Consultation outcome

The future of insolvency regulation

Updated 12 September 2023

Applies to England, Scotland and Wales

Foreword

The UK is rightly regarded as having a first- class insolvency regime, which is respected and admired internationally, and this Government is committed to ensuring that it retains and enhances that reputation.

Last year, as the Covid 19 pandemic forced businesses to close and the country to adapt to the unprecedented situation, we updated and improved the insolvency legislative framework. We introduced new restructuring tools for struggling companies as well as temporary measures to protect businesses from unnecessary insolvency as a result of the lockdown. These measures bring the UK into line with best practice internationally and will ensure that our regime is fit for the future.

As we build back in the wake of the pandemic, the insolvency profession has a pivotal role in helping to ensure that people have the confidence to invest and do business here - secure in the knowledge that where at all possible, businesses facing financial difficulty can be rescued and jobs saved. But if rescue isn’t an option and financial failure is unavoidable, it will be dealt with fairly and transparently. This will be vital to encouraging new start-ups and growth in the economy, as well as providing reassurance to those in financial difficulty and their creditors.

That is why I am pleased to publish our plans to make sure that the way the insolvency profession is regulated reflects the way it does business in 21st century.

The current framework dates to 1986 and has not kept pace with developments in the insolvency market. The regulatory structure is based on the individual responsibility of Insolvency Practitioners and does not consider the firms they work for. It is top-heavy for the limited size of the profession, with four recognised professional bodies responsible for regulating a profession of fewer than 1600 people, as well as the Insolvency Service, acting on behalf of the Secretary of State, as oversight regulator. Despite close collaboration between regulators and the Insolvency Service, the current model has not achieved the levels of consistency, independence and transparency which were envisioned following the introduction of statutory objectives for regulators in the Small Business, Enterprise and Employment Act 2015.

Insolvency Practitioners are regulated solely as individuals, with no specific regulation of firms offering insolvency services. This gap in the regulatory framework, causes problems, for example in the individual voluntary arrangement sector, where many have raised concerns about the operation of “volume provider” firms that provide large numbers of such arrangements. There are also concerns about how to address conflicts of interest where there is a tension between the statutory duties of the practitioner and the commercial interests of the firm that employs them. Many other professions (for example audit, law and surveying) are regulated at firm level and I think the time is right to replicate that in the insolvency profession.

This document sets out ambitious proposals to modernise the existing regulatory framework by creating a single independent government regulator to sit within the Insolvency Service and introducing the regulation of firms that provide insolvency services. The consultation is also seeking views on a formal mechanism for compensation where a party has been adversely impacted because of poor service or an error by an Insolvency Practitioner or a firm. Finally, the consultation has some proposals to amend the current requirements for practitioners to hold security to cover losses to creditors as a result of dishonesty or fraud pending any further substantive change to the regulatory regime.

The proposed reforms are bold and forward looking. They will represent a sea change in the way that regulation of the insolvency profession has been carried out for 35 years. They will ensure that our regime provides confidence to all those who use its services and that it remains globally competitive. I would strongly encourage those interested to respond to this consultation and to use this opportunity to provide their views on the Government’s proposals.

LORD CALLANAN

PARLIAMENTARY UNDER-SECRETARY OF STATE

General information

Why we are consulting

This document sets out proposals for the future of insolvency regulation. It takes account of views expressed in response to the Government’s Call for Evidence on the review of the insolvency regulatory landscape issued in July 2019. It also takes account of information gathered by the Insolvency Service as the oversight regulator acting on behalf of the Secretary of State. The consultation sets out the Government’s preferred proposals for the future of the regulatory landscape but considers other options as well.

The document also takes the opportunity to set out proposals for the reform of bonding (security) arrangements for Insolvency Practitioners, which, depending on the outcome of this consultation, could represent interim measures while more fundamental regulatory change is pursued.

Through this consultation, the Government is seeking views on a wide range of proposals and is also asking for respondents’ views on whether they can be improved and (with supporting evidence) views on their likely impact. Comments are welcome on individual proposals as well as the proposals as a whole.

Consultation details

Issued: 21 December 2021

Respond by: 25 March 2022

Enquiries to:

IP Regulation Consultation Team
Insolvency Service
Floor 16
1 Westfield Avenue,
Stratford, London
E20 1HZ

Tel: 0300 304 8482

Email: IPRegulation.Consultation@insolvency.gov.uk

Consultation reference: The Future of Insolvency Regulation

Audiences:

• Insolvency Practitioners

• Firms offering insolvency services

• Recognised Professional Bodies

• Insolvency trade bodies

• Related professionals (lawyers, accountants)

• Compliance agents

• Creditor organisations

• Debt charities

• Current and prospective brokers and sureties that provide bond products to Insolvency Practitioners

• Business representative organisations

• Government departments

• Other interested parties

• Members of the public

Territorial extent:

England, Scotland and Wales

How to respond

Email: IPRegulation.Consultation@insolvency.gov.uk

Write to:

IP Regulation Consultation Team
Insolvency Service
Floor 16
1 Westfield Avenue,
Stratford, London
E20 1HZ
Tel: 0300 304 8127

A response form is available on the GOV.UK consultation page: https://www.gov.uk/government/consultations/the-future-of-insolvency-regulation

When responding, please state whether you are responding as an individual or representing the views of an organisation.

Your response will be most useful if it is framed in direct response to the questions posed, though further comments and evidence are also welcome.

Confidentiality and data protection

Information you provide in response to this consultation, including personal information, may be disclosed in accordance with UK legislation (the Freedom of Information Act 2000, the Data Protection Act 2018 and the Environmental Information Regulations 2004).

If you want the information that you provide to be treated as confidential please tell us but please be aware that we cannot guarantee confidentiality in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not be regarded by us as a confidentiality request.

We will process your personal data in accordance with all applicable data protection laws. See our privacy policy.

We will summarise responses and publish this summary on GOV.UK. The summary will include a list of names or organisations that responded, but not people’s personal names, addresses or other contact details.

Quality assurance

This consultation has been carried out in accordance with the Government’s consultation principles.

If you have any complaints about the way this consultation has been conducted, please email: beis.bru@beis.gov.uk

Executive Summary

The UK is widely regarded as having a world class insolvency regime. It supports those in financial distress, tackles financial wrong-doing and maximises returns to creditors. The insolvency profession is relatively small and highly specialised, with in the region of 1,570 professionally qualified Insolvency Practitioners authorised under the Insolvency Act 1986 to act as an office-holder in formal insolvency procedures. The work of Insolvency Practitioners can preserve economic value and productivity, rescue viable businesses, save jobs, and help individuals deal with their problem debt.

The regulation of Insolvency Practitioners is carried out by 4 professional bodies recognised by the Secretary of State to perform that function, with the Insolvency Service acting as oversight regulator on behalf of the Secretary of State. The Recognised Professional Bodies (RPBs) are required to regulate in accordance with statutory regulatory objectives introduced by the Small Business Enterprise and Employment 2015, which aim to ensure fair treatment, transparency, integrity, consistency and delivery of high-quality services at a reasonable cost.

In 2019 the Government issued a Call for Evidence seeking views on whether the regulatory objectives have had their intended impact and whether further changes might be required, including whether the current model of regulation by 4 RPBs should move to a single regulator.

The Government recognises the important work that Insolvency Practitioners and the RPBs do, with the vast majority of practitioners performing to a high standard. However ongoing regulatory oversight work coupled with findings of the Call for Evidence has led the Government to conclude that the current regulatory regime is no longer fit for purpose. The model was devised in the 1980s, when Insolvency Practitioners operated in a different environment. The way Insolvency Practitioners are regulated (as individuals) has not kept pace with changes in the way the insolvency market operates, with an increase in practitioners now working as an employee of a firm employing several Insolvency Practitioners, with little or no control over the firm’s governance. The current regime’s inability to tackle wrongdoing at firm level has created the potential for conflict between the interests of the firm and the statutory duties of the Insolvency Practitioner.

The current regime is also disproportionately complex, with 4 membership bodies and Government all involved in regulating fewer than 1,600 individuals. This approach has created inherent weaknesses in the regulatory system, mitigating against common standards, consistency and effective disciplinary outcomes.

The Government believes that the current regulatory framework needs to change. This consultation sets out ambitious plans to reform, strengthen and modernise the insolvency regulatory regime through the creation of a single regulator of Insolvency Practitioners, the introduction of firm regulation for insolvency practices, a public register of Insolvency Practitioners and firms that offer insolvency services, and a compensation scheme. There are also proposals for some limited interim reforms to the Insolvency Practitioner bonding regime.

Summary of proposals

The proposed reforms in this consultation are in three parts.

Part A: considers Government options for reform of the current regulatory framework, with a preferred option of a single regulator model.

Part B: considers options to enhance and strengthen the regulatory regime through the introduction of regulation of firms that offer insolvency services, a register of Insolvency Practitioners and firms and a formal process for compensation when things go wrong. This part also considers how the new regulatory model might be funded.

Part C: contains proposals for limited reforms to the current bonding regime for Insolvency Practitioners.

Annex A: is a list of the consultation questions.

Annex B: provides details of and links to monitoring reports produced by the Insolvency Service acting as oversight regulator, on behalf of the Secretary of State.

Annex C: is a summary of the responses received to our 2019 Call for Evidence, “Regulation of insolvency practitioners, review of current regulatory landscape”, which have been considered when developing these proposals.

Annex D is a list of the respondents to the 2019 Call for Evidence.

Part A: Government options for reform and proposals for a new model for a single regulator

Insolvency Practitioners in the UK are regulated through a mixture of legislation and self-regulation. The Insolvency Service acts on behalf of the Secretary of State as the oversight regulator in Great Britain for 4 RPBs that authorise and regulate Insolvency Practitioners. Authorisation and regulation are carried out on an individual basis although Insolvency Practitioners may practise on their own or as part of a firm. The regulation of Insolvency Practitioners is transferred to Northern Ireland, with oversight regulation being carried out by the Department for the Economy.

The Government believes that the current regulatory structure of 4 RPBs and an oversight regulator no longer provide a framework for effective regulation. This consultation outlines options for reform. It explains the issues and concerns that have arisen under the current model including through the Call for Evidence and takes account of findings from the Government’s oversight regulation work. It then sets out the Government’s preferred option of a single regulator model, and two further possible options for consideration and views.

• Option 1: Do Nothing. The Government believes that doing nothing would not address the weaknesses identified in the current regulatory framework. This would not address a lack of confidence in the regulatory regime, and there would be continuing sub-optimal outcomes for people affected by insolvency.

• Option 2: Non-legislative change. An alternative would be to try and drive behaviour change, using non-legislative means. However, this approach has already proved limited in what it can achieve, due to the nature of the structure of the regulatory framework. As with Option 1, it would not address the current weaknesses, nor improve public confidence.

• Option 3: A single regulator. Legislation introduced by the Small Business Enterprise and Employment Act 2015 (SBEE Act) allows the transfer of regulatory functions to an existing regulator or alternatively the establishment of a new non-governmental body as regulator. The Government does not believe that transferring regulatory functions to an existing regulator would be effective in meeting the policy objective of tackling the inherent problems within the current structure. Due to the small nature of the insolvency profession and low number of Insolvency Practitioners/firms, the Government believes that setting up a new arms-length regulatory body could result in a disproportionate burden of cost.

Instead, this option proposes to use primary legislation to create a single independent government regulator, who will be a statutory office holder. The regulator would have powers to authorise, regulate and discipline Insolvency Practitioners, as well as set regulatory standards. The regulator would also have the power to delegate certain functions to other suitable bodies. Crucially, the regulator would also have the power to regulate firms providing insolvency services (see Chapter 6: Statutory regulation of firms).

The Government believes this approach would be in line with current principles of effective regulation, namely that it should be transparent, accountable, proportionate, consistent and targeted, with the independence and accountability of regulators helping to ensure public confidence.

Part B: Proposals to strengthen the regulatory regime

Statutory regulation of firms

In the 35 years since the introduction of the Insolvency Act 1986, there has been a shift in the way the insolvency market operates, with an increase in Insolvency Practitioners being employed by larger firms, rather than practitioners working for themselves or within small practices. The current regulatory scope does not extend to firms offering insolvency services, and this can lead to tensions between the commercial interests of the firm and the statutory responsibilities of the practitioner.

The lack of firm regulation is a significant gap, and reform is necessary to protect those affected by insolvency. The inherent conflicts of interest between the role of Insolvency Practitioners and their duties, and the commercial interests and internal governance processes of the firms that employ them, was identified as an issue in the Call for Evidence. This could be addressed by giving the single regulator a power to regulate firms that employ (or offer the services of) an Insolvency Practitioner.

The Government is therefore consulting on the introduction of the authorisation and regulation of firms that offer insolvency services, that is, the provision of persons to act as Insolvency Practitioners (within the meaning of section 388 of the Insolvency Act 1986) in formal insolvency proceedings. The regulation of firms would run alongside regulation of individual Insolvency Practitioners. The statutory regulation of firms would require legislative change. However, the ability to regulate firms would plug what is currently a significant gap in the regulatory system and help achieve better outcomes for creditors and consumers.

It is intended that all firms offering insolvency services would fall within the scope of the regulatory framework and the Government acknowledges that the introduction of the statutory regulation of firms could result in additional administrative burdens and costs. However, the regulator would take an intelligence-led, proportionate approach to firm regulation to avoid creating an unnecessary regulatory burden on businesses. The consultation is therefore seeking views on whether some qualifying firms should be subject to a set of additional specified requirements for authorisation and a process of enhanced monitoring.

A public register of Insolvency Practitioners and firms offering insolvency services

In this chapter the Government sets out its proposals for reforms to the current authorisation and licensing arrangements for Insolvency Practitioners and the introduction of minimum requirements for authorisation of firms offering insolvency services.

The Government believes that a single system of registration should replace the current arrangements for licensing an Insolvency Practitioner. The Government is consulting on a proposal to introduce a requirement for Insolvency Practitioners and firms to meet certain conditions (as Insolvency Practitioners do now) before they can be entered onto a public register. Insolvency Practitioners would have to be qualified to practise, meet requirements for training and hold requisite insurances. Similarly, firms would have to meet certain minimum threshold requirements before registration, which might include having their centre of main interest or registered office in Great Britain, being able to demonstrate their solvency and that they have sufficient qualified Insolvency Practitioners and administrative support staff to carry out the level of work undertaken.

The register would be a public record of all individuals and firms that offer insolvency services and only those on the register would be authorised to do so. A register will provide transparency for all users of insolvency services, who would be able to access the register to check whether the Insolvency Practitioner/firm they are dealing with is authorised to act. As well as allowing users of insolvency services to check that those offering such services are authorised, the register will also be a means to check whether an individual or firm has been sanctioned or had other action taken against them by the regulator.

A mechanism for compensation

At present there is no formal mechanism by which RPBs can require an Insolvency Practitioner or the firm that employs them to pay compensation when they have got things wrong. In practice, where an Insolvency Practitioner has made a mistake or error, they may voluntarily return funds to an estate where the mistake has resulted in financial loss. RPBs may consider the act of repayment mitigation against the level of any sanction or fine imposed on the Insolvency Practitioner following any disciplinary action as a result of the error.

Many respondents to the Call for Evidence noted the lack of a mechanism for compensation within the current insolvency regulatory framework and called for the introduction of such a mechanism. The Government is keen to explore views on whether the insolvency regulatory framework should include a formal compensation process for Insolvency Practitioners/firms. Under the Government’s proposal for a single regulator, the regulator would have a range of disciplinary sanctions to reprimand, fine, direct or to withdraw individual or firm authorisation. The power to direct could include the ability for the regulator to require an Insolvency Practitioner/firm to pay compensation where there has been an error or mistake or for a service failure causing undue anxiety or distress. The consultation also seeks views on whether Insolvency Practitioners should be required to contribute to a fund which would pay compensation where required.

Funding for the new regulatory model

The Government intends that the new regulatory model should be self-funding and this chapter explores different options for funding. While the cost of implementation of the new regulatory model would be met by Government, the running costs would be met by fees levied on Insolvency Practitioners and regulated firms. However, this would be on a cost recovery basis only. The consultation proposals for regulation of firms, if adopted, would see additional costs imposed on some firms, where it was proportionate to do so.

Part C: Reform of bonding arrangements

Part C sets out proposals for reforms of bonding arrangements to improve existing safeguards for creditors against the fraudulent or dishonest behaviour of Insolvency Practitioners. The Government’s review of the current arrangements has concluded that in the rare instances where a bond claim is required, the system does not work as well as it should.

