The government’s consultation, which closed at the end of March, asked for views on a raft of proposals to ensure the insolvency profession is regulated in a way that better reflects the modern insolvency market.
Proposals include the creation of a single independent regulator for insolvency practitioners (IPs), the extension of regulation to firms that offer insolvency services, and a system of compensation for victims of mistakes or wrongdoing.
In its response, the ICAEW Regulatory Board (IRB) acknowledges the need for reform. It argues, however, that the government has not made a convincing case for removing the Recognised Professional Bodies (RPBs) – which include ICAEW – from their role in insolvency regulation, or for the creation of a single regulator.
“We believe the reform which would make the biggest difference to the effectiveness and robustness of the insolvency regulatory regime is not a change in who regulates this area of work but how it is regulated,” says Philip Nicol-Gent, chair of the IRB. “This is why we support the government’s proposal to introduce firm regulation. This would be, in our view, the real game-changer.”
An additional perspective
The Insolvency Service is currently responsible for overall regulatory oversight of the four RPBs that regulate IPs across the UK. In ICAEW’s case, the IRB oversees all the regulatory and disciplinary work carried out by ICAEW’s Professional Standards Department (PSD), including that relating to IPs.
ICAEW and the Insolvency Practitioners Association currently license over 91% of all IPs in the UK. And the joint regulatory footprint is even wider because ICAEW carries out insolvency monitoring work for the Institute of Chartered Accountants of Scotland.
The IRB’s consultation response – separate from ICAEW as a membership body – offers an additional and independent perspective. Not only does the IRB have parity of lay and chartered accountant members, it also has a lay chair with a casting vote and an independent appointments committee.
Although the IRB supports plans to extend regulation to firms that offer insolvency services, it does not believe the government is being radical enough in this context. It argues the plans set out in the consultation document appear to suggest that the primary focus of regulation will still be individual IPs.
The response states: “We would urge instead the government to introduce legislation to make firms the primary focus of regulation with nominated individuals within the firms being approved separately to be suitable for taking on appointments, making the regulation of insolvency work consistent with audit regulation.”
The IRB feels that focusing on regulation of firms will:
- improve the internal oversight within firms over the work carried out by IPs
- provide added protections for creditors and third parties
- allow the RPBs to impose financial penalties on the entities that benefit financially from appointments that should not have been accepted, or where there has been misconduct
- make the creation of a compensation fund, and potential solutions to the malfunctioning insolvency bond process, more realistic
Basis of the proposal
Turning to its critique of plans for a single government regulator, the IRB is particularly concerned about the evidence-base for this proposal. The response states: “We are struggling to recognise the picture which has been painted in sections of the consultation document insofar, at least, as it relates to the performance by ICAEW.”
In particular, the IRB questions why there is no mention of the good examples of ICAEW’s work, and whether there has been a proper analysis of the nature of complaints made against IPs to gauge the true extent of alleged poor behaviour.
The IRB is also sceptical about the introduction of a Government regulator, noting: “as the conflict concern only applies to a single regulator if it were to be the proposed Government regulator.”
This conflict mainly relates to the likelihood of other government bodies or departments being direct or indirect major creditors in an increasing number of insolvencies in future, and how any new regulator’s oversight of IPs or firms might compete with the Official Receiver’s Office.
Other issues include the potential harm to the quality of the insolvency profession if the regulatory role is divorced from the support and education provided by the RPBs, and the risk of losing the insolvency regulatory expertise within the RPBs.
Although the government argues that its proposals will reduce regulatory costs, the board also questions the evidence for this claim. It presents an alternative analysis that suggests it is more likely that the cost of operating the government regulator will be greater than the current costs of regulation by the RPBs.
The IRB is further concerned that the disciplinary and enforcement processes outlined in the government’s consultation document do not meet the key tenets of the right to a fair trial enshrined in Article 6 of the European Convention on Human Rights.
Despite its concerns about the proposals as they stand, the IRB is firmly against a “Do nothing” option. It would prefer, however, to see the government stagger the reforms, rather than trying to do everything at once.
“We believe that the introduction of firm regulation on its own may be all that is needed,” says Nicol-Gent. “The government could continue to reserve the power to replace the RPBs if the firm regulation reform does not produce the improvements we believe it would.”
The IRB is urging the government to re-look at the strength of the evidential case to remove the RPBs and whether their removal – rather than the introduction of firm regulation – would really create any improvements in the effectiveness and efficiency of insolvency regulation. “From our informed viewpoint, we do not believe it would,” says Nicol-Gent.
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