The OFT study into the market for corporate insolvency practitioners
The OFT published its study report in June last year. The report put forward a series of proposals to make it easier for unsecured creditors to challenge IPs’ fees in corporate insolvencies and also advocated the creation of a new independent complaints body. The Study Report also recommended sweeping changes to the system for regulating IPs.
The IS published its response to the OFT on 11 February 2011 in a consultation document which included a number of proposals which diverge from the OFT’s recommendations. The IPC’s response to the consultation has been sent in and can be accessed on our web-site. The following paragraphs summarise the main points in our response.
The OFT’s recommendations on IP’s fees
We accept the OFT’s conclusion that in around 37% of corporate insolvencies where secured creditors are able to recover all the moneys owing to them, the IPs’ fees are set at a higher level by the secured creditors than in other cases and that the unsecured creditors lose out since the higher fees reduce their recoveries from the insolvent estates. While the OFT’s analysis does not necessarily imply any criticism of IPs, or that they are making excessive profits, we agree that it should be made easier for unsecured creditors to challenge IPs’ fees without going to court. We support a number of the OFT’s recommendations for detailed changes to make it easier for unsecured creditors to challenge IPs’ fees, in particular greater transparency about IPs’ remuneration to the insolvency rules, greater transparency vis-a-vis creditors about IPs’ remuneration, creditors having the power to agree hourly rates at the outset of an insolvency, confirmation that creditors can vote on the administrator’s remuneration.
A New Complaints Body
The OFT and the IS recommend that a new independent complaints body should be created, either to replace the entire complaints and disciplinary systems of the RPBs, or to provide an independent appeals tribunal. It is envisaged that the new complaints body would be able to award financial redress to successful complaints, including unsecured creditors whose challenges to IPs’ fees have been upheld. The IS offers a choice of four different models for the new body in its consultation document.
The IPC strongly supports the objectives underlying the OFT/IS proposals. We have recommended for the last two years that the RPBs should reform their disciplinary systems as the legal profession and others have done to provide a proper complaints procedure. We also agree that there should be an alternative cheaper procedure available for unsecured creditors to challenge IPs fees than going through the courts. However, the government’s response to the OFT report should be proportionate to the mischief identified and as economical as possible. The question of whether a new complaints body is needed is a second-order issue. The first step is to decide what changes to the current complaints arrangements are required. We recommend the following reforms:-
There should be a separate procedure within the RPBs’ existing systems for dealing with complaints from clients or other market participants that their interests have been damaged, including in cases where the complaint may not necessarily warrant disciplinary action, eg, poor service, one-off errors or bad advice or maladministration;
This procedure must provide for appropriate redress for outside complainants whose complaints are upheld and who have suffered financial loss, distress or inconvenience as the result of the actions or omissions of the IP concerned;
The complainant must have the right to appeal against decisions taken by the RPB’s first tier to an independent reviewer who can rehear the case afresh and grant redress to successful complainants. Most of the RPBs have an independent reviewer, but with a much more limited role; and The RPBs should be required to have a majority of independent members in the first tier panels hearing complaints. We think that this will provide a sufficient degree of independence at the first tier stage. We think also that it is reasonable and helpful to allow IPs to sit in the first tier panels, particularly for the contribution
they can make in disciplinary cases, as do members of other professions in their complaints systems. We believe that all these changes can be made more economically and rapidly by making the necessary changes to the RPBs’ complaints systems (at least in so far they apply to IPs). Several of the RPBs already have independent reviewers in their complaints systems, though with a much narrower role than we propose. If our reform approach is adopted, it would be open to the RPBs jointly to agree to make their existing independent reviewers into members of a joint panel which would supply a single reviewer to carry out the fresh reviews when a complainant or IP appeals against a first-tier decision. This would be a way of creating an independent appeal body without the disadvantage of creating a new public body, which we understand the government would prefer to avoid.