The Government is seeking views, via this consultation, on proposals designed to change elements of the current system for bonding Insolvency Practitioners. This part of the consultation considers:

• Protection for creditors: The consultation reviews the measures currently in place to safeguard creditors against losses due to fraud or dishonesty and looks at the additional protections in place and how they interact with the bonding regime.

• Improving the existing requirements of a bond: This proposes extending the statutory minimum requirements of surety bonds and a revision of the monetary limits (which have not been changed since they were introduced in 1986).

• Managing risks and transparency: Safeguards are already in place to limit the risk of Insolvency Practitioners failing to obtain the appropriate level of bond cover. The consultation proposes requiring RPBs to take responsibility for ensuring cover is in place when the risk of no, or insufficient, bond cover is greatest. It suggests that Insolvency Practitioners should declare to creditors the level of bonding cover obtained at the start of each case. Finally, it explores ways for Insolvency Practitioners, especially those in smaller firms, to limit perceived risks for bonding purposes.

• Claiming against a bond: A best practice protocol to provide clarity and guidance has been developed with key stakeholders. The protocol has been used on an informal basis by Insolvency Practitioners and will shortly be formally introduced.

• Special managers: Following high-profile compulsory liquidations in which the Official Receiver sought the appointment of Insolvency Practitioners as special managers, this section discusses the security required to be provided by a special manager and whether a surety bond is an appropriate form of security for this purpose.

• Future arrangements for bonding in the context of the proposed regulatory reforms: The consultation also seeks views on whether, if the proposal for a single regulator is adopted, there should be more fundamental changes to bonding arrangements, alongside the new regime. This part also asks whether any future scheme for compensation might be extended to losses caused by dishonesty or fraud, thereby replacing the bonding arrangements.

Conclusion

The Government believes the proposals set out in this consultation will strengthen the regulatory framework and is seeking your views on how it can ensure that any reforms will make a positive difference, provide better outcomes for those affected by insolvency, and improve confidence in the insolvency profession as a whole.

Introductory Background

Chapter 1. Government approach to reform

This document seeks views on proposals for changes to the regulatory framework for the insolvency profession and sets out the Government’s preferred approach. It also includes proposals for amendments to the existing requirements for Insolvency Practitioners to hold security (bonding) to cover losses to creditors because of dishonesty and fraud.

The Government believes that widespread reform of the structure of the existing framework is necessary to ensure that the regulatory regime can function effectively in a modern insolvency market. Now more than ever, these changes are important. They will help encourage businesses to build back in the wake of the pandemic by providing a clear framework that will give confidence and reassurance to investors.

We need a regime which is robust, independent from the profession, has appropriate regulatory reach and can act firmly and swiftly when wrongdoing is identified. The Government believes that regulation through membership bodies may not always be wholly effective. It considers that effective regulation within the insolvency sector can best be achieved by a more active role for the Government in regulating the profession. It also considers that it is necessary to plug the current regulatory gap by introducing regulation of firms alongside authorisation of individual Insolvency Practitioners. The new regulator would have powers to regulate both individual Insolvency Practitioners and firms offering insolvency services.

The Government recognises that there is a wealth of knowledge and skill amongst the existing 4 RPBs, which it is keen to retain. It therefore proposes that the new regulator should be able to delegate certain functions to other bodies with suitable expertise and experience.

The Government thinks that those who are adversely impacted by poor service, error or wrongdoing on the part of an Insolvency Practitioner or firm offering insolvency services should be able to obtain compensation. There is currently no formal scheme for this within the existing regulatory framework and consequently there is a lack of consistency around when and if compensation should be provided.

This document seeks views on how such a scheme might be introduced in the future. It also seeks views on more immediate reforms to existing arrangements for security in the event of dishonesty or fraud by an Insolvency Practitioner to ensure that the current regime reflects up to date practice and levels of cover.

Next steps and timetable for change

The Government will consider all responses to this consultation carefully before making any final decisions on whether to introduce legislation to implement the proposed reforms. During the consultation process, we will arrange face to face discussion with stakeholders and those involved in the profession to hear their views.

If there is a decision to take forward the Government’s preferred options the reforms to the regulatory framework would require changes to primary legislation, to be implemented when Parliamentary time allows.

The proposed amendments to the current arrangements for bonding could however be made via changes to secondary legislation and be implemented as interim measures, prior to more significant changes to the regulatory model.

The timing of the introduction of any changes will therefore depend on the Parliamentary timetable, legislative availability and other Parliamentary priorities.

The Government recognises that a wholesale reform of the insolvency framework will take some time to implement and, should the proposals be taken forward, it will work closely with existing regulators and stakeholders to ensure that robust regulation continues in the intervening period.

Any new regulatory model will be drawn up in close consultation with the profession, existing regulators and other interested parties.

Assessing the progress of reform

If legislative changes are introduced, the Government will want to ensure that they are working effectively and have the desired impact of improving confidence in the regulatory regime. The Government would therefore intend to carry out a proportionate evaluation to establish whether the changes are working as intended within 5 years of implementation of the new regulatory model.

Chapter 2. Background to the current regulatory landscape

Insolvency Practitioners act as office-holders in formal insolvency and restructuring procedures and their responsibilities include the rescue of viable businesses and getting in the assets of an insolvent in order to pay creditors. The work of Insolvency Practitioners is highly specialised. Considerable practical experience is required and there are challenging examinations to pass before an individual can be authorised to act as an Insolvency Practitioner. The regulatory framework for the insolvency profession was initially established by the Insolvency Act 1985 and is now found in Part XIII of the Insolvency Act 1986. It provides for authorisation for an individual to act as an Insolvency Practitioner by a body recognised by the Secretary of State for that purpose. There are currently 4 bodies, known as Recognised Professional Bodies (RPBs), able to authorise Insolvency Practitioners. They are required to have rules in place to ensure that their insolvency members meet satisfactory regulatory standards. The Secretary of State is the oversight regulator of the RPBs, and this function is carried out by the Insolvency Service on behalf of the Secretary of State.

Overview of current regulatory landscape for the insolvency profession

Why regulate the insolvency profession?

Regulation of the insolvency profession was introduced by the Insolvency Act 1985 (subsequently replaced by the Insolvency Act 1986 (“the Act”)) following the recommendations in the 1982 Report of the Review Committee on Insolvency Law and Practice, otherwise known as the “Cork Report”.

Prior to this, people with no practical experience or relevant professional qualifications were able to take insolvency appointments. This led to abuse of the system by a minority and a lack of confidence amongst those involved in insolvency proceedings. The Cork Report concluded that an unregulated insolvency sector is unsatisfactory and undermines business and public confidence.

While the Cork Report was nearly 40 years ago, there is a continued need for regulation because of the unique role of Insolvency Practitioners. The nature of the work means that they are dealing with people, some of whom may be particularly vulnerable, during a difficult period of their lives. There is the potential for significant financial consequences for debtors and their creditors in the event of any malpractice by an Insolvency Practitioner, with the accompanying stress and anxiety that this might cause. There is also potential for wider damage to employment and the economy if financial institutions are unwilling to lend money for investment because of a lack of confidence in the insolvency regime. This is particularly relevant in today’s current economic climate as we build back from the impact of the pandemic. Effective and proportionate regulation is needed to minimise the risk of potential abuse and provide reassurance and trust in the profession.

Authorisation as an Insolvency Practitioner

An Insolvency Practitioner is an individual who is authorised under the Act to act as an office-holder in formal insolvency procedures for companies, individuals and insolvent partnerships. This means that only an authorised Insolvency Practitioner can be appointed to certain roles, such as an administrator, liquidator, supervisor for a company voluntary arrangement or as a monitor in a company moratorium. Additionally, only an authorised Insolvency Practitioner can act as a trustee in bankruptcy or the supervisor of an individual voluntary arrangement in England and Wales or as trustee in a sequestration or protected trust deed in Scotland. Following changes made under the Deregulation Act 2015 an Insolvency Practitioner can now be “partially authorised”, meaning that they can take either only corporate or only personal insolvency appointments. However, the majority of practitioners are “fully authorised” and still take both types of appointment.

It is a criminal offence for a person to act as an Insolvency Practitioner unless they have been authorised to do so by a professional body, which has been recognised for the purpose of providing this authorisation by the Secretary of State.

The Act provides that the Secretary of State may declare a body that meets certain requirements to be an RPB capable of authorising its members to act as Insolvency Practitioners. These requirements are:

• the body regulates (or is going to regulate) the practice of a profession

• the body has rules which it is going to maintain and enforce for securing that its insolvency specialist members:

  • are fit and proper persons to act as Insolvency Practitioners, and
  • meet acceptable requirements as to education and practical training and experience
• the body’s rules and practices for or in connection with authorising persons to act as Insolvency Practitioners, and its rules and practices for or in connection with regulating persons acting as such, are designed to ensure that the regulatory objectives, set out in section 391C(3) of the Act, are met

A person cannot act as an Insolvency Practitioner if they fail to meet certain general eligibility criteria, for example if they are bankrupt or subject to bankruptcy related restrictions, or if they are disqualified from acting as a company director.

In addition, any Insolvency Practitioner appointed as an insolvency office-holder in England, Wales and Scotland must have in force security (or in Scotland, caution), for the “proper performance of their functions”. This is known as a surety bond (“a bond”). The purpose of the bond is to provide protection from losses caused by the fraudulent or dishonest behaviour of the Insolvency Practitioner. Part C of this consultation seeks views on proposals for amendments to these requirements.

The RPBs and how they regulate

Prior to 2016, there were 8 regulators (including the Secretary of State) regulating only 1,350 appointment-taking Insolvency Practitioners. At the time there was considerable criticism of this arrangement. A report by the Office of Fair Trading in 2010 identified that the relatively large number of regulators resulted in a duplication of regulatory efforts. Many Insolvency Practitioners felt that regulation was inconsistent and that it provided opportunities for regulatory arbitrage.

In 2011 the then Government consulted on proposals for regulation of Insolvency Practitioners. It stated that in principle it considered that it was undesirable to have so many regulators for a relatively small profession as it was bound to cause inconsistencies and that its long term aim was to work with the RPBs to achieve the model of a single regulator. At the time, however, the Government stopped short of this. A Ministerial statement in response to the consultation said that the Government could see the merits of a single regulator model and had not ruled this out, but that it wished to see if there was a way to reform the system without such a significant change.

The Government instead introduced statutory objectives for insolvency regulators in the Small Business, Enterprise and Employment Act 2015 (“the SBEE Act”). The aim of the objectives was to provide RPBs with a clearer enhanced structure and to encourage greater consistency. The regulatory objectives would thereby help to improve overall confidence in the regulatory regime.

The objectives require the RPBs to have a system of regulating Insolvency Practitioners that:

• secures fair treatment for people affected by their acts, is transparent, accountable, proportionate and ensures consistent outcomes
• encourages an independent and competitive insolvency practitioner profession whose members provide high quality services at a fair and reasonable cost, act transparently and with integrity, and considers the interests of all creditors in any particular cases
• promotes the maximisation of and promptness of returns to creditors, and
• protects and promotes the public interest

Regulatory activities by the RPBs include carrying out monitoring inspections for compliance with regulatory and statutory requirements, monitoring statutory bonding requirements for Insolvency Practitioners and providing training and support. They also consider and investigate complaints referred by the Insolvency Service’s Complaints Gateway. Where an RPB identifies a regulatory or statutory breach, which may require regulatory or disciplinary action, a report is prepared for consideration by the relevant regulatory committee of the RPB. RPB committees are convened with an equal or majority lay membership and are independent but sit within a framework set by the RPB. Having considered the report, the committee may determine to issue a sanction, which can include the restriction or withdrawal of a member’s authorisation to act as an Insolvency Practitioner.

The RPBs set rules and regulations for their insolvency members. Professional and ethical standards for the profession are developed by the Joint Insolvency Committee (JIC). The committee comprises a mixture of both lay and insolvency members including representatives from each of the RPBs (usually an Insolvency Practitioner) and representatives from the Insolvency Service, as oversight regulator on behalf of the Secretary of State. Lay members include representatives from HMRC, the British Property Federation and the Chartered Institute of Credit Management. The purpose of the JIC is to maintain, improve and promote high standards of insolvency practice amongst regulated members of the insolvency profession. It issues guidance and facilitates discussion between authorising bodies in order to ensure that, as far as possible, Insolvency Practitioners are dealt with consistently and in accordance with regulatory objectives.

The guidance issued by the JIC includes Statements of Insolvency Practice (SIPs) and the Insolvency Code of Ethics. SIPs set out principles and key compliance standards with which Insolvency Practitioners are required to comply. The Code of Ethics sets out the obligations of Insolvency Practitioners to meet the ethical requirements expected of them, for example, how to identify and handle potential conflicts of interest, ensure objectivity, professional competence and due care.

There are currently 4 RPBs:

• Chartered Accountants Ireland (CAI)

• Institute of Chartered Accountants in England and Wales (ICAEW)

• Institute of Charted Accountants of Scotland (ICAS)

• Insolvency Practitioners Association (IPA)

The table below shows the number of Insolvency Practitioners authorised per RPB as at 1 January 2021. The majority of practitioners, (around 97% of appointment takers) continue to be authorised to take both corporate and personal insolvency appointments:

Type	ICAEW	IPA	ICAS	CAI	Total
All Insolvency Practitioners	820	617	87	46	1,570
Insolvency Practitioners taking insolvency appointments	648	523	74	43	1,288
Non-appointment taking Insolvency Practitioners	172	94	13	3	282

Oversight regulation

The Insolvency Service acts as “oversight regulator” on behalf of the Secretary of State. Oversight regulation is undertaken on a targeted and risk-based approach that takes account of current regulatory information and intelligence along with wider legislative and economic factors. Monitoring visits are carried out regularly to assess RPB compliance against the regulatory objectives and the Insolvency Service publishes reports that highlight what has been tested, the findings and any recommendations for change. (See Annex B for details of and links to reports of monitoring visits).

The Insolvency Service team works closely with the RPBs to develop guidance to support them in carrying out their functions, for example how to comply with the statutory objectives introduced in 2015, guidance on common sanctions to assist the regulatory and disciplinary committees of RPBs in ensuring consistency in disciplinary proceedings, on monitoring of firms offering personal insolvency solutions on a large scale (known as “volume providers”), and also on relationships with companies introducing debtors to firms offering insolvency services.

The SBEE Act also introduced powers for the Secretary of State to sanction RPBs and to apply to court to sanction an individual Insolvency Practitioner. The policy of the Insolvency Service, as oversight regulator on behalf the Secretary of State, has generally been to resolve any issues through discussion and agreement with the relevant RPB, rather than through use of formal sanctions, as stated in the 2015 guidance on the new regulatory objectives and sanctions.

Chapter 3. The need for regulatory reform

The Government believes that the current structure of the regulatory framework for Insolvency Practitioners, with 4 separate Recognised Professional Bodies (RPBs) as regulators and an oversight regulator for fewer than 1,600 professionals, is no longer fit for purpose. The framework has not kept pace with developments in the insolvency market, for example the recent proliferation of “volume provider” firms offering Individual Voluntary Arrangements and Protected Trust Deeds. It lacks an overall strategic approach and leads to inconsistencies in outcomes and uncertainty for those impacted by insolvency.

The responses to the Call for Evidence and oversight monitoring findings have identified some weaknesses and problems which undermine public confidence. This lack of confidence has also been reflected in Parliament, notably in debates during the passage of the Corporate Insolvency and Governance Act 2020 (Hansard - vol 676 HC 03.06.2020 and Hansard vol 803 HL 09.06.2020) and more recently in debates during the passage of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021.

As businesses and the economy face the challenge of rebuilding following the Covid-19 pandemic it is important, more now than ever, that there is a robust regulatory framework for Insolvency Practitioners, which is impartial and transparent. The Government has therefore concluded that the existing structure needs to be reformed and replaced with a different regulatory framework.

Since 2015, the number of RPBs has reduced from 8 to 4. Despite this, the Government has concluded from its analysis of the responses to the Call for Evidence and information gathered from the Insolvency Service’s oversight role (see pages 29 to 31 and Annexes B and C below) that the 2015 reforms have not done enough to drive the levels of consistency and robustness required in an effective regulatory framework.

The Government considers that there are fundamental weaknesses in a regulatory framework delivered through multiple membership bodies and limited to regulation of individuals, with no remit over firms operating in the insolvency sector. The existence of 4 different RPBs and an oversight regulator means that, despite statutory objectives and supporting guidance, there are likely to be inconsistencies. It also means that there is a risk that RPBs compete to retain membership, particularly given the relatively limited pool of Insolvency Practitioners (currently around 1,570 of which around 1,290 are appointment takers).

