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How is the Government proposing to change insolvency regulation?

How is the Government proposing to change insolvency regulation?

21 January 2022

On 21 December 2021, the Government published ‘The Future of Insolvency Regulation’, a consultation setting out new proposals to “strengthen, reform and simplify” insolvency regulation. The proposed changes in the consultation document amount to an overhaul of insolvency regulation and will have a significant impact on the insolvency profession and how it works.

The Government has concluded that the current regulatory framework, established by the Insolvency Act 1986, needs to be revised to reflect how the market has changed and evolved since the Act was introduced.

There are five key proposals in the consultation:

1.     A single “independent” government regulator of insolvency practitioners (IPs), sitting within the Insolvency Service.

2.     Statutory regulation of all firms offering insolvency services, in addition to the existing regulation of individual IPs.

3.     A register of authorised IPs and firms offering insolvency services.

4.     A formal compensation scheme.

5.     Limited reforms to the IP bonding regime.

The creation of a single regulator

The consultation proposes to create a single independent government regulator, which will sit within the Insolvency Service. This regulator will be a statutory office holder and will have powers to authorise, regulate and discipline individual IPs and firms providing insolvency services, and set technical, professional, ethical and educational standards.

The role of the regulator would be “separate and independent” from the other functions of the Insolvency Service, with functions including standard setting, complaint investigation, investigations with public interest and disciplinary proceedings.

Certain other functions, such as consideration of applications and authorisation of IPs/firms, routine monitoring, anti-money laundering supervision, and provision of training for the insolvency profession, will be delegated to suitable bodies.

Statutory regulation of firms

One key element of the Government’s proposals is the idea of introducing the regulation of firms who provide insolvency services. This is partly a result of feedback to the Government’s 2019 call for evidence on IP regulation, when many stakeholders highlighted the potential benefits of extending individual regulation to the volume Individual Voluntary Arrangement and Protected Trust Deed market, and the large corporate entities that deal with high profile business insolvencies.

If these proposals are passed, firms would be required to follow a set of conditions and processes. These could include the appointment of a Senior Responsible Person (similar to the Financial Conduct Authority’s Senior Manager and Certification Regime) to demonstrate the business’ suitability to conduct business and to confirm that appropriate controls against conflicts of interest are in place. A fee to cover the cost of regulation would also be required.

Public register of IPs and firms

The Government proposes to create a statutory public register to replace the current licensing process for authorisation of IPs. IPs and firms would have to be qualified to practise, meet requirements for training and hold requisite insurances to register.

Under the proposals, firms would have to meet certain minimal threshold requirements before registration, which might include being able to demonstrate their solvency and that they have qualified IPs and administrative staff to carry out the level of work undertaken.

The proposed register would also list details of any disciplinary action or sanction taken against an individual or firm by the regulator, and there would be an annual assessment to ensure IPs and firms continue to meet the minimum requirements.

Formal compensation scheme

Because the current RPBs cannot order compensation, the Government is proposing that the new single regulator would be able to direct an IP or a firm to compensate where an act or omission has either had an adverse impact and/or caused some form of loss to a complainant.

Potential compensation orders could include up to £250 compensation where there has been a service failure, restore a party or parties to the position they would have been in had a wrongdoing not occurred and repay or waiver fees.

Reform of bonding arrangements

There are various proposed changes to the bonding (a specialist kind of insurance for insolvency practitioners) regime, including an allowance for reasonable associated costs of the bond claim, a statutory minimum period of run-off cover for all insolvency estates for two years after the IP has vacated the appointment.

The Government is also considering whether a levy-funded scheme could replace the existing bonding regime and whether to introduce a broader regime for compensation.

New proposals, many questions

In our initial response to the consultation, we highlighted that while a number of the Government’s proposals reflect some of the recommendations we have made previously, there are still substantial issues that will need to be worked through before any changes can be introduced.

Crucially, there appears to be a lack of evidence around some of the claims the Government has made around the current efficacy of the framework. And while we are not opposed to a single regulator in principle, under these proposals there is the potential for a serious conflict of interest if that regulator were to operate from within the Insolvency Service.

As the consultation progresses, we hope the Government will clarify the detail of how it will ensure this proposed single regulator is genuinely independent.

Moving forward

The Government is now seeking written responses to the consultation, and we will be consulting with members to gather their views on the proposals and to inform our consultation response. As well as discussing the proposals with our policy committees, and at meetings of R3 regional and national committees, we will also be publishing a survey that all R3 members will be able to complete to share their perspective.

Once the consultation process is finished, it’s likely that any changes won’t be introduced for some time given the scale of the proposals and the difficulty in finding sufficient parliamentary time to debate the primary legislation that will be required to implement these reforms.

But through every step of the policy journey R3 will, as usual, engage with the Government to ensure that the voice of R3 members and the profession’s feedback on the new regulatory framework are heard at every possible opportunity.

 

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Amelia Franklin
Amelia Franklin
James JeffreysJames Jeffreys
Head of External Affairs
020 7566 4220
Stuart McBrideStuart McBride
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Amelia FranklinAmelia Franklin
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Pim UngphakornPim Ungphakorn
Senior Public Affairs and Policy Officer
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