Insolvency regulation: Changes on the horizon
26 March 2021
No one in insolvency and restructuring would question the need for a strong regulatory system. The profession plays a vital role in the economy, resolves financial distress for businesses and individuals, and safeguards the confidence and public trust which underpin trading, lending, and investment.
Insolvency practitioners are entrusted with hefty responsibilities and wide-ranging powers when appointed as office holders in corporate or individual insolvency cases, allowing them to investigate potential fraud and wrongdoing, and recover funds for creditors in often challenging circumstances.
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. In order to foster this confidence, an effective and trusted regulatory framework which polices and promotes high standards is vital. High standards within the profession matter, quite possibly more to the profession itself than to any other stakeholder.
Ahead of a Government review of insolvency regulation, expected later this year, and in light of recent parliamentary interest in the issue, we set out below: the current framework; the recent history of changes to how the insolvency and restructuring profession is regulated; and what the profession would like to see improved, to make outcomes swifter, more consistent, and more transparent.
The current regulatory framework
Currently, the Insolvency Service regulates the profession's Recognised Professional Bodies to ensure that the members they license are fit to act as insolvency practitioners, as well as to ensure that the RPBs themselves are fit for purpose.
The RPBs are required to have rules in place to ensure their insolvency practitioners meet acceptable education, practical training, and experience requirements. At present, the four RPBs are: 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).
All insolvency practitioners are subject to regular monitoring visits from their RPB to establish that they are adhering to the legislation, and to accepted standards such as Statements of Insolvency Practice (SIPs), the Insolvency Code of Ethics, and the relevant rules and regulations of the authorising bodies.
Any complaints about the conduct of an insolvency practitioner are handled initially by their RPB, but complainants have recourse to the Insolvency Service for a final decision if they are unhappy with the RPB's investigation and response. Sanctions against insolvency practitioners who are found to have contravened regulations range from financial fines to the loss of their licence to practice - a serious deterrent.
The Insolvency Service publishes an annual review of insolvency practitioner regulation, including statistics on complaints and sanctions. The most recent version can be found here. The review states that, in 2019, out of 121,882 personal and 17,224 corporate insolvencies (some of which were handled by the Official Receiver as well as insolvency practitioners), there were a total of 856 complaints about insolvency practitioners to the Complaints Gateway, of which 428 were deemed appropriate to be referred to the RPBs,, equating to a complaint referral rate per insolvency procedure of 0.3%.
Opportunities to review and evolve
While the current framework is effective, we believe it could be improved in a number of ways, particularly in relation to speed, consistency in monitoring and enforcement, and the scope of regulation.
For example, publishing service standards could help speed up disciplinary processes, while further transparency around sanctions outcomes is both possible and desirable. Closer regulatory collaboration between the RPBs on monitoring and sanctions would aid consistency, although care should be taken that consistency does not push regulators towards a tick-box approach.
Notably, the profession itself needs to be given clearer routes to 'speak up' about unethical behaviour on an anonymous basis, including a recognised protected-disclosure 'whistle-blowing' channel to the Insolvency Service.
Finally, there is a need to expand the scope of regulators' powers so that they can monitor and sanction the work of practices alongside that of individual insolvency practitioners. The extent of this expansion of powers needs to be considered in more detail, and some specific parts of the insolvency framework may be in more need of a practice-wide rather than individual insolvency practitioner-based regulatory approach than others, but we believe that with a little imagination and with input from interested stakeholders, a beneficial change could be put in place.
Reform on the agenda
Because insolvency practitioners are granted such wide-ranging powers, the regulatory framework which sits above them is often the topic of discussion among stakeholders and interested observers.
The most recent round of scrutiny of the insolvency regulation framework began in the summer of 2019, when the Government issued a call for evidence, "Regulation of insolvency practitioners: review of current regulatory landscape", which closed in October 2019. Our response to the call for evidence can be read here.
At the time of writing, we expect the Government to return to this issue later this year, most likely through the publication of a consultation on potential changes to the regulatory framework for insolvency practitioners.
A current inquiry
One body also looking at insolvency regulation is the All-Party Parliamentary Group on Fair Business Banking, which has been conducting an inquiry into how SMEs are treated by the financial system, focusing on the regulation of corporate insolvency.
R3, on behalf of the insolvency and restructuring profession, submitted a response to the inquiry, setting out how the profession is regulated, and what we hope will be included in the forthcoming official consultation on the topic. Our submission can be read here.
We welcome the opportunity to hear a range of views on insolvency regulation, and look forward to positive engagement with the APPG in future.
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