While healthy competition is normally to be welcomed, it is questionable whether it has a place in a regulatory framework as it has the potential to influence how regulators operate. There is a perception of a lack of impartiality by RPBs in carrying out their functions, which undermines confidence in the regulatory regime. In other professional sectors, such as audit and accountancy, there is a growing view that self-regulation through industry bodies is not always appropriate where there is a strong public interest.

For example, the Independent Review of the Financial Reporting Council by John Kingman recommended that self-regulation of the largest audit firms should be reduced in some circumstances, and the subsequent Government consultation on Restoring Trust in Audit and Corporate Governance proposes the creation of a new regulator, the Audit Regulation and Governance Authority (ARGA), to replace the current regulator for audit.

The current insolvency regulatory framework is over 30 years old, having been introduced in the Insolvency Act 1985 and now embedded in the Insolvency Act 1986. It has failed to keep up to date with developments in the insolvency market. At the time the legislation was introduced, Insolvency Practitioners generally had full control of all their cases and a genuine stake in the business they worked for. The reality is that Insolvency Practitioners today can be employed by firms where they have little or no say in the way the business is run.

In other professional sectors such as audit, surveying and legal services, it has been recognised that the firm and its culture may not be in alignment with the individual’s regulatory duties, causing potential conflicts of interest. Regulation in other areas has therefore been developed to hold the firm as well as the individual to account. While insolvency regulators can penalise an individual practitioner, this may fail to get at the root of the misconduct if the reason for the breach is a result of the governance and practices of the firm that employs them. As insolvency regulation only covers the regulation of individuals, it is increasingly out of line with other professions and the direction of travel for regulatory reform.

Concerns about the lack of firm regulation in the insolvency sector are particularly evident in relation to firms offering personal insolvency solutions, such as Individual Voluntary Arrangements (IVAs) and Protected Trust Deeds (PTDs). There are also concerns that there is scope for tensions between firm culture and the regulatory duties of an Insolvency Practitioner within the corporate insolvency sector, leading to insolvency appointments where there is the potential for professional conflicts of interest with other work undertaken by the firm.

A report by the All-Party Parliamentary Group on Fair Business Banking published on 14 September 2021 is critical of the failure to address apparent conflicts of interest in the relationship between Insolvency Practitioners in the leading accountancy firms and banks and other financial institutions. The Government recognises that some firms have, however, taken steps to reduce such conflicts by separating their audit and advisory functions from their insolvency arm.

Responses to the Call for Evidence

A Call for Evidence on the review of insolvency regulation was issued in July 2019. There were 88 responses from across the insolvency industry, including the RPBs, R3 (the insolvency trade body) creditor organisations, debt charities and individual Insolvency Practitioners. A fuller summary of responses to the Call for Evidence and details of those who responded can be found at Annexes C and D.

Responses to the Call for Evidence were generally along expected lines. The RPBs and others in the profession reported that the existing regulatory system is working satisfactorily. Creditor organisations and debt charities expressed a lack of confidence in the regulatory system, including:

• Failure by some RPBs to hold Insolvency Practitioners to account with ineffective disciplinary outcomes and a lack of consistency with different regulators taking different approaches to enforcement of the same rules
• Delays by some RPBs in progressing complaints about Insolvency Practitioners, and in some instances a failure to keep complainants updated on the progress of their case
• An overall lack of confidence in the regulatory system and concerns as to whether it could be truly impartial because of the dual roles of the RPBs as membership bodies and regulators
• Concerns about levels of Insolvency Practitioner fees and whether there is sufficient scrutiny of fees by the RPBs. It should be noted that some respondents felt that as there is creditor approval for fees, the RPBs should not intervene
• Lack of effective mechanisms for compensation or redress where there has been wrong-doing or a mistake on the part of the Insolvency Practitioner, which has adversely affected parties involved in the insolvency proceedings
• Concerns about the activities of volume IVA providers and abusive practices in the IVA and PTD markets. These centred around inadequate or misleading advice being given to individuals proposing to enter an IVA/PTD, with concerns about the potential risk of mis-selling and subsequent failure of the arrangement. There were also concerns about the levels of fees charged for IVAs and the use of intermediaries, known as “lead generators” or “debt packagers” who promote the use of IVAs/PTDs to consumers. Some respondents felt that the introduction of firm regulation would help to address these concerns

Findings of the oversight regulator

The Insolvency Service as oversight regulator on behalf of the Secretary of State has carried out regular monitoring visits to all RPBs to determine whether they are authorising and regulating Insolvency Practitioners in line with the statutory objectives. This has included carrying out themed reviews on complaint handling, monitoring and regulatory functions and regulation of volume IVA/PTD providers. Details of the Insolvency Service’s monitoring visits and links to the monitoring reports can be found at Annex B.

The Insolvency Service’s monitoring findings acknowledge that, overall, the RPBs have the appropriate infrastructure and systems in place to regulate and discipline their member Insolvency Practitioners. The RPBs are mindful of the need to carry out their functions in accordance with the statutory objectives. They co-operate effectively with the Insolvency Service on regulatory issues and respond to recommendations for improvement, which has helped in driving some change and positive outcomes. However, there are weaknesses, some of which are indicative of the current structure, and which reflect many of the concerns raised in response to the Call for Evidence, such as:

• The RPB processes for investigating disciplinary breaches can be slow and time-consuming. The Government understands there is a need to follow due process, but significant outcomes often take years to achieve, which undermines confidence in the effectiveness of the regulatory framework. The reasons for disciplinary decisions can in some cases be unclear. There are issues with repeat misconduct not being considered on a cumulative basis and this can result in relatively low level and repeated sanctions without fundamentally addressing the underlying mischief. The sanctions therefore do not act as a sufficient deterrent or effectively tackle systemic issues. RPBs generally publish details of sanctions, but this does not apply in all cases. This creates a lack of transparency and makes it harder to assess whether individuals have been held to account.

• Time taken to progress complaints can be slow. One RPB has more than 80 cases over 12 months old unresolved, of which around 30 cases are over 3 years old. Although measures have been put in place to improve complaints handling there is a tendency only to focus on matters referred by the Complaints Gateway and not to consider wider issues in particular cases or more systemic matters. This can make the overall approach disjointed at times and only recently have RPBs looked at how they might tackle more systemic issues. While improvements are made in response to Insolvency Service recommendations, these are not always sustained, and the same problems tend to reoccur.

• There has been limited progress on tackling concerns about fees. The Small Business, Enterprise and Employment Act 2015 introduced a statutory requirement for RPBs to encourage an independent and competitive profession whose members provide high quality services at a fair and reasonable cost. Little has been done, however, to tackle what appear to be excessive fees in some cases, because of the commercial nature of the charge out rate and quantification of the work done. While creditors agree the fee, it remains the responsibility of regulation to ensure that it is considered fair and reasonable for work properly done. This is based on a number of factors including complexity, size of the case, value of assets to be realised and other factors.

• In the IVA sector, there has been considerable concern about the level and categorisations of expenses charged, as well as the recovery of fees upfront. This still exists to some extent, although a number of providers have now moved to a fixed fee model. We continue to see examples of IPs breaching SIP requirements and failing to disclose to creditors disbursements to connected parties.

• There has been very limited progress to implement a mechanism for compensation where there has been an error or poor standard of service by an Insolvency Practitioner. A recommendation in the Insolvency Service’s Complaints Themed Review carried out in 2016 was that RPBs should enter discussions with the Insolvency Service about a potential regulatory mechanism to incorporate compensation. This has not been taken forward, with some RPBs arguing that it would be difficult to change their rules in respect of Insolvency Practitioners as it would impact on their accountancy members. Where RPBs do have mechanisms in place, we have not seen their use.

• There remain concerns regarding regulatory powers in the IVA sector. While some RPBs have now taken steps to adapt their regulatory approach in respect of IVA volume providers, which is very welcome overall, these remain limited and insufficient to react to the changes in the IVA market. This has led to the growth of some concerning business practices.

• Professional standards for the insolvency profession are set out in Statements of Insolvency Practice and the Insolvency Code of Ethics produced by the Joint Insolvency Committee (JIC). The process of standard setting by the JIC tends to be time-consuming, and the range of those involved inevitably means that elements of compromise are necessary, which does not always provide the best solution. For example, it took over 5 years to agree a revised Insolvency Code of Ethics, which was issued in May 2020.

Notwithstanding these concerns the Government recognises the ongoing work to improve standards and achieve greater levels of uniformity since the introduction of the statutory objectives in 2015. The Government appreciates the constructive and collaborative approach demonstrated by the RPBs, despite the potential for uncertainty regarding the future of the regulatory framework, especially following the Call for Evidence in 2019. While this is welcomed, it does not alter the Government’s view that that significant reform to the existing regulatory structure is necessary to protect both consumers and creditors.

Conclusion

There are weaknesses in the regime that are unlikely to be addressed by voluntary regulatory activity alone. The Government is therefore consulting on an overhaul of the insolvency regulatory framework to restore confidence and provide better protection for those involved in insolvency proceedings. This will be particularly important to meet the challenges that the economy will face as it emerges from the Covid-19 pandemic and to maintain the UK’s leading position internationally amongst other insolvency jurisdictions.

The Government considers that to ensure an effective independent regime, regulation should be brought within Government control. This consultation document seeks views on a new independent government regulator which would have responsibility for regulation of both individual Insolvency Practitioners and firms offering insolvency services.

Part A

Chapter 4. Government options for reform

The Government wants to build a robust and effective regulatory framework which will give confidence to businesses, investors and those involved in insolvency proceedings. The Government’s preferred option is to:

• establish a single government regulator, with powers to delegate certain functions
• introduce regulation of firms providing insolvency services, alongside licensing of individual Insolvency Practitioners

This option would require changes to primary legislation. This consultation also seeks views on other options.

The three options for consideration set out in this document are:

• do nothing option
• a non-legislative option
• the Government’s preferred option

Do nothing option

Doing nothing would mean that the current structure of 4 different RPBs and the Insolvency Service, acting on behalf of the Secretary of State as oversight regulator, would remain in place. Insolvency Practitioners would be required to be a member of an RPB and would continue to be authorised and regulated on an individual basis (without the introduction of regulation of firms). The existing statutory objectives would set the overarching requirements for regulators to ensure fair treatment, transparency, consistent outcomes, provision of high-quality services at fair and reasonable cost and to consider the interests of all creditors.

A do-nothing option would not address the innate weaknesses of the multi-regulator structure, or the lack of regulation of firms, which is a significant gap in the current regulatory model. This option is unlikely to address the shortcomings identified in the responses to the Call for Evidence and information gathered by the Insolvency Service in its role as oversight regulator. It would mean that concerns about a lack of consistency in outcomes, impartiality in decision making, conflicts of interest and the speed and effectiveness of the disciplinary process would continue.

Importantly, preserving the existing regulatory structures would mean that firms offering insolvency services would remain outside of the remit of the statutory regulatory framework. RPBs all offer some level of voluntary regulation of firms, which is welcomed. However, voluntary regulation does not seem to have been effective in tackling issues such as the pervading culture at some volume IVA providers, for example.

It is difficult to see how doing nothing would lead to an enhancement in the existing position or ensure that the framework reflects the realities of today’s insolvency market. Many of the responses to the Call for Evidence were strongly in favour of the introduction of mandatory regulation of firms, with particular reference to the IVA market.

Potential conflicts can also face Insolvency Practitioners working for the major accountancy firms. A recent report by the All-Party Parliamentary Group (APPG) on Fair Business Banking has raised concerns that a perceived close relationship between banks, lending institutions and the major accountancy firms can conflict with the professional and ethical requirements of individual Insolvency Practitioners working for those firms. The introduction of statutory regulation of firms would help to address these concerns.

A do-nothing option would be backward-looking. It would fail to reflect developments in the insolvency market and to address shortcomings in the existing regulatory framework. It would not enhance confidence in the regulatory framework for either those impacted by insolvency or those working in the insolvency industry. This would weaken the overall reputation and international standing of the UK insolvency profession, which would be detrimental for businesses and the economy. The Government does not therefore believe that to do nothing is a suitable option.

A non-legislative option

This option would preserve the current structure of the regulatory framework and statutory objectives as set out in the do-nothing option above. It would, however, seek to make improvements to existing regulatory processes through the continued development of guidance and sharing of best practice.

Since 2015 and the introduction of the statutory objectives, the Insolvency Service, acting on behalf of the Secretary of State as oversight regulator, has worked closely with the RPBs and other industry bodies to develop regulatory standards and provide guidance for Insolvency Practitioners. For example, it has worked with RPBs to develop guidance on how to comply with the statutory objectives and to provide guidance on common sanctions for the regulatory and disciplinary committees of the RPBs. It has also worked with wider industry to update the Insolvency Code of Ethics and to revise the IVA protocol, as well as updating professional standards set out in Statements of Insolvency Practice.

Under this option, it might be possible for the oversight regulator to take greater control of standard setting for the profession. The Insolvency Service could develop its own non-statutory standards, such as an enhanced code of ethics. Such standards could be drawn up in consultation with others, but there is currently no statutory power which would require RPBs to adopt or comply with such a set of standards. As oversight regulator, the Secretary of State can direct an RPB to do something which is within its remit in relation to the authorisation or regulation of Insolvency Practitioners, but only in specific circumstances where an act or omission of the RPB in discharging its functions has had, or is likely to have, an adverse impact on the achievement of one or more of the regulatory objectives as set out in section 391C(3) of the Insolvency Act 1986. The Secretary of State must also be satisfied that it is appropriate in all the circumstances of a particular case to issue the direction.

The approach of seeking to change behaviour through guidance and non-statutory means has some merit. This approach has previously provided regulators with the broad parameters within which to carry out their functions. Responses to the Call for Evidence and the oversight monitoring findings, indicate, however, that the approach is slow to achieve results; nor would it address concerns regarding lack of impartiality, ineffective disciplinary outcomes, and the conflicting roles of the RPBs as both membership bodies and regulators. While the SBEE Act introduced powers for the Secretary of State to sanction RPBs, these are quite narrow and specific and the policy of the Insolvency Service as oversight regulator on behalf of the Secretary of State has always been to use a consensual approach to drive change.

Given that a non-legislative, advisory approach has been tested over the last 6 years and has not had the desired effect, it seems unlikely that continuing with such an approach would result in any significant improvements. Importantly, this approach would not resolve the structural weaknesses of a multi-regulator regime which cause the inconsistencies and failings of the existing system. There would still be 4 different RPBs (and an oversight regulator) and the element of competition between RPBs would remain. Each RPB would interpret any additional guidance and advice provided in its own fashion and the tensions in the current system would continue. It is possible that over time there might be a reduction in the number of RPBs, which could bring some degree of greater consistency, but that would be a long-term solution and cannot necessarily be anticipated.

Similarly, as with the do-nothing option, this option would not provide for the statutory introduction of firm regulation and therefore the gap in the regulatory framework would remain. While this option would allow for the development of guidance and best practice to support a voluntary approach to regulation of firms, it is questionable whether a voluntary approach could effectively drive the necessary degree of improvements. There would also continue to be the risk of parties withdrawing from the arrangement.

An attempt to strengthen regulation of pre-pack sales in administration through voluntary means has previously proved unsuccessful.

Note: A pre-pack is where the sale of all or part of the business or assets of a company is arranged prior to it entering formal insolvency proceedings with the sale completed on or immediately after the appointment of an administrator.

An independent review by Teresa Graham in 2016 recommended a number of measures to improve transparency of pre-pack sales, including strengthening the regulatory guidance for Insolvency Practitioners in the relevant SIP and the introduction of a voluntary mechanism for purchasers to seek an independent opinion on a pre-pack sale. A report by the Insolvency Service published in 2020 concluded that this non-statutory approach had not proved wholly successful, and that statutory intervention was necessary to increase confidence in the pre-pack mechanism. The Government is not therefore convinced that a non-legislative option would be successful in reforming the regulatory framework.

A non-legislative option would be unlikely to improve confidence in those who are affected by insolvency proceedings, which would not benefit the wider business environment. Concerns around inconsistency in outcome and impartiality would persist and, without significant structural reform, the UK’s reputation as a world leader in insolvency is likely to suffer. The Government does not therefore believe that a non-legislative option is viable.

The Government’s preferred option – a stronger more transparent regulatory framework

The Government’s preferred option is to introduce legislation to:

• create a single, independent government insolvency regulator to sit, with appropriate separation of duties, within the Insolvency Service
• introduce a requirement for authorisation and targeted regulation of firms offering insolvency services, alongside authorisation of individual Insolvency Practitioners
• introduce a formal mechanism for compensation where a poor standard of service by an Insolvency Practitioner or firm has had an adverse impact on a party or parties to an insolvency proceeding
• create a public register of authorised individuals and firms offering insolvency services

The regulator would have powers to authorise, regulate and discipline Insolvency Practitioners and firms offering insolvency services. It would also have the powers to set professional, ethical and educational standards. The regulator would be able to delegate its functions to other specified bodies.

