The All-Party Parliamentary Group (APPG) on Fair Business Banking’s report Resolving Insolvency: Restoring confidence in the system recommended a ban on appointments where an insolvency practitioner has conducted pre-appointment work for a creditor and a database recording the outcome of administrations.
The report, produced with law firm Humphries Kerstetter LLP, also urges a move away from self-regulation of the system through professional bodies including ICAEW to oversight provided by a single regulator and the creation of an ombudsman to process resolution of certain disputes, and “systems for financial penalties to benefit victims rather than the regulator”.
In his foreword to the report, Kevin Hollinrake MP, Chair of the APPG on Fair Business Banking, said that despite a handful of high-profile regulatory sanctions in recent years, the data on fines showed there is “very little jeopardy for an IP who is prepared to break the rules”.
Insolvency’s biggest problem is the framework, not the bodies that enforce it
ICAEW said it had long argued that insolvency sector reform is needed but says the report’s assessment of the way the insolvency sector is regulated is flawed. Duncan Wiggetts, Chief Officer in ICAEW’s Professional Standards Department, said the APPG report was a missed opportunity for an independent, objective and evidence-based review into the sector.
“The authors of the APPG’s report appear only to have interviewed those who agreed with what they believed and it was noticeable that no professional bodies were called upon to give any evidence about the current regulatory arrangements and how they operate,” Wiggetts said.
In 2019, responding to a call to evidence as part of the ongoing consultation by the Insolvency Service on a single insolvency sector regulator, ICAEW had said that reform should focus on the regulatory framework rather than the regulators themselves. Wiggetts said: “In our view, the biggest problem is the regulatory framework itself, not the bodies that enforce it.
“The best way to strengthen insolvency regulation is to move away from the current regime, where insolvency practitioners are regulated on a personal basis, to a system where firms are licensed to carry out insolvency work and individuals within those firms are authorised to take appointments. This will allow the professional bodies like ICAEW to take enforcement action against the firms that may have profited from that misconduct rather than being confined to issue personal fines,” Wiggetts added.
Schemes and frameworks cross over
The APPG report refers to the case of Silentnight, which was sold to private equity firm HIG resulting in KPMG and one of its former partners being fined £13m and £500,000 respectively by accounting watchdog the FRC after it emerged they had lost objectivity when they advised on HIG’s purchased without its £100m pension scheme.
However, as Wiggetts points out, the case was brought under the Accountancy Scheme - a voluntary arrangement in place since 2003 between those professional bodies who act as Recognised Supervisory Bodies (RSBs) for audit and the FRC - and not the current insolvency framework. “If it had been brought under the latter, KPMG itself would not have faced any complaints of misconduct relating to the activities of their IP and the sanctions would have been considerably lower.”
Wiggetts said ICAEW’s actions relating to its investigation of the administrators of Comet were a good demonstration of its robust and rigorous approach. “Not only did we oppose the administrators in the High Court on behalf of the unsecured creditors but as a result of our actions, we were successful in getting the court to appoint an additional liquidator to reinvestigate the matter. As a result of that reinvestigation, that liquidator is now running an action to recover £82m on behalf of unsecured creditors. That would never have happened without ICAEW stepping into the High Court.”
In his letter to Hollinrake sent in July, Wiggetts said that despite some sympathy with the APPG’s recommendation to remove conflicts of interest, banning all IPs from taking all appointments where they have carried out prior work may actually work against the best interests of creditors. “This is because an IP with prior knowledge will be able to hit the ground running and be better placed to start trading a distressed company, and professional fees for the appointment could be much lower given the IP’s prior knowledge of the business.”
In its response to the report, insolvency trade body R3 said the UK’s insolvency and restructuring profession was one of the most regulated and well-regarded in the world and every year helps to rescue tens of thousands of businesses, hundreds of thousands of jobs and return billions of pounds to creditors.
R3 president Colin Haig, said: “Members of the profession are highly qualified, highly regulated individuals whose work often requires them to take on the running of a financially distressed company almost overnight. They take their requirement to comply with the profession’s regulatory framework and its strict code of ethics incredibly seriously and any insolvency practitioner who falls short of the code of ethics’ standards can and should be reported to their regulator for investigation.”
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