The NOCLAR provisions in the revised Insolvency Code of Ethics: what they are and how to comply
Author Allison Broad. Allison is a Chartered Accountant and Senior Manager at ICAEW. She heads up ICAEW’s insolvency monitoring team.
- The revised Insolvency Code of Ethics came into effect from 1 May 2020 and includes new provisions on non-compliance with laws and regulations (NOCLAR), and insolvency practitioners’ (IPs) responsibilities.
- These provisions, as with the Code generally, do not just apply to IPs but also apply to their insolvency teams, so it is critical that IPs and their staff have carried out effective training on the revised Code.
- The article also comments on the working arrangements for ICAEW’s monitoring visits in the current pandemic.
The revised Insolvency Code of Ethics came into effect on 1 May 2020. The fundamental principles, and the framework approach, are the same as before, but the new Code looks and feels different with its use of ‘Requirements’ and ‘Application material’. It also has some new sections, such as the section on the IP as an employee. Some sections have been amended and expanded, including the gifts and hospitality section which is now expanded, both in title and content, to ‘Inducements, including gifts and hospitality’.
However for me, one of the most interesting aspects of the revised Code is the ‘NOCLAR’ section. NOCLAR, or its full title, ‘Non-Compliance with Laws and Regulations’ had, in substance, been reflected in the Code of Ethics for accountants for some time, but is a new provision for those IPs who aren’t members of an accountancy body and don’t work in a firm to which the Code of Ethics for accountants applies.
The NOCLAR section explains that an IP might encounter or be made aware of non-compliance or suspected non-compliance with laws and regulations in the course of carrying out their professional activities. And the section guides IPs in assessing the implications of the matter and the possible courses of action when responding to such scenarios.The non-compliance in the title relates to three areas:
- laws and regulations generally recognised to have a direct effect on the conduct of an appointment;
- other laws and regulations that do not have a direct effect on the conduct of an appointment, but compliance with which might be fundamental to the outcome of an appointment; and
- other laws and regulations that do not have a direct effect on the conduct of an appointment, but compliance with which might be fundamental to the operating aspects of the employing organisation’s business, to its ability to continue its business, or to avoid material penalties.
In referencing the IP’s obligations where they come across NOCLAR, the Code reflects an IP’s responsibility to act in the public interest. And it is that responsibility, together with the fundamental principles of integrity and professional behaviour, which drive the obligations to alert management or, where appropriate, those charged with governance of the entity, to seek to:
- enable them to rectify, remediate or mitigate the consequences of the identified or suspected non compliance; or
- deter the commission of the noncompliance where it has not yet occurred.
In some cases the public interest role means that it will be incumbent on the IP to take further action.
One of the key changes throughout the revised Insolvency Code of Ethics is its structure. The revised Code has clear requirements (designated with an ‘R’), supported by additional application material (designated with an ‘A’). This application material provides context relevant to a proper understanding of the Code and is intended to help IPs understand how they should apply the conceptual framework to a particular set of circumstances and to understand and comply with specific requirements. Although application material in itself doesn’t impose a requirement, it needs to be considered so that IPs can properly apply the requirements.
In relation to NOCLAR, the application material puts meat on the bones of the NOCLAR requirements. It explains that the requirement is talking about acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by eight potential parties:
- an entity over which the IP has been appointed;
- those charged with governance of an entity;
- management of an entity;
- other individuals working for or under the direction of an entity;
- the IP’s employing organisation;
- those charged with governance of the employing organisation;
- management of the employing organisation;
- other individuals working for or under the direction of the employing organisation.
In terms of understanding the acts or omissions which may be relevant, the application material gives us some examples. These are just examples, though. Throughout the Code the drafting goes to great lengths to make it clear that examples cited in application material are just examples, and that ethical considerations are not limited to the examples provided. In terms of NOCLAR, the examples of laws and regulations are stated as those relating to:
- insolvency processes and procedures;
- fraud, corruption and bribery;
- money laundering, terrorist financing and proceeds of crime;
- securities markets and trading;
- banking and other financial products and services;
- data protection;
- tax and pension liabilities and payments;
- environmental protection; and
- public health and safety.
The application material also makes it clear that while some acts of non-compliance might result in fines, litigation or other consequences for the entity or employing organisation, others might have wider public interest implications in terms of potentially substantial harm to creditors, employees, investors or the general public.
The application material clarifies that an IP needn’t comply with the requirements where the non-compliance relates to an inconsequential matter, unless other laws or regulations require it (such as in the case of money laundering where there is no deminimis). There is no additional material to say what is inconsequential, other than that should be judged with respect to the nature and impact, financial or otherwise, on the entity, the employing organisation, its stakeholders and the general public.The application material explains that an act that causes substantial harm is one that results in serious adverse consequences to any of these parties in financial or non-financial terms. Examples in the Code include breaches of environmental laws and regulations endangering the health or safety of employees or the public and perpetration of fraud against appointment estates resulting in significant financial loss to creditors.