The revised model would provide a strengthened framework that better reflects the nature of the current insolvency market and would lead to improvements in the effectiveness of the regulatory regime. A public register would enable those using insolvency services to check the validity and disciplinary status of individual Insolvency Practitioners and firms offering insolvency services. This will result in:

• a regulator with a strong interest in ensuring high standards and delivering an excellent service
• greater public and creditor confidence in the effectiveness and independence of the regulatory regime
• better outcomes for those using insolvency services
• a streamlined and more efficient regulator with wider powers, able to act more swiftly and deliver quicker outcomes
• more consistency in complaint handling and disciplinary outcomes
• improved professional standards in the insolvency sector

Why a government regulator?

The SBEE Act provided for the designation of a single regulatory body for the insolvency profession either through the creation of a body corporate established by regulations or by designating an existing body as regulator. The power, which expires in October 2022, was created in the wake of the then Government’s policy of abolition of non-departmental public bodies. Consequently, given the Government’s approach at the time, the power does not provide for a government body to be the single regulator. The Government has carefully considered the options available under the SBEE Act power to create a non-government single regulator.

Creation of a new “body corporate”

The approach of creating a body corporate established by regulations has been used successfully in other regulatory models within the financial and professional services sphere. It would allow for the necessary degree of regulatory independence which the Government believes is required to restore confidence. However, in the sectors where this model is already used, such as accountancy and legal, there tends to be a considerably larger population of regulated professionals than in the insolvency sector.

The Government considers that the relatively small number of Insolvency Practitioners, currently around 1,570, means that it is unlikely to be financially viable to establish a new body corporate. The potential costs of setting up and servicing such a body could be disproportionate to the limited size of the profession. Once established, the body would need to be self-funding in line with Government principles for managing public money. This could result in a heavy financial burden on those regulated, leading to an adverse impact for smaller practices. Some responses to the Call for Evidence voiced concerns about the expense of setting up a specific new body for insolvency regulation. On balance, the Government has concluded that using the SBEE Act power to set up a new arm’s length body would be disproportionate.

Designation of an existing body

The SBEE Act also provides for an existing body to be designated as the single regulator of Insolvency Practitioners. This would potentially allow one of the existing RPBs to become the single regulator, or an alternative established regulator.

Several respondents to the Call for Evidence were firmly of the view that an existing RPB should not become the single regulator. The Government agrees that designating an existing RPB as regulator would not be a suitable option. One of the weaknesses of the existing system is the perception of the lack of impartiality and independence of RPBs, because of their dual role as a membership body and a regulator. Transferring regulation to an existing RPB would not dispel those problems. Moreover, the findings from the Insolvency Service’s oversight monitoring identified a number of weaknesses with RPB processes, which suggests that it would not be an effective option for an existing regulator to become the single regulator.

The provision in the SBEE Act is not, however, specific to the RPBs, and it would be possible to designate another existing body as the single regulator. The Government has considered whether insolvency regulation should be transferred to another regulator. Examples include the Financial Conduct Authority (FCA) or the current Financial Reporting Council, although there are proposals that this should be replaced by the new Audit Regulation and Governance Authority (ARGA). While these bodies are likely to have the resources and capacity to take on regulation of the insolvency profession, including firm regulation, the Government does not consider that such a transfer to either body would deliver a good outcome.

A transfer to a non-specialist insolvency regulator would require the development of specialist expertise, which would take time and resource to achieve. The Insolvency Service is the agency within Government that has responsibility for the insolvency legislative framework and advising ministers on insolvency policy. Designating an alternative regulator would separate policy and practice from regulation, which could lead to disconnection and a lack of co-ordination. Furthermore, the regulated insolvency profession comprises a relatively small number of individuals and firms and there is a risk that insolvency regulation would become a secondary consideration if located within a much larger non-insolvency regulator.

The UK is a founding member of the International Association of Insolvency Regulators (IAIR) which aims to help promote international co-operation on insolvency regulation and the development of best practice. IAIR, following consultations with members and considering international best practice, published principles for the regulation of insolvency practitioners. The principles recognise that there is no right way to regulate the sector and each market needs to consider its own relevant factors. There is a range of valid regulatory approaches, whether through state, self-regulation, or a mixture of both, and each regime must respond to their unique set of circumstances. The Government has concluded that to ensure continued alignment with the IAIR principles, there now needs to be a greater role for government in the regulatory framework. There are several other international jurisdictions that have adopted a government-led approach to regulating the insolvency profession, such as Australia, Canada and Finland. The Government believes that the creation of a government regulator will provide a robust and impartial framework, which promotes public confidence, whilst keeping pace with other well-regarded jurisdictions.

This consultation seeks views on the establishment of a new independent statutory office of regulator, which would sit within the Insolvency Service, the Government’s specialist insolvency agency. As the power available under the SBEE Act cannot be used to create a government regulator, primary legislation would be required to implement the proposal.

Question 1. What are your views on the Government taking on the role of single regulator for the insolvency profession?

Question 2. Do you think this would achieve the objective of strengthening the insolvency regime and give those impacted by insolvency proceedings confidence in the regulatory regime?

Devolution implications

The proposed new regulatory model would apply to England, Scotland and Wales. Insolvency, including regulation of insolvency, is a transferred function in Northern Ireland, although there is close alignment of the insolvency and regulatory frameworks between Great Britain and Northern Ireland. The Government will work closely with Devolved Administrations in Wales and Scotland to seek their views and ensure a smooth transition to any new regulatory model. The Government will also liaise closely with the Northern Ireland Executive to consider the impact of the reforms in Northern Ireland.

Chapter 5. A single government regulator

The Government proposal is for a single independent regulator to sit within the Insolvency Service. The regulator would have powers to authorise, regulate and discipline Insolvency Practitioners. The regulator’s powers would also extend to authorisation, registration and regulation of firms offering insolvency services. The regulator would have powers to delegate certain regulatory functions to other suitable bodies with the relevant expertise and experience.

The proposed regulatory model

The Government’s proposal is to create a single government regulator of Insolvency Practitioners and firms offering insolvency services. This would sit within the Insolvency Service, the Government’s specialist insolvency agency. The Insolvency Service is an executive agency and part of the Department of Business, Energy and Industrial Strategy (BEIS).

The Insolvency Service is not a distinct legal entity and cannot be named in legislation as the regulator of the insolvency profession. To promote independence, the Government proposes to create a new statutory officeholder, who would be responsible for authorising and regulating individuals acting as Insolvency Practitioners and firms offering insolvency services (see Chapter 6: Statutory regulation of firms). The role of the regulator would be separate and independent from the other functions of the Insolvency Service. It is intended that the legislation would also include powers for the regulator to assign staff to assist them in carrying out their regulatory functions. The Official Receiver and the Adjudicator in Bankruptcy are similarly independent statutory officeholders.

Statutory objectives

The Government believes that it is important that the new regulator should have clear, high-level objectives to set direction and provide an overall framework for the regulatory regime.

The Small Business, Enterprise and Employment Act 2015 introduced the following statutory objectives for regulators:

• having a system of regulating Insolvency Practitioners that secures fair treatment for people affected by their acts, is transparent, accountable, proportionate, and ensures consistent outcomes
• encouraging an independent and competitive Insolvency Practitioner profession whose members provide high quality services at a fair and reasonable cost, act transparently and with integrity, and consider the interests of all creditors in any particular case
• promoting the maximisation of, and promptness of returns to creditors
• protecting and promoting the public interest

These objectives apply equally to the Recognised Professional Bodies (RPBs) and to the Insolvency Service as oversight regulator.

The Call for Evidence sought views on whether the 2015 regulatory objectives were fit for purpose and whether any changes were necessary. The responses to the question were limited, but those that responded generally felt that they were fit for purpose. Due to the limited response, however, it is difficult to draw conclusions as to the impact of the current objectives in shaping the effectiveness of the regulatory framework. Some respondents were concerned that the objectives were too focused on the needs of creditors and did not take account of the concerns of debtors/consumers. As it is, the current objectives were drawn up in respect of a different regulatory framework and the Government believes changes are needed to take account of the proposed new regulatory model, which includes regulation of firms offering insolvency services. The Government is therefore seeking views on the following revised objectives but welcomes other suggestions.

Statutory objectives for a new regulator

To have a system of regulation that:

• secures fair treatment for those impacted by insolvency and acts impartially and transparently with regard to those regulated

• encourages a competitive and innovative industry, that acts with integrity, promotes the maximisation and promptness of returns to creditors, protects the public interest and offers high quality services at a fair and reasonable cost

• supports those regulated in complying with their responsibilities and ensures consistent and effective outcomes

The Government expects that the regulator would have a set of more specific non-statutory regulatory duties/aims, to underpin the objectives. It would expect the regulator to consult with industry stakeholders when drawing up these duties/aims.

Question 3. Do you consider the proposed objectives would provide a suitable overarching framework for the new government regulator or do you have any other suggestions? Please explain your answer.

Functions of the government regulator

The Government proposes that the regulator should have powers to carry out the following functions in respect of Insolvency Practitioners:

• to set the requirements for authorisation to act as an Insolvency Practitioner
• to authorise individuals (either fully or partially) to act as Insolvency Practitioners
• to regulate and monitor the activities of Insolvency Practitioners
• to investigate complaints against Insolvency Practitioners
• to discipline and impose sanctions in respect of Insolvency Practitioners
• to set technical, educational, professional and ethical standards for Insolvency Practitioners
• to create and manage a public register of authorised Insolvency Practitioners
• to share and receive intelligence
• to require the production of information
• to levy a fee to cover the cost of regulation
• to delegate certain functions to other specified bodies and to make payment for the cost of undertaking those functions

The regulator would also have the following functions in respect of firms offering insolvency services:

• to set the requirements for authorisation of firms offering insolvency services
• to authorise firms to offer insolvency services
• to regulate and monitor the activities of firms offering insolvency services
• to investigate complaints against firms offering insolvency services
• to discipline and impose sanctions in respect of firms offering insolvency services
• to set professional and ethical standards for firms offering insolvency services
• to create and manage a public register of authorised firms offering insolvency services
• to share and receive intelligence
• to require the production of information
• to levy a fee to cover the cost of regulation
• to delegate certain functions to other specified bodies and to make payment for the cost of undertaking those functions

Question 4. Do you consider these to be the correct functions for the regulator in respect of Insolvency Practitioners and in respect of firms offering insolvency services? Please explain your answer.

Question 5. Are there any other functions for which you consider the regulator would require powers? Please explain your answer.

Exercise of functions

The Government envisages that the regulator would carry out certain functions directly, but that other functions could be delegated to other bodies with suitable experience and expertise. We are seeking views on which functions should be carried out directly by the regulator and which might be delegated. Where functions were delegated, the regulator would still retain the power to exercise those functions, should it be necessary.

Functions to be carried out directly by the regulator

The Government believes that the proposed new regulator should be required to carry out the following functions directly (rather than delegating them):

• Standard setting

• Complaint investigation
• Targeted and intelligence led investigations
• Disciplinary and enforcement proceedings

Standard setting

As set out above, professional standards for the insolvency profession are currently developed by the Joint Insolvency Committee. The role of the Committee is to develop and revise standards for the insolvency profession in the form of Statements of Insolvency Practice (SIPs) and other documents. The Committee has a mixture of insolvency and lay members and a lay Chair and there is usually public consultation on any proposed changes to standards.

The Government welcomes the intention to ensure a balanced view, but in practice the range of different interests represented on the Committee means that progress on making changes can be slow. The Government believes that the necessity to compromise to reach agreement means that the professional standards are not as robust as could otherwise be achieved through a single government regulator. The Government therefore proposes that the new regulator should have powers to set standards as part of the statutory process. This will ensure that professional and ethical standards are set independently and take account of the public interest.

We have considered whether the new model should take a “principle” or “statute” based approach to setting standards. That is whether the regulator should have an overarching legislative power to set standards, but the standards themselves would be non-statutory and set in guidance, or whether standards should be set in secondary legislation. The FCA adopts a principle-based approach in relation to the standards it sets for firms offering financial services (albeit elements of consumer credit remain governed by the Consumer Credit Act 1974 and underpinning legislation). The Government’s preference would also be for a “principle” based approach, which would be more flexible and enable changes to be made more quickly where necessary.

Currently regulatory standards for Insolvency Practitioners are set across a variety of documents, for example the various Statements of Insolvency Practice and the Insolvency Code of Ethics. The new model would propose to draw them together in one place in what might be termed a manual for Insolvency Practitioners. The Government proposes that the regulator would work with industry experts to develop requirements for authorisation/registration and other professional standards. A non-statutory committee could be established to provide advice to the regulator.

Question 6. Do you agree that the single regulator should have responsibility for setting standards for the insolvency profession? Please explain your answer.

Complaint investigation

Currently where it has not been possible to resolve a complaint directly with an Insolvency Practitioner, a complaint can be made to the Insolvency Service Complaints Gateway. The Gateway assesses the complaint and determines whether it should be referred to the relevant RPB for consideration and potential investigation. Each RPB then follows its own complaints procedure typically involving an initial assessment, formal investigation and consideration by a committee, which may impose a sanction.

The Call for Evidence revealed that the current system for complaint handling, whereby RPBs investigate and discipline their own members, undermines public confidence. There is a perception of unwillingness to deal robustly with poor behaviour because of the potential impact on membership. Respondents also pointed to delays in dealing with complaints, and a lack of consistency in outcomes between RPBs and sometimes even within RPBs. Insolvency Service oversight monitoring has also revealed similar concerns.

Under the proposed new model, complainants would still be required initially to try and resolve problems directly with the Insolvency Practitioner or the firm offering the insolvency services. The Gateway would continue to operate as the point of contact for complainants and to carry out an initial assessment of the complaint, but the Gateway would be brought within the remit of the regulator. Where a complaint was investigated by the regulator, the new model would be set up in such a way as to ensure a clear separation between the investigation of the complaint and the process for deciding on whether a disciplinary sanction should be imposed.

The Government believes that the establishment of a single government regulator would ensure a more consistent approach to investigation of complaints and provide a more efficient and user-friendly service for all parties involved.

Question 7. Do you agree that it would help to improve consistency and increase public confidence if the function of investigation of complaints was carried out directly by the single regulator? Please explain your answer.

Targeted and intelligence led investigations

The Government proposes that the regulator would directly carry out targeted and intelligence led investigations into potential breaches/malpractice by an Insolvency Practitioner or a firm offering insolvency services, where it was a high profile or public interest matter. It believes that this would enable action to be taken more swiftly in response to intelligence. The Insolvency Service has considerable expertise and experience in acting on intelligence under its existing investigatory functions, so is well placed to take on the role in respect of targeted and intelligence led regulatory investigations.

Some respondents to the Call for Evidence suggested that currently those within the profession were concerned about reporting potential misconduct because of fears that it would not be kept confidential and there was a risk of repercussions. They suggested that clearer whistle-blowing routes would help with gathering intelligence to target regulatory activities. While the Government acknowledges that there are already existing mechanisms for reporting misconduct of Insolvency Practitioners (for example via the RPBs and Action Fraud), the establishment of a government regulator would provide the opportunity to set up a single route for those within the profession to share intelligence with the regulator confidentially and therefore with more confidence.

Disciplinary and enforcement proceedings

To maintain confidence, a regulatory framework needs not only to be fair but also seen to be fair. It is important that there is consistency in disciplinary and enforcement proceedings, so that both those regulated and those who may be bringing a complaint feel that they have been treated transparently and fairly. The Call for Evidence noted that despite the availability of Common Sanctions Guidance, there is a lack of consistency in the application of sanctions by the disciplinary committees of the different RPBs. In imposing sanctions, there also seems to be no consideration of whether someone is a habitual offender and should therefore be dealt with in a more holistic way. There are concerns that the level of sanction can be downgraded for “mitigating” factors, which do not always seem to be relevant or appropriate to consider. This adds to the perception that RPBs can be reluctant to sanction their own members. The Insolvency Service’s own monitoring findings have noted that RPBs can sometimes be slow to act when misconduct is found to have occurred.