We suggest a number of other ways of reducing the cost of these reforms compared with the models proposed by the IS. First, we believe that the appeal reviews can be carried out by a single reviewer, not a panel. Second, we recommend that all appeals coming from the complaints procedure should, as is the case with the Financial Ombudsman Service, be settled through a papers-only hearing although the possibility of oral hearings for disciplinary cases would have to be kept open.
Third and fourth, we recommend special fast-track arrangements for handling complaints from unsecured creditors about IPs’ fees and from personal debtors against IPs for bad advice or maladministration of debt adjustment schemes such as IVAs. We suggest that most fee disputes, which are generally nearer in character to a commercial dispute rather than a complaint, should go directly (after a short attempt at mediation) to a binding review again conducted by a single reviewer through a papers-only hearing.
Similarly, we propose that personal debtors who want to complain about poor service in the handling of their
affairs, should be able to appeal direct to either the RPB’s independent reviewer or to the Financial Ombudsman Service if they are dissatisfied by the way in which their complaint has been handled by the IP’s in-house complaints system. This approach already applies to debtors who are advised by IPs who hold a standard (individual) credit licence from the OFT, but not yet to debtors advised by IPs covered by the group licences held by the accountancy RPBs. This anomaly needs to be resolved.
Proposed Changes to the Regulatory System
The changes proposed by the OFT in its report and by the IS in its response have only a distant connection with the market failure regarding IPs fees diagnosed by the OFT and therefore should be considered on their own merits.
The Role, Powers and Objectives of the Insolvency Service
We agree that the IS should be entirely focused on its role as the “oversight regulator”, ie, defining the role and setting the terms and conditions for the RPBs as regulators and monitoring and, where necessary, correcting their performance. We agree accordingly that the IS should cease itself to license and regulate IPs except as a last resort and also that the IS should be given the powers to impose sanctions on the RPBs for inadequate performance of their functions. We understand that primary legislation will be needed to effect these changes. We agree that the legislation should be amended to prescribe statutory objectives for both the IS and the RPBs to follow. These will need to be carefully drafted to avoid creating unnecessary conflicts of interest or a playground for lawyers. We agree that there should be three main objectives – promoting the recovery of the maximum returns to creditors in insolvency, procedures protecting the rights and interests of unsecured creditors and personal debtors and promoting an independent and skilled IP profession that acts with integrity. Given the need for primary legislation, we suggest that the government should also consider whether the Insolvency Act should extend the regulatory regime to cover not just individual licensed IPs, but the firms and partnerships in which they work as well as is the case in other regulated sectors. If this were done, it would be necessary to take account of any overlap with debt advice firms licensed by the OFT, which in some cases employ IPs.
The Future of the RPBs
The IS consultation document indicates that it will wish to initiate discussions with the RPBs on the idea of a single regulator as a possible future objective. We agree that it would be reasonable for the IS to initiate such discussions. However, in the interim or if a move to a single regulator is ruled out, we believe it is important that the IS take steps to promote greater consistency in the ways IPs are regulated. This could be achieved by cooperation among the RPBs, eg, by getting them to set up a joint monitoring team using the same methods and benchmarks for checking IPs’ conduct and by agreeing on common standards for judging when IPs are compliant and when regulatory or disciplinary action is appropriate.
In addition to the requirements imposed on them by primary and secondary legislation IPs have to comply with Statements of Insolvency Practice (SIPs) and a Code of Ethics issued by the Joint Insolvency Committee (JIC) , which bring together the seven RPBs and the IS (in its current role as a direct regulator). The OFT recommends that the standard-setting process should be streamlined by enabling decisions to be taken by a weighted majority of the RPBs rather than by consensus as at present. The IS consultation document argues that, as oversight regulator, it should have a stronger role in setting these standards. With this in mind, the IS proposes to replace the JIC by a wider body in which the RPBs would not be in the majority and outside stakeholders such as creditors and debtors would be represented. The IS would be able to intervene to impose its own standards in the event of deadlock. In a more radical version, the new body would not set the standards but would act only as an advisory body to the IS.
