This is my sixth and last Annual Report since being appointed as Chairman in 2005 I will be standing down from the IPC at the end of May. I am glad to say that David Tracy has agreed to lead the IPC’s work from 1st June and has been appointed by the board of IPR Services Limited as Chairman. I wish him and my other colleagues all the best in the work that lies ahead of them. This will include working together with the Insolvency Service (IS), the Joint Insolvency Committee, the Recognised Professional Bodies (RPBs) and other stakeholders on possible changes to the future regulation of the insolvency profession (see my comments below on the follow up to the OFT Study Report). The IPC will also have plenty to do and say in its normal work of scrutinising the professional and ethical standards of the profession and incontributing to the ongoing policy debates on improving debtadvice and SIPs.
The IPC has always worked as a closely-knit team. My heartfelt thanks go to all my past and present colleagues, both lay and professional, and to Mike Stancombe and his predecessor, David Harrison, the two IPC Secretaries with whom I have worked, for all their help and support, wise advice and dedication during the past six years. I have also greatly enjoyed my involvement with the insolvency profession, its regulators and the IS and wish them all the best for the future.
The Insolvency Market since 2005
My time as Chairman has coincided with a turbulent and rapidly changing period for the insolvency profession, particularly those dealing with personal insolvencies. From 2004 to 2008 the number of personal insolvencies tripled and in 2010 reached a historical high of 137,000 for England, Wales and Northern Ireland; a record level of over 23,000 was also reached in Scotland. Within the total level of personal insolvencies in England and Wales, Individual Voluntary Arrangements (IVAs) now represent over one-third of the total compared with around 22% in 2004 and Debt Relief Orders (DROs) have risen from zero in 2009 Q1 to over 7,000 (almost 20%) of the total in 2010 Q3. These represent the tip of the iceberg of individuals and families having difficulties dealing with their debts. The number of commercial debt advice firms, licensed by the OFT, has risen dramatically as has the number of informal Debt Management Plans (DMPs) of which Bristol University recently estimated there were 350,000 in existence. The OFT and other organisations, including the IPC, have voiced serious concerns about the quality of debt advice and debt management. The non-commercial “free-advice” organisations have expanded their resources, but are still struggling to cope with the numbers of clients seeking their advice. The recent decision of the government to find another year’s funding for Citizens Advice is therefore welcome.
In the corporate sector, insolvencies rose sharply in 2009. In England and Wales they fell back markedly in 2010 (though the corresponding numbers rose in Scotland and Northern Ireland) and are at a low level in terms of the percentage of companies affected compared with earlier recessions, though the absolute numbers of insolvent UK incorporated companies is double that in the 1991 recession. The work of IPs in handling corporate insolvencies, however, is much more in the public spotlight than in previous economic downturns. This is primarily because of the controversy over the increasing use of “pre-pack” sales, particularly to previous owners or managers. The outlook for both the corporate and personal sectors for 2011 remains highly uncertain because of similar uncertainties over the performance of the UK and of the global economy.
The IPC’s priorities and achievements
The IPC’s main priority since it was set up has been to try to improve the quality of advice given to distressed personal debtors. We have achieved or contributed to a number of successes. In 2000 R3 produced the pamphlet “Is an IVA right for me?” in response to an IPC recommendation. We helped to persuade the government to improve the treatment of the matrimonial home in bankruptcy through the Enterprise Act 2002. Since 2005 the IS has responded to our recommendations by producing and publishing regular statistics on the completion/failure rates of IVAs and supplying detailed breakdowns of these figures for each IP to the insolvency regulators as a basis for their monitoring. We have consistently pressed for a more “joined –up” and evidencebased approach to policy on and the regulation of advice to personal debtors. As observers on the IVA Standing Committee we strongly supported the production of the Debtors’ Guide. We have pressed for an initiative, which the IS is now pursuing, to get the wider debt advice sector to produce meaningful statistics on the numbers, duration and completion/failure rates of DMPs. We successfully urged the IS and the RPBs to increase the frequency of their monitoring of the large “IVA factories.”
Last, but not least, we campaigned for the RPBs’ disciplinary and complaints systems to be reformed to provide a more independent consumer-friendly complaints procedure, which could award financial and other redress. Both the OFT and the IS have now put forward proposals which go in this direction (see below). On the corporate side we expressed concerns about pre-packs in our Annual Report on 2006. In addition to the need for greater transparency through the SIP 16 Reports, we recommended that the RPBs should give more specific guidance to IPs who have negotiated a pre-pack sale to recognise that they should refuse the appointment as administrator to execute the pre-pack, because they would be conflicted.
New Policy developments in 2010
Debt advice: the OFT survey and our response to the HM Treasury/BIS call for evidence
In the second half of 2010 and in the last few weeks there were three major developments relating to our work, the third of which puts the question of our future in discussion. In September, the Office of Fair Trading (OFT) published the results of its major survey into the compliance of the debt-advice firms, which it licenses, with the guidance it requires them to follow in advising personal debtors and managing their affairs. Its report disclosed that significant numbers of licensed firms were failing to comply with OFT guidance on advertising, on upfront disclosures of their fees and charges and on providing their clients with appropriate and unbiased advice on the options open to them. A number of debt advice firms were said to guide debtors to the debt solution which was most profitable to the firm to the point where this might constitute mis-selling. To its credit the OFT is instituting a programme of action to root out these malpractices. Its criticisms, some of which extend to some of the IPs covered in its survey, are generally very much in line with concerns we expressed about the possible mis-selling of debt solutions in our Tenth Annual Report (on 2009).