Under the proposed model the regulator would take responsibility for disciplinary and enforcement proceedings against Insolvency Practitioners and firms offering insolvency services. The regulator would have the ability to:

• reprimand an Insolvency Practitioner/firm

• impose a fine on an Insolvency Practitioner/firm
• impose conditions or restrictions on an Insolvency Practitioner’s/firm’s authorisation/registration
• direct an Insolvency Practitioner/firm to carry out certain actions
• withdraw an Insolvency Practitioner’s/firm’s authorisation/registration

As already mentioned, the disciplinary process envisages clear separation between the investigatory and disciplinary roles of the new single regulator. Following investigation, a report would be presented to the regulator, who would consider the findings and make a recommendation on whether a sanction was applicable and the proposed level of sanction. Parties involved would have the opportunity either to agree the findings and recommendation of the regulator or to make written representations where they disagreed.

In the event of disagreement, the regulator would review the recommendations and proposed sanction in the light of representations. Where the recommendation was for a severe sanction, such as withdrawal of authorisation or a significant financial penalty, there would be an automatic right to a face to face hearing with the regulator, at which the Insolvency Practitioner or firm would be permitted to be legally represented.

If the matter remained unresolved following the review by the regulator, there would be an opportunity to seek an appeal to an independent “Appeals Officer”. This would be similar to the model of the Communities Interest Company Regulator. The “Appeals Officer” would be a statutory officeholder appointed by the Secretary of State as and when required to hear an appeal. It is expected that they would be from outside the Insolvency Service but would need to have the necessary skills and technical knowledge and be independent of all parties. The “Appeals Officer” would review the case in the light of representations made and determine whether the decision and the recommended sanction should stand. There would be the right to an oral hearing. To discourage vexatious appeals there would be a fee charged for referral to the “Appeals Officer”.

We considered whether an independent tribunal should be set up for the purpose of considering appeals. However, any new tribunal jurisdiction would need to come within the aegis of Her Majesty’s Courts and Tribunal Service. Given the small size of the insolvency profession, we consider that this would be disproportionate. While it is a more streamlined process and individuals can represent themselves without legal assistance, it is still a judicial process and has the potential to be as costly as a court process. In the civil courts, if the court decides to make an order about costs, the general rule is that the unsuccessful party pays the successful party’s costs. Although tribunals can generally award costs in certain circumstances, this depends on the procedure rules of the relevant tribunal. Generally, the presumption in tribunals is that parties will bear their own costs and the bar for awarding costs is high. This could therefore deter appeals as it could impose an undue financial burden on parties, even if the case could potentially be successful.

If parties remain unsatisfied following recourse to the “Appeals Officer”, it is envisaged that there would be a final route of appeal to the Court.

Question 8. What are your views of the proposed disciplinary and enforcement process and the scope to challenge the decision of the regulator? Please provide reasons to support your answer.

Question 9. Are there any other functions which you think should be carried out directly by the single regulator? Please explain your answer.

Delegation of functions to specified bodies

Under the proposed new model, the regulator would have the power to carry out the full range of regulatory functions but would also have the power to delegate certain regulatory functions. Functions could be carried out on behalf of the regulator by delegating them to existing RPBs; they could also be delegated to other bodies.

The Government wants to allow a flexible arrangement for the relationship between the regulator and such bodies which can be altered if circumstances require without requiring new legislation. It does not therefore propose to set in statute either the basis of the relationship with the regulator or suitability requirements for bodies carrying out delegated functions. Instead, the Government proposes that these matters would be set contractually with accompanying contractual penalties should the body fail to deliver what has been agreed.

The Government seeks views on whether the following functions in respect of regulation of individual Insolvency Practitioners should be capable of being delegated by the regulator to other bodies where the regulator considers that body to be competent to carry out the task:

• consideration of applications and authorisation of Insolvency Practitioners/firms in accordance with standards and requirements set by the regulator
• routine monitoring of Insolvency Practitioners/firms to ensure compliance with statutory and regulatory requirements and provision of a report to the regulator on the outcome of monitoring
• provision of education and training for the insolvency profession

RPBs are currently authorised by the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) to carry out anti-money laundering supervision of Insolvency Practitioners. If the Government proposals are implemented, we will discuss with OPBAS and the RPBs how this function might best be carried out under the new regulatory framework.

Question 10. In your view should the functions specified above be capable of being delegated to other bodies to carry out on behalf of the single regulator? Please explain your answer.

Question 11. Are there any other functions that you think should be capable of being delegated to other bodies to carry out on behalf of the single regulator? Please explain your answer.

Part B

Chapter 6. Statutory regulation of firms

Whereas there is an established regulatory framework for all Insolvency Practitioners, there is currently no statutory requirement for firms that offer insolvency services (that is formal statutory insolvency solutions) to be regulated. This means that the Recognised Professional Bodies (RPBs) that regulate Insolvency Practitioners have no formal powers to act against a firm where there has been wrongdoing and the governance or business model at the firm has been a contributory factor.

Concerns have been raised in some of the responses to the Call for Evidence, as well as more widely, about the practices of some firms that operate in the insolvency market. There have been well-publicised problems with the functioning of the Individual Voluntary Arrangement (IVA) and Protected Trust Deed (PTD) markets, known as “IVA/PTD volume providers”.

Peers and MPs expressed their concerns about the apparent conflicts of interest, between the statutory duties of Insolvency Practitioners and the commercial interests of the major accountancy firms they work for, during debates on the Corporate Insolvency and Governance Act 2020. Similar concerns have been raised in a report on insolvency regulation published recently by the All-Party Parliamentary Group on Fair Business Banking (APPG).

These concerns highlight that the current model of regulation, solely on an individual basis, has not kept pace with the changing nature of the way insolvency services are delivered, creating a gap in the existing regulatory framework. The Government is therefore consulting on a proposed model for the regulation of firms, to run alongside the regulation of individual Insolvency Practitioners.

The need for statutory regulation of firms

Currently the regulation of those taking insolvency appointments is based upon individuals who must be licensed to carry out their functions. This framework, devised in the 1980s, has not kept pace with changes in the way Insolvency Practitioners now do business. The insolvency landscape has changed with the introduction of new business models, in particular firms providing individual voluntary arrangements (IVAs) and their Scottish equivalent, protected trust deeds (PTDs), often called ‘volume-providers’, entering the market.

Note: The Guidance for Monitoring of Volume Individual Voluntary Arrangements and Protected Trust Deeds defines a “volume provider” as a firm that controls greater than 2% of the total market (including new and existing cases), or 10% for PTDs or greater than 2% of new cases over a three-month period.

The business model of such firms often appears to regard IVAs and PTDs as a commodity, with the aim of selling as many as possible, rather than providing a professional service to help someone find the appropriate solution to their financial difficulties. IVAs comprised 65% of total individual insolvencies in England and Wales in 2020/21, totalling 82,199 individuals. The practices of some volume providers may mean that these individuals may not have been advised on all the options available to them to resolve their problem debt and therefore may not have found the most appropriate solution.

In February 2021 the FCA published its findings following a review of the unsecured credit market conducted by Christopher Woolard. The Woolard Review – A review of change and innovation in the unsecured credit market, also examined the effect of changes in regulation. The review considered the extent to which there may be a need for further regulation of emerging business models that are outside the scope of consumer credit regulation. The review highlighted respondents’ concerns about “the functioning of the IVA and PTD markets, neither of which is regulated directly by the FCA”. In particular, that “the often high and front-loaded fees for these solutions were driving poor outcomes and practices for both consumers and creditors.”

Other concerns around the IVA/PTD markets have highlighted the misleading advertising for these types of debt solutions and the use by such firms, of what are known as “lead generators” or “debt packagers” to provide business. The FCA is currently consulting on new rules to ban debt packagers from receiving referral fees from debt solution providers. For the purpose of the FCA consultation, a “debt packager” is a firm, the business model of which relies largely or entirely on remuneration from referral fees from debt solution providers, primarily providers of IVAs and PTDs. Consultation has also recently closed on proposed amendments to SIP 3.1 which sets the compliance standards for dealing with IVAs. These include proposals to require an Insolvency Practitioner to carry out due diligence to ascertain whether a lead generator or debt packager is appropriately authorised or regulated to conduct such activities. The Joint Insolvency Committee is currently considering the responses to the consultation. While these measures are welcomed, the Government’s view is that they are unlikely on their own to be sufficient to remedy the current concerns in the IVA/PTD sector.

Users of insolvency services should be able to expect all insolvency professionals to meet high standards of conduct, set by their profession. The Insolvency Code of Ethics requires that Insolvency Practitioners should always act with integrity and objectivity and not allow any bias, conflict of interest or undue influence of others to over-ride their professional judgement. The type of business models where an Insolvency Practitioner is employed by the firm, with little or no control over the decisions made by its senior management, can lead to tensions between the regulatory requirements placed on the Insolvency Practitioner and the culture of the firm that employs them. This can also lead to firms avoiding the consequences of action taken by the regulators against a particular Insolvency Practitioner by simply employing a different practitioner. Furthermore, the internal governance structures to safeguard against such conflicts can sometimes be opaque and unreliable.

Several high-profile cases involving major accountancy firms have highlighted that a lack of objectivity and transparency is not just a concern for the emerging business models in the personal insolvency sector. For example, the recent outcome of a high-profile case found that administrators had failed to give robust consideration to the potential conflict of interest when agreeing to take the appointment. In this instance, it was also noted that the firm’s own internal safeguarding procedures had failed to consider adequately whether the practitioners’ appointments would constitute a conflict of interest.

This type of behaviour, where Insolvency Practitioners have taken appointments without due consideration of their duty to consider conflicts of interest in contravention of the Insolvency Code of Ethics, has also been demonstrated in other cases. While the conduct in some of these cases occurred some time ago, the media attention around recent regulatory outcomes has contributed to a perception of a lack of objectivity and integrity generally by Insolvency Practitioners working in the high-end corporate sector and the firms that employ them. This is almost as damaging to the reputation of the insolvency profession as a lack of objectivity and integrity itself.

Responses to the Call for Evidence

Responses to the Call for Evidence highlighted the need for effective regulatory controls of both individuals and firms to increase responsibility within the whole firm, whilst retaining the accountability of the individual practitioner. A quarter of those who responded to the Call for Evidence suggested that firms should be regulated alongside the individual Insolvency Practitioner, with only a minority expressing concerns, mainly due to the impact that the costs might have upon small firms.

Many responses acknowledged that there may be benefits in extending regulation to the volume IVA and PTD market and the large corporate entities that deal with high profile business insolvencies, where Insolvency Practitioners are employees of the firm with little or no direct say in the corporate governance or operating procedures of the business. One respondent noted that the RPBs are not able to regulate effectively those practitioners who are employed by the large volume companies in part due to the “conflicts between the Insolvency Practitioner’s professional requirements, and their contract with their employer”. Some respondents suggested that there were high failure rates of IVAs, which was an indication that providers are not always acting in the best interests of their clients. Around 9% of IVAs registered in England and Wales in 2018 terminated within 1 year and 18% within 2 years. There was a reduction in early termination rates in England and Wales as of 31 December 2020. While it is too early to say, lower early termination rates as at 31 December 2020 may have been partly driven by the updated Coronavirus (COVID-19) guidance for the IVA protocol in April 2020. This guidance was drafted to support consumers to enable them to continue with their IVA throughout the pandemic with a sustainable payment plan.

Question 12. In your opinion would the introduction of the statutory regulation of firms help to improve professional standards and stamp out abuses by making firms accountable, alongside Insolvency Practitioners? Please explain your answer.

Regulation of firms in other Industries

The Royal Institution of Chartered Surveyors (RICS) operates under byelaws approved by the Privy Council. It is not a statutory body, nor does it have a statutory reservation of function so surveyors could undertake their activities without being a member of RICS. There are around 135,000 qualified surveyors and 10,000 regulated firms offering surveying services. Regulation of firms was introduced in addition to the pre-existing individual regulation arrangements in 2008 as a result of a move away from partnerships and the creation of larger firms, resulting in individuals’ limited ability to control process. A senior individual at the top of the firm “the Responsible Principal” is responsible for ensuring compliance with RICS standards. Firms can be deregistered or fined, served with a reprimand or have conditions imposed. The introduction of regulation of firms was a key step to ensure that standards within the surveying profession and is well established within the regulatory compliance and enforcement activities that RICS undertakes.

In other professional areas such as audit and the legal sector regulation of firms exists on a statutory basis. The Legal Services Act 2007 sets out the framework for regulation in the legal profession, under which both the entity and individuals within the legal profession - for example, solicitors, barristers and legal executives - are regulated. The legislation requires a firm to be authorised by the Solicitors Regulation Authority (or another approved regulator) to provide specific legal services to the public. A firm is also regulated by the Solicitors Regulation Authority in relation to any non-authorised legal services it provides.

In the audit sector, under the Companies Act 2006 a firm can only accept an appointment as a statutory auditor if it is a registered auditor under the rules of a recognised supervisory body (RSB). The firm must pay an annual audit registration fee and be monitored by an RSB. With a firm of registered auditors, the individual(s) who sign(s) company audit reports is required to be nominated by the firm as a responsible individual.

While there is no statutory regulation of firms within the insolvency profession, the RPBs offer some degree of voluntary regulation. This is very welcome, but the Government is not convinced that a voluntary approach would be sufficiently effective in driving significant change in behaviours. There is a risk that robust sanctioning might impact on buy-in for a voluntary scheme. Moreover, the market drivers and reputational pressures, which might lead some firms to adapt their procedures and business model, might not apply across the board to all firms offering insolvency services. Also, as explained in the Non-Legislative Option above in Chapter 4: Government options for reform, voluntary approaches in other areas, for example, the reform of pre-pack sales in administration, were not wholly successful in improving standards and it has been necessary to legislate.

Proposals for the regulation of firms offering insolvency services

Scope of regulation of firms

The Government recognises that there is a need to address the current gap in the regulatory framework and is therefore consulting on ways in which it can regulate firms that offer insolvency services. We propose that “firms offering insolvency services” should be taken as meaning firms which offer Insolvency Practitioners to act as an Insolvency Practitioner within the meaning of section 388 of the Insolvency Act 1986.

The insolvency profession is relatively small, and an individual may be a sole practitioner or part of a firm with other practitioners. Insolvency Service data suggests that there are circa 600 firms offering insolvency services alongside Insolvency Practitioners. Using the definition in the business population estimates used by BEIS, an estimated 20% of firms offering insolvency services can be classified as medium or large. At the top end the data suggests that only 3 firms have more than 40 Insolvency Practitioners. We acknowledge that statutory regulation could introduce additional administrative burdens for firms offering insolvency services that also operate in the accountancy, audit, and legal sectors, where there could be a risk of regulatory duplication. We are keen to ensure that there will not be a disproportionate regulatory burden on firms and regulation will take a risk-based and proportionate approach

The proposal for regulation of firms is that all firms that offer insolvency services should be authorised and meet certain minimum requirements. (See Chapter 7: A public register for Insolvency Practitioners and firms offering insolvency services.) The definition of firms offering insolvency services would be drawn carefully to ensure that all relevant firms are captured. While all firms within the definition would be required to be registered, additional regulatory requirements and monitoring would be targeted at firms that have the potential to cause the most damage to the insolvency market. This would ensure that regulation is proportionate and avoid unnecessary burdens on low-risk businesses.

Question 13. The Government believes that all firms offering insolvency services should be authorised and meet certain minimum regulatory requirements, but that additional regulatory requirements should mainly be targeted at firms which have the potential to cause most damage to the insolvency market. What is your view? Please explain your answer.

Additional requirements regime

The additional requirements regime would introduce a set of conditions and processes to be met by certain qualifying firms. These firms would also be required to pay a fee to cover the cost of regulation. The definition of which firms should be subject to the additional requirements regime would be designed to avoid the risk of gaming the system or creating an unnecessary administrative burden on compliant businesses. At the same time, there would need to be flexibility to be able to take account of developments in the insolvency market and changes at individual firms.

The criteria for qualifying firms would be based primarily on the risk the firm is assessed to pose to the public but could include size of the firm, level of turnover or the number of appointments held by Insolvency Practitioners employed by the firm. The additional conditions and processes to be met by qualifying firms subject to the additional requirements regime could include:

• a requirement to appoint a senior responsible person
• a requirement of the firm to demonstrate its suitability to conduct business, including an appropriate business model
• a requirement to provide confirmation that appropriate controls and governance are in place, to ensure that there are no conflicts of interest between the aims and policies of the firm and the duties and responsibilities of the Insolvency Practitioners they employ
• a process for enhanced monitoring

Many of the responses to the Call for Evidence suggested that the Financial Conduct Authority’s (FCA) Senior Manager and Certification Regime (SM&CR) model for firm regulation could be applied to firms offering insolvency services.

