Regulation overhaul could place ‘unmanageable burden’ on small practices
29 September 2023
By Matt Jukes
Two of the largest RPBs and R3 have welcomed the Government’s changes to insolvency regulation, but the industry trade body and some insolvency practitioners have warned that the introduction of a compensation scheme could place an “unmanageable burden” on smaller practices.
R3 has also warned that the compensation scheme could undermine the UK’s international reputation for having an effective insolvency framework, and ICAS has criticised the creation of “unnecessary bureaucracy and risks”.
Under the Government’s plans announced in September, regulation will remain the responsibility of the four existing RPBs but will be expanded to include insolvency firms as well as individuals.
The new measures will also include a public register of all insolvency firms and individual practitioners, which will also state whether they are subject to sanctions by their regulator.
The Government will take control of ethical and technical standards for the profession, introduce a new “redress and compensation scheme” targeted at IP mistakes and misconduct, and changes to the bonding regime including an increase in general penalty sum cover, changes to the application of the indemnity period and cancellation conditions, and an expansion of the minimum requirements.
Jeremy Frost, insolvency practitioner and director at Frost Group said: “The insolvency profession has always been a myriad of conflict and self-interest. The focus is on the IPs, but you can add banks, unions and various Government agencies to the mix. As time is going on this mix is getting more complicated as the FCA, which will become increasingly important, expects us to now look after customers. The concept of adding value and keeping viable businesses alive while recognising a loss now is a dim and distant dream.
Firms will go out of business
“For many of these interest groups, their needs are diametrically opposed, leading to IPs having to make quite difficult decisions, usually with incomplete information and limited budgets. It is against this background that they wish now to have a fund to cover losses made as a result of IP mistakes – determined in glorious 20-20 hindsight. Firms will go out of business as [we are] put up as scape goats to cover realities that various interest groups would rather not deal with.”
Christina Fitzgerald, speaking on behalf of R3 as immediate past president welcomed the Government’s announcement and move away from a single regulator, but she added: “It is important that any regulatory changes do not impose onerous burdens on the profession and such regulatory changes should be introduced in such a way so that they support diversity, choice and a breadth of provision within the market.
“We understand the rationale behind the compensation scheme, but have significant concerns it could lead to a wave of unsubstantiated claims and the creation of a PPI-style claims management industry, which could place an unwanted and potentially unmanageable burden on the smaller practices within the profession, have consequences for the profession’s ability to deliver for clients and creditors, and potentially undermine the UK’s national and international reputation for having an effective insolvency framework and profession.”
The Government proposed in December 2021 to create a single regulator for the insolvency profession to sit within the Insolvency Service, but it has now said “that the Secretary of State be given the overall responsibility to set ethical and technical standards for the insolvency profession”. The Government has also said it will impose a single regulator “should it prove necessary”.
Duncan Wiggetts, ICAEW chief officer, professional standards said: “We are pleased that the Insolvency Service has listened to feedback and is making these much-needed reforms to modernise the regulatory framework. Regulating firms as well as individual IPs will strengthen our powers as a regulator.
“We have long argued that this has been the biggest problem with the existing regime, not the identity of the enforcing body, so are also pleased that the four recognised professional bodies will continue to have oversight of the profession.”
Paul Smith, chief executive at the IPA said: “The IPA has been a strong advocate for the introduction of firm regulation for a considerable period of time, and I am particularly pleased to note the commitment of the Government to legislate to this effect at a future date.”
ICAS also welcomed the move away from a single regulator but retained concerns about the approach to ethical and technical standards. David Menzies, director of practice, at ICAS, said: “Transferring ethical and standard setting powers from an independent body to Government creates unnecessary bureaucracy and risks.
Significant implications in terms of cost
“The current inclusive approach to setting standards; involving the profession and wider insolvency stakeholders, is essential to produce authoritative standards that are supported by users and regulators alike, as well as being relevant and realistic.
“While the Government intends to continue to collaborate with profession experts and the RPBs, there will be significant implications in terms of cost, effectiveness and timeliness for the development of standards which will need to be addressed.”
The Government has said that some of the reforms will require legislation to implement fully but remains committed to doing so quickly and as parliamentary time allows.
Kevin Hollinrake, minister for enterprise, markets and small business, said: “Our insolvency sector is highly-respected around the world, with the vast majority of insolvency practitioners doing a good job, making a valued contribution to our economy, and s0upporting those in financial difficulty. But there continue to be instances of poor conduct that have a direct impact on those closely involved. When that happens, it tarnishes the reputation of the whole profession, and undermines confidence.
“This forward-looking package of reforms reaffirms the Government’s commitment to ensuring the insolvency profession is effectively regulated, with a regulatory framework fit for the future. These reforms will deliver transformational improvements, modernise the regime, and, crucially, increase public confidence.”