The IPC does not agree with bringing outside stakeholders into the new standard setting body as the IS proposes, or turning the RPBs into a minority. We believe that this would make it even more difficult to reach a consensus on new standards and would therefore run counter to the objective of speeding up the standard setting process to enable the RPBs to respond more quickly to market developments (such as pre-packs). Nor do we agree with the IS’s proposal that it should become the standard setter. Our view is that the setting of professional and ethical standards is more properly a task for the RPBs as the primary regulators, since SIPs and other guidance issued by the JIC are the instruments which the RPBs use to explain to IPs what is expected of them and what the RPBs’ monitors will be looking for in their inspections. Since breaches of SIPs or of the ethical code can provide grounds for a regulatory action, a complaint or disciplinary action, the RPBs need to be able to satisfy themselves that any new standards can be properly monitored and enforced. We also believe it would be wrong for the IS to take over the role of standard setter, since this would allow it to impose new legal obligations on IPs without any Parliamentary scrutiny.
We therefore support the OFT’s proposals for streamlining the JIC’s working practices by enabling the RPBs to reach decisions by qualified majority decisions. We favour bringing independent lay members onto the JIC (though the voting rules would have to be carefully worked out). The JIC must be required to consult all outside affected parties on all its proposals for new standards. We also agree to the OFT’s proposal that the IS should have limited powers of intervention to prevent the standards-setters from acting in breach of the proposed new statutory objectives and to require the body to introduce a new standard where it judges that is needed to meet the statutory objectives.
The Future of the IPC
The OFT proposes that the IPC (or an alternative “voice organisation”) could continue in existence with two main functions, first to report on whether both the RPBs and the IS are meeting their new statutory objectives, second, specifically, to represent the interests of “vulnerable market participants” such as unsecured creditors and personal debtors. It cites in support of this similar “voice organisations” active in relation to financial and legal services. In its consultation document, however, the IS proposes that the IPC should be abolished and its role as a “public interest” organisation carried out by the IS itself.
The IPC does not agree that it would be appropriate for the IS to take on the IPC’s functions itself. We accept, of course, that, like any regulator, the IS will seek to act in the public interest and that it will also have the responsibility, as oversight regulator, to monitor whether the RPBs are complying with any new statutory objectives. We consider, however, that a “voice organisation” such as the IPC is nevertheless appropriate for the following reasons:-
First, the IS should not be left as its own judge as to whether it too is meeting its statutory objectives. This is why the OFT proposes that a “voice organisation” should be given the remit to make this assessment in relation to the IS as well as the RPBs;
Second, the OFT proposes that the IPC or an alternative “voice organisation” should particularly represent the interests of unsecured creditors and personal debtors. This is particularly relevant in markets in which there are large asymmetries of knowledge and understanding between consumers and the professional providers of the services, as is certainly the case in the insolvency market. The statutory objectives proposed for the IS contain, as the OFT recognises, inherent conflicts between the objective of maximising the returns to creditors and the interests of both personal debtors and the interests of IPs. It is therefore faced with a difficult balancing act and cannot properly act as a representative of particular market participants; and
An independent “voice organisation” helps to ensure that the debate on how to balance the conflicting regulatory objectives takes place in public rather than behind closed doors. This is particularly desirable when there is a risk that regulators can be subject to pressures from elsewhere in government etc to alter the balance of interest one way or another or to shifts of governmental fashion in how regulation should be conducted, eg, the recent emphasis on “light-touch” regulation in financial services.
We believe that the IPC has carried out its public interest role successfully on a very modest budget (commensurate with the size of the sector) over the last ten years and in particular has played a useful role in representing the interests of distressed personal debtors. We also believe that we would be well equipped to carry out the slightly expanded role proposed for us in the OFT Report