The SM&CR regime consists of 3 key parts:

• Senior Managers Regime – The most senior people who perform key roles require FCA approval before starting their roles. Every senior manager needs to have a “Statement of Responsibilities” that clearly says what they are responsible and accountable for.
• The Certification Regime – This applies to employees whose role means it is possible for them to cause significant harm to the firm, its customers, or the market more generally. Such employees do not need to be approved by the FCA, but firms will need to check and certify that they are fit and proper to perform their role at least once a year.
• Minimum Standards of Conduct – These set minimum standards of individual behaviour in financial services. They apply to almost all employees, who carry out financial service activities, or linked activities in a firm.

Given the relatively small size of the insolvency profession and the limited number of firms offering insolvency services, we believe an approach like the FCA SM&CR regime may be top-heavy and expensive to apply in the insolvency sector for most firms. However, individual elements of the regime could be suitable as a part of an additional requirements regime, such as the appointment of a senior manager with certain responsibilities acting on behalf of the firm to ensure compliance with the regulatory regime. We are not proposing that there should be formal approval of the individual before appointment, but they would be required to be “fit and proper” with the necessary skill and experience to perform the role. We will work closely with stakeholders to develop a model for regulation of firms which is appropriate to the sector.

Question 14. In your view should certain firms be subject to an additional requirements regime before they can offer insolvency services? If so, what sort of firms do you think should be subject to an additional requirements regime? Please explain your answer.

Question 15. Do you think that the regulation of firms should require a firm subject to an additional requirements regime to nominate a senior responsible person for ensuring that the firm meets the required standards for firm regulation? Please explain your answer.

Question 16. If so, would you envisage that the senior responsible person would be an Insolvency Practitioner? If not, please specify what requirements there should be for that role?

Chapter 7. A public register of Insolvency Practitioners and firms offering insolvency services

This chapter seeks views on the introduction of a public register. Currently individual Insolvency Practitioners must be authorised by a Recognised Professional Body to take appointments in corporate and personal insolvency proceedings. It is an offence for an Insolvency Practitioner to act without authorisation. The Government is proposing to introduce a public register for both individual Insolvency Practitioners and firms offering insolvency services. There would be certain minimum requirements to be entered on the register and it would be an offence for an individual practitioner to take an appointment or for a firm to offer insolvency services without being entered on the register.

The process for authorisation of Insolvency Practitioners is carried out by the Recognised Professional Bodies (RPBs). An Insolvency Practitioner must first pass the Joint Insolvency Examination Board (JIEB) exams before they can be licensed to practise, and they must meet certain minimum experience requirements. Since 2015 Insolvency Practitioners can hold either a full or partial licence. A full licence allows an Insolvency Practitioner to take appointments in both corporate and personal insolvencies. A partial licence permits the Insolvency Practitioner to take appointments in either corporate or personal insolvencies only. In addition, an Insolvency Practitioner must be a ‘fit and proper’ person, have professional indemnity insurance and meet further requirements for bonding of cases, as well as completing a specified number of hours of continual professional development.

A public register

The Government proposes to introduce legislation to create a statutory public register to replace the current licensing process for authorisation of Insolvency Practitioners. The statutory register would be a public record containing details of all authorised Insolvency Practitioners. All firms offering insolvency services would also be required to be registered and individual practitioners would be cross-referenced to their relevant firm, where applicable.

In order to be entered onto the register, practitioners would need to demonstrate they met requirements as to training and experience. Similarly, firms would need to meet minimum requirements (see below). It would be an offence for an individual to practice without being registered and similarly for a firm to offer insolvency services without being registered.

The regulator would have powers to obtain information to ensure compliance with the conditions for registration. In addition to the regulator’s powers to discipline and sanction an Insolvency Practitioner or firm, there would be a power to suspend or remove an Insolvency Practitioner or firm from the register if necessary. Removal from the register would mean that an Insolvency Practitioner was unable to take appointments and a firm was unable to offer insolvency services.

The register would also list details of any disciplinary action or sanction taken against an individual or firm by the regulator. This would provide greater transparency and confidence for users of insolvency services who would be able to check whether an individual or firm they are dealing with is regulated. It would also provide users with a means to check whether an individual or firm has been sanctioned or had any other action taken against them by the regulator, including suspension or removal from the register.

Threshold conditions for registration of Insolvency Practitioners and firms

Legislation would set minimum requirements for the registration of Insolvency Practitioners, similar to current licensing conditions for individuals. An Insolvency Practitioner would be either fully or partially authorised as now. An individual would also be required to be ‘fit and proper’ to act, meet acceptable requirements regarding qualifications, practical training, and experience and have the relevant insurances. Firms would also be required to meet certain minimum requirements. These might be, for example, having a registered office and/or place of business in Great Britain, being solvent and compliant with any Companies House filing requirements which may apply, having confirmation of relevant insurance cover in place and sufficient qualified and non-qualified staff to administer effectively the number of appointments being taken by practitioners at the firm.

Annual assessment of Insolvency Practitioners and firms

There would be a requirement for an annual assessment of Insolvency Practitioners to ensure they continue to meet the prescribed minimum requirements for registration, as well as compliance with the regulatory objectives and standards. In addition, Insolvency Practitioners would be required to demonstrate that they met any requirements for continuing professional development. Firms would also have to demonstrate that they continued to meet the required conditions for registration, including, where applicable, compliance with the conditions of any additional requirements the regime imposed.

Question 17. Do you think that a single public register for Insolvency Practitioners and firms that offer insolvency services will provide greater transparency and confidence in the regulatory regime? Please explain your answer.

Chapter 8. A compensation scheme for the insolvency profession

Some of the responses to the Call for Evidence on the review of the current regulatory landscape called for the introduction of a mechanism for compensation where there are poor standards of service by an Insolvency Practitioner which result in an adverse impact for a party or parties involved in the insolvency proceedings. A report in 2016 by the Insolvency Service recommended that Recognised Professional Bodies (RPBs) should enter discussions with the Insolvency Service about a potential mechanism for compensation. The Government is seeking views on whether such a scheme should be formally introduced and how it might operate.

Current arrangements

There are statutory measures in place to recover funds for creditors where there has been dishonesty or fraud on the part of an Insolvency Practitioner (see Chapter 10: Reform of bonding arrangements). However, there is no formal mechanism for compensation for inconvenience, loss or distress where an Insolvency Practitioner has made an error or omission, whether inadvertently or knowingly, but which does not meet the threshold of dishonesty or fraud. In practice, where a transgression by an Insolvency Practitioner has had an adverse impact, the practitioner may voluntarily undo the wrongdoing, which might include returning funds to an estate. RPBs may consider this as mitigation against the level of any sanction or fine imposed on the Insolvency Practitioner because of the error or omission.

The Insolvency Service’s Complaints Themed Review carried out in 2016 found that payment of compensation by Insolvency Practitioners to complainants was inconsistent and RPBs had different approaches to whether compensation should be paid. To address the inconsistencies across the RPBs, the Complaints Themed Review recommended that RPBs should enter discussions with the Insolvency Service about how a formal mechanism for compensation could be incorporated into the current regulatory framework. Following this, several of the RPBs said that it would be difficult to change their rules on compensation in respect of Insolvency Practitioners as it would impact on their accountancy members. New rules on compensation have recently been introduced by one RPB, but the Insolvency Service’s oversight findings have noted that an opportunity to use them was not taken.

Some respondents to the Call for Evidence felt that the lack of a mechanism for compensation was a gap in the current regulatory framework and called for its introduction. It was suggested that insolvency should be brought within the Financial Ombudsman Scheme (FOS) or that a similar scheme should be introduced for the insolvency profession. Other respondents were concerned that this might lead to a surge in speculative complaints.

Ombudsman schemes

Ombudsman schemes are a mechanism for providing an independent and impartial decision on a complaint, which can result in the payment of compensation. The schemes are usually designed to be free to the complainant and user-friendly. Complainants do not normally need legal representation or other assistance to access ombudsman schemes. They help to provide a level playing field between the individual complainant and organisations. They often use Alternative Dispute Resolution (ADR) mechanisms and can offer advantages over, and sometimes alternatives to, potentially expensive litigation.

An independent ombudsman scheme for users of insolvency services may have some benefits. While there are existing mechanisms available in statute that enable creditors to take action through the courts against an Insolvency Practitioner in certain circumstances, these are not often used. Reasons for this may include the financial cost involved in litigation and because some people may lack the confidence to bring a legal claim. The potential liability for costs if a claim is unsuccessful may also mean that many claims are not pursued. Use of an ombudsman scheme would provide a more user-friendly dispute resolution mechanism outside of the courts.

The Financial Ombudsman Scheme (FOS)

The FOS is an independent scheme that can determine complaints between consumers and businesses that provide financial services, including awarding payment for financial loss up to a maximum award of £355,000 and payment for compensation for distress, worry or reputational damage. A similar scheme operates in the legal sector: the Solicitors Regulation Authority (SRA) Compensation Fund.

The Government’s view is that it would not be suitable for an existing ombudsman scheme, such as the FOS, to consider complaints about providers of insolvency services. The insolvency profession is highly specialised. Complaints can often be complex, technical and hinge on fine judgements. Referral to an established ombudsman scheme would require those administering the scheme to develop the necessary expertise and knowledge of insolvency legislation and to keep up to date with its developments. Also, due to the nature of insolvency, those involved are either in financial difficulties or have suffered a financial loss because of the insolvency (which may have put them in financial difficulties), therefore parties are likely to feel distressed or aggrieved. There is a risk that the prospect of compensation from an ombudsman, such as the FOS, could encourage a flurry of unsubstantiated complaints, which would be resource intensive to investigate and unproductive.

A power for the new regulator to introduce a statutory scheme for compensation

As an alternative to joining an existing independent ombudsman scheme, the Government is seeking views on whether there should be a specific power for the regulator to direct that an Insolvency Practitioner or a firm offering insolvency services compensate a party or parties. This would be where an act or omission by an Insolvency Practitioner or a firm has either had an adverse impact and/or caused some form of loss to a complainant. It might take the form of financial compensation to make good any financial loss to an estate, a repayment or waiver of fees, or a payment to compensate for any undue stress or anxiety. However, it might not always involve financial compensation. The regulator could for instance direct, where possible, that the Insolvency Practitioner or firm should restore the complainant to the position they would have been in, if the error or omission had not occurred.

The Insolvency Service has a mechanism in place to pay compensation where there has been a service failure on the part of an official receiver or other staff that has caused a person or persons undue anxiety or distress. In these circumstances, the amount of compensation normally payable by the Insolvency Service is capped at £250. The Insolvency Service also has a mechanism for compensation where the action or omission of an official receiver has caused a financial loss to an estate, for example by the failure to realise an asset.

The Government is seeking views on whether similar arrangements could operate under the proposed regulatory regime. That is, whether the regulator should have the power to direct an Insolvency Practitioner or firm offering insolvency services to:

• pay compensation of up to an amount of £250 where there has been a service failure which has caused undue inconvenience, anxiety or distress to an individual. For example, where a practitioner has failed to address a question from a debtor about the future of the family home, which has caused the debtor and their family excessive anxiety.
• restore a party or parties to the position they would have been in had a wrongdoing not occurred, which could be non-monetary, but could also include repayment of financial loss to an estate incurred as a result of the action of an Insolvency Practitioner or a firm offering insolvency services.
• repay or waive fees.

While the Government believes that it is right that a financial loss or other damage incurred as a result of a mistake or failure should be made good, it recognises that the introduction of a regulatory mechanism could lead to an influx of unsubstantiated claims. The consultation therefore seeks views on whether there should be a limit on the amount that the regulator could direct an Insolvency Practitioner or firm to pay for financial loss. Where there is a claim for a higher amount, the complainant would need to resolve the matter directly with the Insolvency Practitioner or firm or via the Court.

Question 18. What is your view on the regulator having a statutory power to direct an Insolvency Practitioner or firm, to pay compensation or otherwise make good loss or damage due to their acts or omissions? Please explain your answer.

Question 19. What is your view on the amount of compensation that the regulator could direct an Insolvency Practitioner or firm to pay for financial loss? Please explain your answer.

Funding for a compensation scheme

One approach to payment of compensation would be for the regulator to direct an Insolvency Practitioner or firm to make the payment on their own account. In practice, Insolvency Practitioners and firms would be likely to hold insurance to cover the eventuality of being required to pay compensation. A formal scheme for compensation might result in increased payment premiums, which could be detrimental for small businesses. An alternative approach would be to establish a fund to which Insolvency Practitioners and firms would be required to contribute and from which the regulator would make compensation payments where it was appropriate to do so. However, this approach would mean that all practitioners would be required to pay, and compliant practitioners would effectively be paying for the errors of others. The Government would therefore welcome views on whether there should be a power for the regulator to require Insolvency Practitioners and firms offering insolvency services to pay a levy for a fund from which compensation would be payable. This could also be linked to wider reforms to the bonding regime. Chapter 10: Reform of bonding arrangements, seeks views on whether such a fund should replace the current regime and be extended to cover payment for losses arising from dishonesty and fraud.

Question20. Which option or options, do you consider would be most suitable to fund a compensation scheme for the insolvency profession? Alternatively, do you have a suggestion on how a compensation scheme for the insolvency profession might be funded? Please explain your answer.

Chapter 9. Funding for the proposed new regulatory model and regulation of firms

The Government’s intention is that the proposed new regulatory model should be self-financing and the aim would be to ensure that the impact would be cost neutral for individual practitioners, who would not pay more than they would if the existing regime continued. It recognises, however, that the introduction of regulation of firms would impose additional costs for certain businesses, although regulation will be risk based and proportionate to ensure that any additional costs are necessary. This chapter explores different options for funding the new regulatory model.

In considering any new funding model, the Government is required to take account of the principles of Managing Public Money. This provides that charges for services provided by public sector organisations normally pass on the full cost of providing them. While the costs of implementing the new regulatory model would be met by the Government, once it is established the running costs will need to be met by fees levied on those that are regulated. We believe that the new arrangements should, for the most part, be cost neutral and could offer the opportunity for economies of scale. We are also keen to ensure that there is no disproportionate financial impact for individuals or businesses as a result of these reforms. A consultation stage Impact Assessment has been prepared to accompany the consultation document and we are also seeking views and evidence to support our analysis of the impact.

Question 21. Are there any further impacts (including social impacts) that you think need inclusion or further consideration in the Impact Assessment?

While the consultation seeks initial views on how funding options might operate under a new regulatory model, the Government would continue to develop the funding model further with stakeholders and interested parties, once decisions have been taken in the light of views received on the proposal for a single regulator.

Current arrangements

Individuals wishing to be an Insolvency Practitioner are generally liable to pay an annual member subscription to their Recognised Professional Body (RPB) and other fees as an insolvency licence holder. The fees charged vary between different regulators, and according to factors such as whether the practitioner is active in taking on insolvency cases, their fee income in the previous year, and whether they are also a member of the same body. Depending on the RPB, annual fees are typically in the range of £1,000 - £3,500. These fees will include costs, which are charged to RPBs by the Insolvency Service.

These are:

• a statutory levy for each practitioner of £470 payable for the cost of oversight regulation
• a charge of £82.80 for each practitioner to fund the operation of the Insolvency Service’s Complaints Gateway

Funding options for the new regulatory model

The Government is mindful of the costs and burdens on businesses, particularly as they recover from the economic impact of the pandemic. We do not want to see any significant increases in the level of fees for Insolvency Practitioners and expect that the impact would be cost neutral for individuals.

The introduction of regulation of firms would require a separate fee structure that ensures small and micro businesses are not unduly affected. Firms subject to the additional requirements regime (Chapter 6: Statutory regulation of firms) would pay an additional fee to cover the costs of enhanced regulation. We believe this would be proportionate since it would be targeted at those firms where there is the greatest risk of damage to the public and the reputation of the insolvency profession. The Government would seek to ensure that there is no fee duplication between that paid by individual practitioners and the firm they work for. The Government would also develop transitional arrangements for funding as we move from the current regulatory scheme to the new model.

This consultation suggests possible funding options, but we are keen to explore alternative, innovative methods of funding and welcome other suggestions. The options set out below do not need to be considered in isolation, and elements of the options could be combined to provide an overall model.

