other compliance problems commonly encountered at struggling companies. An effective regulatory framework - from regulatory oversight through to ethical codes and best practice guidance - helps the profession navigate these difficult situations.

Following the publication of the Government's call for evidence, R3 held member workshops and open member forums, and carried out an all-member survey. The good news is that the vast majority of members surveyed by R3 have confidence in their own regulator, and they have confidence in the wider regulatory framework. Where members are also regulated by a non-insolvency regulator as part of their work, 77% of respondents to our member survey said that their insolvency regulator is as, or more, effective at regulation as the other regulator. Insolvency practitioners feel that they are held to account by the regulatory framework, while sanctions - either the publicity of sanctions or the ultimate threat of a career-ending licence withdrawal - focus minds.

However, there is always room for improvement, and our members have identified a number of opportunities for potential reforms. Speed, consistency in monitoring and enforcement, and the scope of regulation could all be improved.

The future of regulation

In considering the way forward for insolvency regulation, there are a number of factors to consider. Firstly, the profession is split on a number of issues. Although the profession is relatively small (with just under 1,600 licensed insolvency practitioners at the start of 2019), it is nonetheless diverse in terms of the size of practice in which licence holders work - from sole practitioners to the global professional services firms - and the types of work undertaken by licence holders. Secondly, any framework for regulating the insolvency profession will have its own advantages and disadvantages - a 'Single Regulator' (something the Government has the power to introduce), for example, would not be a silver bullet for the concerns outlined R3's consultation response.

Ultimately, what is delivered by a regulatory framework is more important than how regulation is delivered. From R3's perspective, it is important that the UK has a regulatory framework for insolvency which is:

• Fair and proportionate for those who have cause to make a complaint or have made a complaint, and for those subject to the regulatory process. Regulation should not be an excessive burden on the profession, debtors, or creditors, and it should not unreasonably restrict the growth and success of insolvency practices;
• Transparent in terms of how to complain or to raise a concern, and it must be clear what is involved in the regulatory process. It must also be clear what action is being undertaken (whether this is dealing with a complaint or standard monitoring), and what the outcomes of any regulatory actions have been;
• Effective, in that oversight provides as complete a picture of the insolvency profession's work as possible. Regulators should be given the necessary powers to do their work, and should also be given any government support necessary to develop innovative approaches to regulation;
• Efficient, so that regulatory processes have clear timetables and any delays or extensions of a process should be transparent and justified. Complaints should be dealt with quickly, while extended gaps between monitoring visits should not be allowed to develop;
• Flexible enough that it can adapt to innovation within the insolvency and restructuring profession, and be able to keep up with the way the market operates; and
• Consistent in terms of the powers available to regulators, the regulatory requirements that the insolvency profession is expected to meet, the approach taken to complaints, and the consequences of breaching regulatory requirements.

There are particular areas of regulation where improvements can be made. Service standards could help speed up disciplinary processes; further transparency around sanctions outcomes is possible; closer regulatory collaboration on monitoring and sanctions would aid consistency, although care should be taken that consistency does not push regulators towards a tick box approach. The profession needs to be given clearer routes to 'speak up' about unethical behaviour on an anonymous basis, and there is a need to expand the scope of regulators' powers so that they can monitor and sanction the work of practices alongside individual practitioners. The extent to which this latter change is made needs to be considered in more detail, and some specific parts of the insolvency framework ('volume' IVAs, for example) may be in more need of a practice and individual practitioner-based regulatory approach than others.

Conclusion

R3 believes that while the current regulatory framework is robust and ensures a high standard of ethical compliance across the insolvency and restructuring profession, more could be done to improve outcomes for all stakeholders. In turn, efforts to strengthen the regulatory framework will help to maintain public confidence in the work of the profession, to the ultimate benefit of the UK economy.