Second, HM Treasury and BIS published in October a call for evidence covering all aspects of consumer credit and personal insolvency entitled Managing Borrowing and Dealing with Debt. The IPC welcomed this initiative and responded in December to the questions in the document which ask for views on how personal debtors could be helped to find the most appropriate solution to their problems. Our response can be accessed on our web-site. Our answers reflect issues we have raised in recent Annual Reports. We share the government’s view that it is debtors who should make the final decision on which debt solution is most appropriate for them and should remain free to enter into negotiated informal debt arrangements with their creditors. We also believe that there should be a seamless suite of statutory debt solutions covering all distressed personal debtors, whatever their levels of debts or their income, which should encourage debtors to repay as much as they reasonably can to their creditors, while providing appropriate debt relief and protection from harassment. Our reply suggests ways of improving the statutory solutions currently on offer. We say we are persuaded by the OFT’s survey and by other evidence of possible mis-selling that the quality of information and advice given to debtors by IPs and other debt advisers needs to be significantly improved to enable them to make better informed decisions. We suggest a series of measures to promote this objective. Our Report below spells these out in more detail.
The OFT Study into the market for corporate insolvency practitioners
Finally, the OFT published last June a study of the market in corporate insolvency, which found that in over a third of corporate insolvencies unsecured creditors lose out on potential recoveries because of the higher fee levels authorised by secured creditors when the latter were likely to make a full recovery of the debts owed to them. The OFT recommended ways to help unsecured creditors to exercise more influence in corporate insolvencies and to challenge IPs’ fees, including the setting up of a new independent body to deal with complaints against IPs. The OFT also recommended an overhaul of the system of regulation applying to insolvency practitioners under the Insolvency Act 1986. The IS published its response to the OFT document on 11th February 2011 in the form of a consultation document to which we replied on 26th March. Our Report below sets out our position in detail and our full reply
is available on our web-site (www.insolvencypractices.org.uk).
We agree with many of the proposals made by the IS in its consultation document on the reform of the regulatory system, in particular, that the IS should be given stronger powers to carry out its role as the “oversight regulator”, authorising and monitoring the seven RPBs which regulate IPs, and should itself cease to license and regulate IPs directly. We agree that the IS and the RPBs should be given statutory objectives against which their performance should be judged and that these should include an obligation to promote the protection of the rights and interests of unsecured creditors and personal debtors. Finally, we agree that it is timely to explore the pros and cons of moving to a single regulator of IPs.
Primary legislation will be needed, eg, to strengthen the IS’s powers. We suggest that the opportunity should be taken to consider whether the regulatory system should be extended to cover not just individual licensed IPs, but the partnerships and firms which employ them. We also suggest that in reviewing the primary legislation BIS should look at the case for a more unified approach to the regulation and monitoring of all providers of debt advice and debt management (including IPs) .
There are, however, three points on which we diverge from the IS’s proposals. We agree with the OFT and the IS that the current disciplinary and complaints systems run by the RPBs need to be reformed to provide a genuine complaints process, which should be distinct from the disciplinary process and be able to provide redress (both financial and otherwise) for successful complainants. Both the complaints and disciplinary processes need to be made more independent of the profession, particularly at the appeals level. We have ourselves recommended changes in this direction for the last two years. But we do not agree that setting up an entirely new complaints body is necessary to achieve these aims. Our response to the IS consultation document sets out an alternative approach of reforming the RPBs’ existing complaints systems, which we believe would be just as effective and more economical, including a low-cost independent review or arbitration system for resolving disagreements between creditors and IPs over fees in corporate insolvencies. This would avoid the need to create a new public body.
Second, we do not agree with the IS proposals to replace the Joint Insolvency Committee (JIC), in which the RPBs initiate Statements of Insolvency Practices (SIPs) and other guidance to IPs, by a new standards setting body in which the RPBs would be in a minority. We believe that both the options for the new body put forward in the consultation document would lead to the IS becoming the standard-setter. We think this would be wrong, first, because setting professional and ethical standards should be the job of the RPBs as the front-line regulators which have to monitor and enforce them and, second, because the IS should not be empowered to legislate without Parliamentary scrutiny. We support the OFT’s proposals to streamline the work of the JIC and to give the IS limited powers to veto JIC proposals with which they disagree and to mandate the JIC to produce new standards, where necessary. We also propose that the JIC should be strengthened by the inclusion of lay members and that there should be full consultation of any outside parties likely to be affected by any new standards being considered by the JIC.
Finally, we disagree with the IS’s view that the IPC would no longer be needed under the new regulatory regime because the IS could take over our role of reviewing IPs’ professional and ethical standards and the work of the RPBs. On the contrary, we believe that the proposals to strengthen the IS’s role as “oversight regulator” reinforce the case for a “voice organisation” such as the IPC, similar to the Financial Services Consumer Panel, to provide an independent view of the regulatory system as a whole. The IS should clearly not act as judge and jury in assessing its own performance. We therefore agree with the OFT’s proposals that the IPC’s remit could be extended to enable us to review how the IS exercises its role as the oversight regulator and how both the IS and the RPBs comply with their new statutory objectives and that we could also be given a clear responsibility to represent the interests of unsecured creditors and personal debtors, since this is only one of several potentially conflicting objectives the IS will have to meet. We believe that the IPC has carried out much of this role successfully for the last ten years at modest cost. We explain our case on this and our response on other aspects of the OFT Report in more detail below.
Geoffrey Fitchew CMG