Potential Fee Options

• a nominal fixed fee to cover the administration costs for authorisation and registration of individual Insolvency Practitioners and all firms offering insolvency services

• a nominal fixed annual fee for renewal of authorisation and registration of individual Insolvency Practitioners and firms

• a fee to cover the wider costs of regulation for individual Insolvency Practitioners and firms offering insolvency services. In respect of firms, this would only be payable by those which met the criteria for the additional requirements regime. The fee could be based either on a fixed amount (which would be a different amount for individuals and qualifying firms) or on a sliding scale, for example in relation to individuals, the number of appointments held or the value of appointments, or in respect of firms’ turnover from insolvency services/market share. However, as noted above, it will be important to ensure that there is no overlap in the fees paid by individuals and firms

• a fee to cover the cost of additional complaint investigations/monitoring visits. The fees to cover the wider cost of regulation would provide for a certain number of complaint investigations per year and a scheduled monitoring visit. There would be an additional charge levied on an individual Insolvency Practitioner or firm as appropriate to cover the cost of any complaint investigation above that limit, and similarly for any unscheduled or additional monitoring visits. This would ensure that those responsible for extra regulatory activity bore the financial cost, i.e., the “polluter pays” principle

• a fixed fee for making an appeal to the Appeals Officer against a decision of the Regulator

Question 22. What are your views on the above proposals for funding of insolvency regulation? Do you have any other suggestions for self-funding of regulation?

Part C

Chapter 10. Reform of bonding arrangements

Introduction

This section seeks views on changes to the current bonding arrangements for Insolvency Practitioners. These include proposals for amendment of the existing legislative requirements, which could be made through secondary legislation.

Views are also sought on wider changes to the bonding requirements in the context of the proposed changes to the overall regulatory framework. These changes would require primary legislation and would therefore be longer term.

Some changes to the current arrangements could be introduced as an interim measure within the existing framework ahead of more significant reforms to the regulatory regime requiring primary legislation.

Background

To be, and remain, authorised to act as an insolvency office-holder in England, Wales and Scotland, an Insolvency Practitioner must have in force security (or in Scotland, caution). This is known as a surety bond (‘a bond’).

A surety bond is made up of two parts:

• Enabling bond – Required before an Insolvency Practitioner can accept an insolvency appointment. It provides cover for a general penalty sum (GPS) of £250,000 that can be claimed against if the Insolvency Practitioner fails to obtain specific cover in respect of an insolvency appointment or where specific cover is insufficient. It must be renewed annually.

• Insolvency estate specific cover - Cover taken out for each insolvency appointment. It is referred to as the specific penalty sum (SPS) and cannot be obtained without an enabling bond. The value of SPS cover should be at least the estimated value of the insolvent estate’s assets. Currently the regulations require the cover obtained to be a minimum of £5,000 and a maximum of £5 million.

The Insolvency Practitioners Regulations 2005 (‘the regulations’) stipulate the form the bond should take and in what situations it should apply. The wording of the bond must be approved by the Secretary of State.

The purpose of the bond is to protect insolvent estates from losses caused by the Insolvency Practitioner’s fraudulent or dishonest behaviour. It is a tripartite agreement between the Insolvency Practitioner, their RPB and the bond provider. The bond makes the provider jointly liable with the Insolvency Practitioner for losses suffered by creditors as a result of fraud or dishonesty of the Insolvency Practitioner (whether acting alone, with another, or with their connivance).

Where there is evidence of fraud or dishonesty by an Insolvency Practitioner in relation to insolvent estates, a successor practitioner will usually be appointed in place of the existing one to take over their cases. This is usually at the instigation of the RPB and generally, although not always, follows the loss of an Insolvency Practitioner’s licence. The successor Insolvency Practitioner assumes the statutory functions of the former appointed Insolvency Practitioner and will investigate losses from the estates. Where there is evidence of losses suffered through fraud or dishonesty, the successor Insolvency Practitioner will submit a claim to the bond provider. Where a claim is agreed and paid, the fraudulent or dishonest Insolvency Practitioner remains liable for the losses, with the bond provider being able to pursue them personally for the value of any claim paid out. The claim submitted to the provider will include investigation costs. Payment of these investigation costs are at the discretion of the bond provider, and successor Insolvency Practitioner fees may, in many cases, consume a significant portion of the entire bond claim.

Professional indemnity insurance (PII)

In practical terms Professional Indemnity Insurance (PII) usually covers an Insolvency Practitioner’s firm – for example their partnership or their sole practice – rather than the individual practitioner. PII is not a statutory requirement for Insolvency Practitioners. Instead, each of the RPBs has its own set of minimum requirements that the policies held by its practitioners must meet which are set out in their rules. Generally, PII policies will cover losses suffered by creditors due to negligence (rather than, say, fraud) on the part of the Insolvency Practitioner and/or their staff.

In the event that a successor Insolvency Practitioner is appointed on an Insolvency Practitioner’s portfolio of cases and the successor finds evidence of losses to insolvency estates, a bond claim will only be agreed and paid where there is evidence of fraud or dishonesty by the Insolvency Practitioner (or with their collusion or connivance). Where there is no evidence of fraud or dishonesty it may still be possible for a claim to be made against the Insolvency Practitioner’s (or their firm’s) PII policy.

Government review of bonding arrangements

Responses to a 2016 Call for Evidence were generally of the view that the current arrangements are inflexible, prescriptive and fail to adequately protect creditors. The majority of respondents favoured amending the existing legislation for bonding along with the introduction of a best practice protocol to improve the claims process. Since then, and working with other information received from stakeholders, the Government has developed the proposals set out in this consultation.

The Government’s review of the current arrangements has concluded that in the rare instances where a bond claim is required, the system does not work as well as it should. The bonding regime is complex and has not been substantively updated since its introduction in 1986. This section of the consultation contains a range of proposals designed to improve the bonding system under the current regulatory framework. They would ensure that the regime continues to achieve its purpose of protecting creditors from financial loss on those rare occasions where there is fraud or dishonesty by an Insolvency Practitioner, pending any wider changes to the regulatory system.

Improving the existing requirements for a bond

The Government thinks legislative change is needed to give better clarity and consistency in the terms of the bond, and to update cover limits. It also thinks there is need for a mechanism to make sure that the reasonable costs of investigating fraud and dishonesty can be met. We are therefore recommending changes to improve the existing system and help ensure creditors are protected, while more substantive proposals to change the overall regulatory regime are developed.

Bond wording

The bond must meet the prescribed requirements as defined in Schedule 2 of the Insolvency Practitioners Regulations 2005 and the Secretary of State must approve all bond wording.

There are broad similarities in bond wording across the principal bond providers; however, some have ‘shaped’ their services to better meet the needs of a specific group within the insolvency industry. Through this commercial differentiation some bond providers specialise in providing security for Insolvency Practitioners in a particular area of the industry, for example volume IVA providers or practitioners in large firms.

All the current bond providers’ bonds go beyond the statutory requirements and include many common terms. These have been developed over time; many are important protections for creditors and now represent the standard expected for the Secretary of State’s approval of the bond wording.

The Government believes that by extending the statutory minimum requirements of the bond to include these standard bond terms that protect creditors, there would be greater transparency and no further need for the Secretary of State to approve bond wording. The Government therefore proposes to extend the prescribed requirements and remove the requirement to agree the wording by the Secretary of State from the legislation.

Proposal

The Government has reviewed the standard provisions found in bonds which go beyond the statutory requirements and considers that those which protect creditors and should be incorporated into statute include the following:

1. An allowance for reasonable associated costs of the bond claim. The Government believes that it is important that these costs are met within a bond claim and not out of creditors’ funds (which can occur when a settlement is made across a portfolio of cases). In all likelihood, the cost of investigating and submitting a claim would be significantly greater than the cost of realising the original assets. These costs will often be in addition to the realisation costs, where the original Insolvency Practitioner had realised assets and dissipated the funds. Were these costs not included as part of the claim it could result in significant losses to creditors. By making this a statutory requirement the Government hopes to provide clarity as to what costs are claimable.

2. A period of run-off cover that introduces a statutory minimum period that allows for claims to be submitted after an Insolvency Practitioner has left office. This would ensure a period for claims to be made after an Insolvency Practitioner has ceased to act.

3. Interest on amounts to be paid out under the bond, to be calculated on the amount of the loss from the date it was incurred. This will guarantee that there is a level of compensation attributable to an insolvency estate, for the time that will have elapsed between when the funds were removed from the estate (due to fraud or dishonesty) to when they are returned through the bond claim. Currently the rate of interest paid out by bond providers is based on the London Interbank Offered Rate (LIBOR), the average rate at which banks lend to each other . The Financial Conduct Authority (FCA) has confirmed that most LIBOR panels will cease after 31 December 2021 and therefore there will need to be a transition to some other rate. The Bank of England is the administrator for SONIA (Sterling Overnight Index Average) but there are other risk-free rates available.

4. GPS to cover all of an office-holder’s appointments. Currently, different bond providers have interpreted the requirements for access to the GPS funds differently, for example not allowing claims against the GPS for estates where SPS cover was not obtained. This means that the amount claimable between providers differs dependent on the providers’ interpretation of the requirement. The Government believes that the “safety net” provided by GPS cover should be available for all of an Insolvency Practitioner’s cases.

Question 23. Should the current minimum statutory requirements of a bond be extended as proposed to include the following (if you disagree, please explain your answer, including any alternative proposal or any additional factors to be included):

1. An allowance for reasonable associated costs of a bond claim.

2. A period of run-off cover that allows for claims to be submitted for a period after the Insolvency Practitioner has left office.

3. Interest to be claimable against a bond to be calculated on the amount of the loss from the date it was incurred (if so, which interest rate benchmark should the rate be tied to?).

4. GPS cover to be available for all of an office-holder’s appointments, including those where no SPS cover has been obtained.

Question 24. Would extending the statutory minimum requirements of bonds remove the need for Secretary of State approval of bond wording? What would be the possible impacts of this change?

Duration of cover

The statutory requirements for a bond allow for a time limit to be set for a claim to be made. In practice this has translated into the use of run-off periods and maximum indemnity periods. A run-off period provides cover for historic liabilities after the Insolvency Practitioner has ceased to be the office-holder on an insolvency estate, whilst a maximum indemnity period is the maximum length of time for which liabilities are covered and benefits are payable under a policy.

Due to the different approaches bond providers have to time-limiting claims, stakeholders have raised concerns that in some cases it is unclear what the applicable deadlines would be for the submission of claims. They stated that a considerable amount of time can be spent trying to determine whether cover exists and which estates the cover relates to. There are also reported difficulties for successor practitioners in obtaining copies of the relevant bonds. This results in successor Insolvency Practitioners submitting protective claims to ensure that substantive claims are not rejected as being made out of time. This causes additional work and costs for both successor practitioners and the bond providers.

Proposal

The Government proposes the introduction of a statutory minimum period of run-off cover and, where there is a maximum indemnity period, to place restrictions on this. The Government proposes that the run-off period should cover all insolvency estates for 2 years after the Insolvency Practitioner has vacated the insolvency appointment and it should cover access to both the SPS sum and the GPS sum. A minimum period of 2 years run-off cover is proposed as this is what is commonly offered by bond providers and would mirror the minimum requirements set by the RPBs for PII cover.

The Government proposes that any maximum indemnity period for an estate (SPS cover) should be at least 6 years. This time frame would likely cover most insolvencies. Where an insolvency has not been concluded within 6 years then the Insolvency Practitioner should be able to extend the maximum period with the agreement of the bond provider.

Question 25.Should a minimum period of run-off cover be provided for in statute and should the period be 2 years? If not 2 years, what should it be? Do you see any disadvantages to applying a minimum period for run-off cover?

Question26. Where a maximum indemnity period is applied by a bond provider:

1. should the maximum period an insolvency estate is covered be at least 6 years from the date of appointment?

2. should the Insolvency Practitioner be able to extend cover past the maximum period if they are still appointed on the case, with agreement from the bond provider?

Validity of cover

Some surety bonds provide that cover is only available when the premiums are paid. While the premium for the enabling bond is generally paid at the outset of cover (typically for a year), the premiums relating to each insolvency estate are generally collected throughout the year following each appointment taken. Where an Insolvency Practitioner fails to make payments, we believe that in some instances bond providers are terminating cover retrospectively, which leaves estates without protection.

Some bonds state that once the bond provider has given written notice to both the Insolvency Practitioner and their RPB declining further cover, there is no liability for appointments taken after the date of the notice.

Proposal

The Government proposes that where an Insolvency Practitioner has failed to make payment of any required premiums, cover should only be revoked where application has been to the Insolvency Practitioner for payment and reasonable notice of the cancellation of cover has also been provided to both the Insolvency Practitioner and their RPB.

The Government proposes that in circumstances where an RPB has been given notice by a bond provider that cover may be revoked due to non-payment of premium, the RPB should have a duty to ensure that any insolvent estates affected continue to be covered. The manner of the protection would be a decision for the RPB. It may involve the RPB making payment for any outstanding premium (reimbursable from the insolvent estate in accordance with existing priorities, for example, as set out in r.7.108(4)(e) Insolvency (England and Wales) Rules 2016) or taking steps for any affected cases to be reallocated to another Insolvency Practitioner.

Question 27. Should cancellation of cover due to non-payment of premium only be allowed where application for payment has been made and reasonable notice has been given to the Insolvency Practitioner and their regulator? If yes, what would be considered reasonable notice?

Question 28. Where a regulator has been notified that cover may be revoked due to non-payment of a premium, should the regulator be responsible for ensuring creditors of affected insolvency estates remain protected?

Monetary limits and costs attributable to claims

The Insolvency Practitioners Regulations 2005 currently set the general penalty sum (GPS) at £250,000. It is provided through the enabling bond, which is renewed yearly and lodged with the Insolvency Practitioner’s regulator. The purpose of the GPS is for it to be called on if the Insolvency Practitioner has obtained insufficient specific cover or fails to obtain it at all. The GPS cover amount is the same for all Insolvency Practitioners, irrespective of the size or number of cases. The GPS sum has not changed since 1986. The Government believes that the amount of the GPS cover is no longer sufficient.

Specific cover is required in respect of each insolvency appointment, for an amount not less than the estimated value of the insolvent’s assets. The current regulations specify a minimum £5,000 and a maximum £5 million cover requirement. Any case where the assets are valued at less than £5,000 requires a bond for the minimum amount. Where the assets are valued at more than £5 million the bond is only required to cover the maximum sum. Additionally, the regulations permit the terms of the bond to limit the aggregate liability of the bond provider in respect of an Insolvency Practitioner to £25 million. The monetary limits have not been revised since they were first introduced in 1986.

When a successor Insolvency Practitioner is appointed, they are tasked with investigating the actions of the Insolvency Practitioner they have replaced. In calculating the amount of the specific sum for which a case is bonded, the legislation does not require provision for potential investigation and parallel costs.

Note: Parallel costs include those costs incurred twice: firstly by the original IP and then by the successor IP. For example, where a successor IP feels that they cannot rely on valuations obtained by the original IP, or where debtors have to be interviewed to obtain further information about assets and liabiities.

Proposals

There is a range of options that may address concerns regarding current monetary limits and the costs attributable to a claim. The Government is seeking views on which of these (some of which would be mutually exclusive) would be most successful at achieving the greatest protection against creditors’ losses, balancing the need for investigation by successor Insolvency Practitioners with the impact on the cost of premiums of any increase in monetary limits.

Raise GPS cover to £750,000

The Government considers that the current GPS cover limit of £250,000, which was set in 1986, is out of date and does not provide a realistic level of cover considering current asset levels in insolvency cases. The deflator value of the current limit in today’s market would be £493,000 and asset values since the introduction of the limit have increased at a rate far higher than inflation. For example, the FTSE 100, an indicator of asset values across the wider economy, has increased by around 285% since 1986. An increase of 285% on £250,000 would be £712,000. The Government therefore proposes to raise the GPS cover limit to £750,000.

Note: The deflator allows for the effects of changes in price (inflation) to be removed from a time series.

Question 29. The Government proposes to increase GPS cover to £750,000. Is this sufficient? If not please explain why.

Increase the minimum SPS cover to £20,000

It is not proposed that the maximum SPS cover should be raised, as stakeholder feedback suggests that the current level of cover is sufficient. However, consideration is being given to raising the minimum SPS cover from £5,000 to £20,000. This amount is considered low enough to obtain a bond at a competitive rate for smaller cases and is likely to reduce the incidence of under-bonding.

Question 30. The minimum insolvency estate specific cover is currently £5,000. The Government proposes that this should be increased to £20,000. Would this level provide sufficient cover for small insolvency cases?

Reform the purpose of GPS

Where there is a potential for a bond claim to be made it can take the successor practitioner some time to investigate and prove the claim. If the primary losses caused by the fraud or dishonesty relate to a significant proportion of the assets in the estate (and therefore the cover provided) any associated costs would limit the amount returned to creditors.

One option is to consider extendingthe purpose of the GPS bond to cover fees for the investigation and making of a claim on a particular case. In this option, the SPS cover would be ring-fenced for payment of the primary loss suffered by creditors and fees for investigations and making claims across an Insolvency Practitioner’s portfolio would be limited to the GPS cover.