The above context and the examples of relevant laws and regulations are really helpful in understanding NOCLAR. But to understand what IPs need to do if they find themselves in these circumstances, we need to look at the requirements in the Code.
Where an IP becomes aware of noncompliance or suspected non-compliance with laws and regulations in the course of carrying out their professional activities they need to:
- seek to understand the matter, including the nature of the non-compliance or suspected non-compliance and the circumstances in which it has occurred or might be about to occur;
- understand any legal or regulatory provisions which govern how IPs should address non-compliance or suspected non-compliance in the jurisdiction;
- consider the employing organisation’s protocols and procedures for addressing non-compliance or suspected noncompliance in determining how to respond. Application material suggests that these protocols and procedures could include an ethics policy or internal whistleblowing mechanism, which might enable issues to be reported anonymously through designated channels;
- discuss the matter with the appropriate level of management and where appropriate those charged with governance, where not prohibited from alerting the relevant party, such as where the tipping off restrictions apply;
- comply with the legal and regulatory provisions, including any requirement to report the latter to an appropriate authority and any prohibition on alerting the relevant party.
The IP’s actions need to be taken on a timely basis. In considering what that is, the IP needs to have regard to the nature of the matter and the potential harm to the interests of the entity, creditors, employees, investors, or the general public.
There are also a couple of specific reporting requirements, where the IP is acting as a liquidator in a members’ voluntary liquidation for an audit client of their firm or a network, or supervisor in a company voluntary arrangement (CVA). In the former case, the IP is required to consider whether to communicate the non-compliance or suspected non-compliance within the firm or to the network firm, as appropriate. And where the IP is supervisor of a CVA, the IP needs to consider whether to communicate the non-compliance or suspected noncompliance to the company’s external auditor, if they have one.
There is also a much wider general requirement for the IP to consider whether further action is needed in the public interest. Throughout the Code, we helpfully have application material to assist in understanding when that might be appropriate. Those circumstances will depend on factors such as the:
- legal and regulatory framework;
- appropriateness and timeliness of the response of management and, where applicable, those charged with governance;
- urgency of the situation;
- involvement of management or those charged with governance in the matter; and
- likelihood of substantial harm to the interests of the client, investors, creditors, employees or the general public.
Responsibility for NOCLAR, however, goes beyond IPs themselves, and permeates down to members of the insolvency team, as does the Code more broadly.
The Code includes a requirement that if, in the course of carrying out professional activities, a member of the insolvency team becomes aware of information concerning non-compliance or suspected non-compliance, they also need to obtain an understanding of the matter; including the nature of the noncompliance or suspected non-compliance and the circumstances in which it has occurred or might occur. There is also an obligation on the team member to inform an immediate superior to enable the superior to take appropriate action. Where their immediate superior appears to be involved in the matter, the team member is required to inform the next higher level of authority within the employing organisation.
With the Code being so new, we haven’t as yet come across any NOCLAR issues on our monitoring visits. However, if you have a visit coming up, you can expect us to ask you how you have carried out continuing professional development on the Code, and trained your staff on the new Code. It is critical that they understand the changes, which include specific changes to the documentation of ethical considerations. And given that NOCLAR is not limited to the IP, and there are responsibilities on the whole insolvency team, it is important that your staff appreciate their responsibilities, and understand your firm’s reporting policies.
The new Code was released on 1 March 2020, back when everyday life was more normal, and before COVID-19 started impacting our working practices. Those IPs or firms who had planned to leave staff training on the Insolvency Code of Ethics until April are likely to have had difficulties in rolling it out, certainly on a face to face basis. If you have not already given your staff training on the changes, which go beyond NOCLAR, there are online options including the webinar ICAEW recorded in November 2019, which outlined the key changes in the Code.
Post-lockdown, the Quality Assurance Department at ICAEW has been continuing to carry out visits where we can. To date, we have been successful in converting most of the insolvency visits we had scheduled to remote visits; and we are continuing to schedule new visits as remote visits for the time being. Where IPs use hard copy files, they have couriered them to us. Where firms have electronic case management systems, we have liaised with them to get remote access to the cases we want to review, either through a portal or via a laptop. So far, the response from our IPs to this way of working has been extremely positive. Other than the visits being conducted remotely and requiring more thought and discussion up front about logistics, the visits are following our usual format – starting with an opening meeting, typically using video conferencing, moving on to reviewing individual case file and discussing our queries which are sent to the IP by email as usual, and ending with a virtual closing meeting.
On 27 March, ICAEW and the Insolvency Practitioners Association (IPA) issued a joint statement setting out our expectations from IPs during the pandemic. This outlined that we expect casework to continue to be progressed as far as possible, and statutory deadlines to be met, but also recognised that certain aspects of work will present a challenge at the present time.
This article was originally published in the Corporate Rescue and Insolvency magazine, June 2020.