The future of insolvency regulation
On December 21, 2021, the government launched a consultation on the future of insolvency regulation. The changes proposed in the consultation paper will have a broad impact on the insolvency profession (and its insurers) with the proposals including: the direct regulation of insolvency firms, the introduction of a single regulator with the power to order compensation for insolvency practitioners and businesses, a new regime of additional requirements, changes to the regime of obligations and a public register of insolvency practitioners and businesses. Many of the proposed changes require primary legislation and therefore it may take some time for the changes to take effect (if adopted). But there seems to be some wind behind these proposals given that they follow the call for evidence in 2019 and a more general focus on insolvency issues in the wake of the Covid-19 pandemic.
Target and areas of consultation
The stated objective of the consultation is consistency and transparency in the regulation of the insolvency profession. The foreword to the consultation roughly foresees that the current framework, which dates back to the 1986 insolvency law, is no longer suited to its purpose and is “top heavy” with four regulators overseeing a pool. relatively small professional under c. 1,600 insolvency professionals.
The main proposals of the consultation are:
- A new single and independent regulator with the power to order compensation;
- Regulation of businesses and individuals;
- A new public register of insolvency practitioners and firms;
- A regime of additional requirements;
- Modifications and possible replacement of the bond regime.
Single independent regulator
The consultation proposes to replace the current regulatory framework with a single independent government regulator as part of the Insolvency Department. At present, the regulation of insolvency practitioners is carried out by 4 professional bodies recognized as performing this function by the Secretary of State, the Insolvency Department acting as supervisory regulator. The government considers that having 4 different bodies regulating the insolvency profession leads to likely inconsistencies, with a risk that the bodies compete against each other to maintain their membership and it is said that there is a perception of a lack of impartiality on the part of these organizations.
The new single regulator will have the power to authorize, regulate and discipline insolvency practitioners as well as to establish professional, ethical and educational standards; this will include the power to regulate companies providing insolvency services. It will also have the power to delegate certain functions to other appropriate bodies and the consultation invites responses on which functions should be exercised directly and which could be delegated.
A new regulator would have the following statutory obligations: have a regulatory system that (1) ensures fair treatment of those affected by insolvency and acts impartially and transparently towards those regulated, (2) encourages a competitive and innovative industry that acts with integrity, promotes maximization and speed of returns to creditors, protects the public interest and provides high quality services at a fair and reasonable cost and (3) helps regulatees comply to their responsibilities and guarantees consistent and efficient results.
Regulation of businesses and individuals
Currently, insolvency practitioners are regulated as individuals without specific regulation of companies providing insolvency services. The consultation says this leaves a “vacuum” in the regulatory framework, citing problems arising from this approach to regulation, including “volume suppliers” in the area of individual voluntary agreements and conflicts of interest in large companies. . The introduction of regulation at the company level will require a legislative change.
Additional requirements regime
For companies that have the potential to ’cause the most damage to the insolvency market’, a regime of additional requirements is proposed. The criteria for entering the scheme are not spelled out in detail in the consultation, but it is said that it could include; the size of the firm, the turnover rate and the number of mandates held by the insolvency practitioners employed by the firm. Companies falling into this category would be subject to additional requirements, including: (1) a requirement to appoint a responsible person, (2) a requirement for the company to demonstrate its ability to conduct business, including a business model appropriate company, (3) a requirement to provide confirmation that appropriate controls and governance are in place, to ensure that there are no conflicts of interest between the objectives and policies of the firm and the duties and responsibilities of the insolvency practitioners they employ and (4) a process of enhanced supervision.
Public register of individuals and companies
There is a proposal to introduce minimum requirements for the authorization of companies offering insolvency services and for companies and individuals to meet certain conditions before being entered in a public register. The minimum requirements are not described in detail in the consultation, but could include for companies with a registered office and / or place of business in Great Britain, being creditworthy and in compliance with all of the Companies House filing requirements. that may apply, have confirmation of appropriate insurance coverage in place, and sufficient qualified and unqualified personnel to effectively manage the number of appointments made by practice practitioners.
The register will also contain details of whether individuals and companies have been sanctioned or other disciplinary action taken against them by the regulator.
The four regulators cannot currently order compensation. The consultation document contemplates and then rejects expanding the jurisdiction of the FOS to include complaints against insolvency practitioners.
Rather, it is proposed that the new single independent regulator have a series of disciplinary sanctions to reprimand, amend, order or withdraw individual or corporate authorization and require an insolvency practitioner or company to ‘he pays compensation for an error or fault or for a failure of service causing excessive anxiety or distress. The proposal sets out potential instructions that would fall within the jurisdiction of the regulator to order, including: up to £ 250 for distress and inconvenience, restore a party or parties to the position they would be in if no wrongdoing was not done. had been committed (which could be non-monetary) and reimburse or waive the charges. The consultation examines whether there should be a cap on the amount the regulator could order an insolvency practitioner or firm to pay for a financial loss.
The consultation also examines whether compensation should be paid from an established fund funded by the profession (rather than under professional compensation policies).
Insolvency practitioners must have security interests called sureties in place that provide security for creditors against fraudulent or dishonest behavior. The bond consists of two parts: (1) an enabling bond required before an insolvency practitioner can accept an insolvency appointment (value of £ 250,000) and (2) a bond specific to insolvency estate, the level of coverage of which is defined by regulation with a minimum of £ 5,000 and a maximum of £ 5 million.
Various changes are proposed to the surety bond regime, including a new legal requirement regarding bond conditions (including an allowance for reasonable costs associated with claiming the bond, a minimum period of liquidation coverage and interest on amounts paid) , the revision of the monetary limits (change of the authorization bond to £ 750,000 and the minimum for the specific bond for the insolvency mass to £ 20,000 (maintenance of the maximum of £ 5 million)), obliging them to recognized professional bodies to take responsibility for ensuring that coverage is in place when the risk of missing or insufficient coverage of obligations is highest and new requirements to include information on obligations in reporting insolvency to creditors.
The consultation is also seeking comments on the complete replacement of the obligations regime with a compensation regime (similar to the one that works for lawyers through the Lawyers Compensation Fund).
And then ?
The consultation is open until 25 March 2022. The consultation foresees fundamental changes in the way the regulation of the insolvency profession works – a single regulator capable of ordering compensation similar to an ombudsman service, extending the regulations for businesses and individuals and new additional requirements for certain businesses. As we have already noted, many of the proposed changes require primary legislation, so whether or not the changes are implemented will depend to some extent on the political will (and time) to move those changes forward. But this is an area that the insolvency profession and its insurers will want to monitor closely.