Insolvency regulation consultation response: R3’s views

25 May 2022

In late December 2021, the Government issued a consultation into insolvency reforms and outlined five key proposals to the insolvency regulation framework. Through engagement with R3 members, we submitted a 26-page consultation response highlighting our main questions and concerns.

A single, ‘independent’ regulator

Since conversations around reforming the regulatory framework for insolvency began, R3 has expressed consistently that it is not opposed to a single regulator - what matters most is what regulation delivers, not how it is delivered.

The attractions of a single regulator are clear: it would make it easier to enforce consistent regulation, and, with an independent regulator, it would be harder to level accusations of self-interest at the profession. However, this reform would not automatically solve current concerns, nor is it the only route to improvements.

In February we launched a survey to gather members’ views on the proposals contained in the consultation. The results showed that a sizable proportion (25%) of R3 members are in favour of an independent single regulator. However, only 3% were in favour of the Government’s proposal for a single regulator operating from within the Insolvency Service.

R3 and its members are firm on the opinion that a single regulator should either be a new, independent body, or an existing regulator, and that the Government should not play a role in the direct regulation of insolvency practitioners (IPs) as explained in further detail below.

Conflict of interest

The current proposals suggest a single regulator should operate from within the Insolvency Service, but the consultation fails to recognise the serious conflict of interest presented by a government single regulator.

Government would set insolvency legislation, regulate IPs, and then, effectively, compete with those same IPs for work – while not being subject to the same regulation itself. 79% of R3 members lack confidence that the single regulator can and will be able to maintain its independence while operating from within the Insolvency Service.

The Official Receiver, the government's version of an insolvency practitioner operating from within the Insolvency Service, is still not regulated to the same level as the insolvency profession. It is not required to produce the same information for creditors, there is no transparency around performance and the value of fees levied, and there is no transparency around disciplinary proceedings involving Official Receiver staff.

R3 cannot support the proposal for a government single regulator in its current form, and in our consultation response we called for consistent regulation across the whole of the insolvency profession – regulation that applies equally to both private and public sectors.

Issue of resource

Given the complex nature of insolvency work, it is critical that any regulators have sufficiently knowledgeable, qualified, and experienced staff to effectively regulate the profession.

In our response, we expressed concern that the single regulator would not have the financial capacity – in a framework that the Government intends to be self-funding – to be able to attract individuals with this level of experience.

A single regulator could also be prohibitively expensive to set up and run and would involve a significant degree of disruption.

Compensation scheme

R3 members are almost entirely united in their opposition to the introduction of a compensation scheme. Over 96% of R3 members thought that the proposed compensation scheme would lead to a significant increase in the number of claims, and more than 95% thought it would lead to a significant increase in costs.

As we explain in our response, insolvency procedures can be very stressful and frustrating for those involved. This is not because of the IPs, but by the very fact of the insolvency itself.

It is difficult to imagine a compensation scheme that could quickly and easily separate out complaints against IPs made by individuals affected by insolvency generally, and those instances where distress has occurred due to the negligence of an IP.

In our view, this proposal could precipitate a wave of unsubstantiated claims and lead to a substantial increase in compliance, administration, and insurance costs. These additional costs risk making the insolvency process in the UK more expensive and much slower.

In our consultation response, we outline a hypothetical case study to demonstrate the difficulty in separating anxiety and distressed caused by the nature of insolvency, and anxiety and distress caused by negligence of an IP, and also explain how this proposal could make it much harder to appoint IPs to certain types of insolvency cases.

Further clarity needed

With only a few pages of detail around each of the proposals, it was difficult to consult effectively with our members and to provide substantive responses to some of the areas covered in the consultation.

For example, R3 supports the principle of firm regulation and the introduction of a public register of insolvency practitioners and firms offering insolvency services. 64% of members agree that firm regulation would improve professional standards, and 55% of members said a single public register would provide greater transparency and confidence in the regulatory framework.

However, much more detail is needed on each of these points. Such significant alterations to the framework requires separate consultations to work through the many practical implications such reforms would involve.

Next steps

R3 is open to reforms that deliver real improvements, that keep costs down, and that supports the profession in resolving financial distress and maximising returns to creditors.

It is crucial that policy making in this area is evidence-based and that any changes made to the regulatory framework are proportionate and relevant to the current issues at hand. We are concerned that the reforms as currently proposed do not deliver this.

As the consultation continues its policy journey, we will work to ensure that R3 members are heard at every possible opportunity, and we look forward to working with the Government to secure new measures that strengthen the regulatory framework, rather than damage it.