Question 31. Should the GPS be reformed to cover interest, investigation, parallel and bond claim costs of the successor Insolvency Practitioner?

Increase the value of the SPS cover above the value of assets

Another option to address the issue of investigation costs accounting for a significant proportion of a bond claim is to set the level of SPS cover required above the value of the assets (for example SPS cover to be 125% of the value of the estate’s assets). Applying an uplift to the value of the estate would mitigate the impact of the costs (reasonably incurred in the investigation of fraud or dishonesty) on the funds available for distribution to creditors in a way that is proportionate.

Question 32. Should the specific cover obtained per insolvency estate be set at a higher level than the asset value to factor in interest, parallel and investigation costs and fees of a successor practitioner in bringing a claim? If so, what percentage above the asset value is an appropriate amount, and why?

Amend legislation to allow global bonds

We are proposing amendments to the regulations to allow bond providers to offer cover in an alternative flexible format, sometimes referred to as a global bond. These bonds would allow for less regular notification of appointments taken. Introduction of a global bond as an optional addition to, rather than as a replacement of, the current system of bonding therefore could reduce administrative burdens and allow bond providers more freedom to innovate. Cover would need to be based on asset values of appointments taken in a given period and levels of cover would need to reflect at least those under the standard regime (including provision for interest, investigation and parallel costs).

Question 33. Should the option of a Global Bond, where the distinction between GPS and insolvency estate specific cover (SPS) is removed, be provided for? If so, who would benefit from such a product and can you foresee any disadvantages?

Transparency

Currently, an Insolvency Practitioner is only required to disclose the level of bonding on an estate to creditors when an application is made to inspect the cover schedule that relates to it. Many creditors are unlikely to be aware of the bonding regime and therefore of their right to view the cover schedules, meaning the current process lacks transparency.

Proposal

As creditors are the ones at risk if an estate is bonded for less than the total value of assets, the Government proposes that the level of cover obtained should be declared to creditors as part of the initial report they receive summarising the assets and liabilities of the insolvent estate. Any changes to the level of cover should duly be reported in a similar manner as and when progress reports are issued. Doing so would ensure that this important protection is brought to creditors’ attention and can be queried if they have any concerns. Providing this additional level of scrutiny may also improve an Insolvency Practitioner’s compliance with the requirement to obtain and maintain the appropriate level of cover specific for each insolvency estate.

Note: Progress reports are required to be sent to creditors to keep them informed of the progress of the insolvency. The content of a progress report is defined in legislation, e.g., rule 18.3 The Insolvency (England and Wales) Rules 2016

Question 34. Would adding a requirement for Insolvency Practitioners to declare the level of cover specific to that estate as part of the initial report to creditors be helpful information for creditors? If so, should any changes to the level of cover also be reported?

Risk and assurance

Sufficient cover

Currently Insolvency Practitioners are required to provide evidence to their RPBs that they have adequate PII cover and a valid enabling bond to remain authorised. The RPBs receive details of the specific cover taken out for each insolvency estate on a regular basis (usually monthly), in the form of cover schedules. The cover schedules provide useful intelligence for RPBs about an Insolvency Practitioner’s caseload and compliance with the requirements of the bonding regime. The RPBs also conduct monitoring visits during which they can check if the levels of cover are adequate.

Although Insolvency Practitioners are monitored for compliance with the bonding requirements, there are instances where bond claims are not possible and/or are restricted due to insufficient levels of cover. This can either be by bonding for less than the value of the assets or by not obtaining any specific cover for a particular insolvency estate.

Stakeholders have also raised a similar issue regarding PII policies. As these policies are usually “claims made” products, if an Insolvency Practitioner fails to make the premium payments the cover lapses and no further claims can be made.

Stakeholders have said that once an RPB commences disciplinary action the risk of an Insolvency Practitioner not arranging cover on new appointments (and failing to keep PII premiums up to date) increases significantly. Some bonds allow for the relevant RPB to step in and request that cover is maintained whilst an Insolvency Practitioner’s continued authorisation to practice is considered.

Proposal

Where an RPB takes action which may foreseeably result in the eventual revocation of an Insolvency Practitioner’s authorisation, the RPB should ensure bond cover is in place for all of the Insolvency Practitioner’s current appointments. This may on a rare occasion lead to the RPB paying bond premiums for a short time if the Insolvency Practitioner does not, or is unable to, do so. Any premiums the RPB did pay would be reimbursed from the insolvent estate in accordance with existing priorities as an expense. Some bonds already include provisions which enable a bond to be renewed at the request of a RPB while they consider the Insolvency Practitioner’s authorisation.

Where it is not possible for the RPB to ensure that cover is in place, they should take action to protect the insolvency estates, including seeking the removal of the Insolvency Practitioner from office.

Question 35. Where a regulator takes action which may foreseeably result in revocation of an Insolvency Practitioner’s authorisation, should the regulator have a duty to ensure that the Insolvency Practitioner’s bond cover is maintained at a sufficient level, until such point as the action has concluded and either the practitioner is deemed fit to continue practising, their authorisation revoked and/or a successor practitioner appointed to their cases?

Bond claims best practice protocol

A draft bond claims best practice protocol has been developed with key stakeholders in the bond claims process. The aim of the protocol is to address concerns about the lack of engagement between the bond providers, regulators and successor Insolvency Practitioners. It clarifies the duties and responsibilities of all parties throughout the claims process and sets timeframes for action by all parties. It aims to reduce perceived conflict, limit lengthy disputes and reduce costs, thereby benefiting creditors by ensuring they receive more of the proceeds of the bond claim.

The protocol is intended to be a voluntary agreement between the parties involved. We hope that its introduction will guide successor Insolvency Practitioners, particularly those who are unfamiliar with the claims process. It is accepted that some deviations may occur, as every claim will have different features, and we will work to ensure the protocol remains fit for purpose and is used by all parties involved in the process. The protocol requires any significant deviations from it to be brought to the attention of the Secretary of State, allowing an overview of its effectiveness to be monitored.

The protocol will shortly be introduced on a formal basis. A Dear IP letter will be published to announce its introduction.

Security requirements for special managers

Following recent appointments of special managers on a number of large complex compulsory liquidations, this section explores whether the rules relating to security requirements (in England and Wales) for special managers remain fit for purpose.

The role of a special manager is to assist the liquidator or trustee in managing the business or property of an insolvent person or company. Special managers are appointed by the court on application by the officeholder. The special manager will generally be someone with managerial or commercial expertise that the office-holder might not have. They do not need to be an Insolvency Practitioner. Their powers are determined by the court and can include powers exercisable by the office-holder.

The appointment of a special manager is not a frequent occurrence, though recently there have been a number of high-profile cases where Insolvency Practitioners have been appointed as special managers to assist the Official Receiver as liquidator in order to provide additional specialist resource at short notice. In the cases of Carillion, British Steel and Thomas Cook, Insolvency Practitioners were employed as special managers to assist the Official Receiver with the management of the affairs, business and property of these companies.

An example of where someone other than an Insolvency Practitioner may be required as a special manager would be where a specific individual has particular knowledge and skills necessary for the orderly winding down of a business. For example, this could be an existing director of an insolvent farming enterprise, with livestock that need to be cared for before sale.

The appointment of a special manager does not take effect until the individual appointed has given security to the liquidator or trustee for the appointment. The amount of the security must not be less than the value of the business or property in relation to which the special manager is appointed. In the example given above, a cash sum deposited with the liquidator to the value of the livestock may be sufficient security.

Note: Insolvency (England and Wales) Rules 2016 set out the requirements for security a special manager must supply in rule 5.18 for members voluntary liquidation, rule 6.38 for creditors voluntary liquidation, rule 7.94 for compulsory liquidation and rule 10.95 for bankruptcy.

The purpose of the security is to ensure the value of the insolvent estate and the interests of creditors are protected. The Insolvency (England and Wales) Rules 2016 do not specify or limit the risks to be covered as the regulations do for insolvency office-holders (i.e. for fraud or dishonesty). The determination of whether the security provided is sufficient is the decision of the court and the office-holder.

Security requirements where the special manager is an Insolvency Practitioner

The statutory requirements for surety bonds set out above only apply when the Insolvency Practitioner is “acting as an insolvency practitioner”. This term is defined in s.388 Insolvency Act 1986. It does not include acting as a special manager.

Recently, where Insolvency Practitioners have been appointed as special managers for compulsory liquidations, both the Official Receiver and the court have accepted a surety bond as adequate security for the Insolvency Practitioner’s appointment. As explained above, a surety bond is subject to a limit of £5 million and only protects against the fraud or dishonesty of the officeholder.

In the case of British Steel Ltd the Official Receiver and the court determined that although the company’s total asset value significantly exceeded £5 million, taking into account the value of secured creditors the net value was below £5 million and therefore they were satisfied that the surety bond provided sufficient security. In circumstances where the net value of assets exceeds £5 million, a surety bond may not provide sufficient security. The same issue may arise where an Insolvency Practitioner is appointed insolvency office holder in a high value case. In these circumstances, stakeholder feedback received indicates that the current maximum SPS cover set in the regulations is sufficient as a safeguard for creditors.

Question 36. Where an Insolvency Practitioner is appointed as special manager, does a surety bond provide sufficient security? If not, please explain why.

Question 37.Are the current rules requiring security for special managers fit for purpose (taking into account that they apply to all persons appointed special manager, including those who are not Insolvency Practitioners)? If not, what changes should be made?

Future development of bonding and security arrangements

The proposed changes to bonding arrangements are only part of this wider consultation on insolvency regulation. The introduction of a single regulator for the insolvency profession would remove the current regulatory role of RPBs and the requirement for Insolvency Practitioners to be a member of a professional body. If created, a single regulator would take a consistent approach to security arrangements across the Insolvency Practitioner sector. Any future changes to the regulatory regime will take time to develop and will require primary legislation. The Government believes that the proposed changes to the current bonding arrangements set out above are needed now and could be introduced through secondary legislation in the interim.

Question 38. Do you agree that the proposed changes to the current requirements for bonding should be made now pending any more significant changes to the regulatory regime?

The prospect of regulatory reform for the insolvency profession presents an opportunity to consider whether the existing bonding regime should be replaced. With that in mind, this consultation seeks some views on how creditors could be protected from malpractice by Insolvency Practitioners under a revised regulatory framework. These are in addition to the broader questions in Chapter 8 of the consultation document on a compensation scheme and whether there should be a levy to create a single fund to cover payment in the event of any loss to an insolvency estate.

Question 39. Considering the changes proposed to the bonding regime above, would the introduction of a single regulator present opportunities for more fundamental reform of the bonding regime? If so, please give reasons for your answers including any suggestions you may have on a proposed reform.

International comparisons

International jurisdictions take differing approaches in this area. We examined the way Australia, Canada, Ireland, Singapore and the USA tackle this issue. All jurisdictions require some form of professional indemnity insurance (PII) for Insolvency Practitioners to practise. Currently in the UK, the holding of appropriate PII is not a statutory requirement for Insolvency Practitioners but is mandated by the RPBs for their members.

The USA operates a bonding regime which is more varied in its approach than that in the UK and allows for the following:

• Individual case bonds covering a single case for an individual trustee
• Blanket bonds which cover multiple trustees, including set limits on cover for a single case and prorated cost for trustees based on their share of the coverage required
• Schedule bonds covering all trustees of a certain region or group. The premium paid by each individual trustee depends on the coverage required, which is based on the funds held on deposit by the trustee, plus a cushion. These bonds include a per-case cap so may require additional individual case bonds for large cases
• Aggregate bonds cover all trustees named under the bond equal to the face amount of the bond. There is no per-trustee limitation as under a schedule bond

The US Trustee is a statutory office-holder with oversight of office-holders (trustees) appointed under the Bankruptcy Code. The US Trustee is also under a duty to ensure that each trustee is sufficiently bonded. This puts the US Trustee in a better position to negotiate terms with bond providers in respect of bonds covering multiple trustees.

Several jurisdictions (Australia, Canada, USA) require fidelity insurance for office-holders. Fidelity insurance covers losses that arise from the fraud and dishonesty of employees and can sometimes form part of a wider ‘corporate crime’ insurance policy. Fidelity insurance would also cover the fraud and dishonesty of an Insolvency Practitioner if that Insolvency Practitioner were an employee of the firm holding the policy.

Several jurisdictions (Australia, Ireland, Singapore) do not require security to cover the fraud or dishonesty of an Insolvency Practitioner. Australia provides that fidelity insurance may cover an Insolvency Practitioner if they are an employee of a firm with an appropriate fidelity policy, but there is no requirement for cover of a sole Insolvency Practitioner acting alone. Singapore has no requirement for insurance cover or other security beyond PII.

What is considered adequate and appropriate insurance cover varies; the USA and Canada require insurance at least to the value of the estate. Ireland sets down minimum amounts at a statutory level, with regulatory bodies having their own requirements for members. Australia and Ireland explicitly state that insurance is not intended to cover all possible claims against an insolvency office-holder. Australia does not provide minimum insurance amounts for personal insolvency cases. For corporate insolvencies minimum cover levels are determined either by annual fee income or by the highest fees charged for a single case in the past year.

In the UK, there is stakeholder concern that bond premiums for Insolvency Practitioners in smaller firms can be significantly higher than those of practitioners in larger firms, in some cases disproportionately so.

The bond providers have indicated that the premium payable for each insolvency estate is calculated taking account of a variety of factors, including the value of the assets, the external compliance and control measures which the Insolvency practitioner has in place, and the assessed risk of the practitioner.

Question 40. Is the current balance in the UK between protection of creditors’ interests and cost to the insolvency profession the right one? If not, how might this be addressed?

Extension of a compensation scheme to cover dishonesty and fraud

We are keen to explore whether the introduction of a scheme for compensation as mentioned in Chapter 8 could be extended to include arrangements for the recovery of all losses to insolvency estates. In other words, whether there should be a single scheme which would cover compensation, and which would replace the current requirements for Insolvency Practitioners to have specific insurance (or bonding) to cover dishonesty and fraud. The scheme would also incorporate firms offering insolvency services and could be funded by a levy paid for by the insolvency profession.

The 2016 Call for Evidence on the review of bonding arrangements for Insolvency Practitioners asked whether a fund similar to that covering fraud and dishonesty in the legal profession (the SRA Compensation Fund) would work in the insolvency profession. At the time all respondents agreed that such a model would not be practical for the insolvency profession given the size of the insolvency profession and the costs of establishing and maintaining such a fund.

There are, however, some in the insolvency profession who have suggested that a central fund would be a viable option to replace existing insurance requirements for Insolvency Practitioners to cover losses to creditors as a result of dishonesty and fraud. In the context of the wider proposals for reform of the regulatory framework, the Government thinks it is timely to consider whether the proposal for a levy-funded scheme is worth exploring. The intention would be that the scheme would cover modest compensation for undue anxiety and distress, compensation for an error or omission causing financial loss, and compensation for losses caused by dishonesty or fraud. Introduction of such a scheme would require further detailed consultation with stakeholders.

Question 41. Do you think that a levy-funded scheme should replace the existing bonding regime, and cover not only acts of fraud or dishonesty by an Insolvency Practitioner but also a broader compensation regime? Please explain your answer.

Annex A

List of consultation questions

Proposals for reform of insolvency regulation

Question 1. What are your views on the Government taking on the role of single regulator for the insolvency profession?

Question 2. Do you think this would achieve the objective of strengthening the insolvency regime and give those impacted by insolvency proceedings confidence in the regulatory regime?

Question 3. Do you consider the proposed objectives would provide a suitable overarching framework for the new government regulator or do you have any other suggestions? Please explain your answer.

Question 4. Do you consider these to be the correct functions for the regulator in respect of Insolvency Practitioners and in respect of firms offering insolvency services? Please explain your answer.

Question 5. Are there any other functions for which you consider the regulator would require powers? Please explain your answer.

Question 6. Do you agree that the single regulator should have responsibility for setting standards for the insolvency profession? Please explain your answer.

Question 7. Do you agree that it would help to improve consistency and increase public confidence if the function of investigation of complaints was carried out directly by the single regulator? Please explain your answer.

Question 8. What are your views of the proposed disciplinary and enforcement process and the scope to challenge the decision of the regulator? Please provide reasons to support your answer.

Question 9. Are there any other functions which you think should be carried out directly by the single regulator? Please explain your answer.

Question 10. In your view should the specified functions be capable of being delegated to other bodies to carry out on behalf of the single regulator? Please explain your answer.

Question 11. Are there any other functions that you think should be capable of being delegated to other bodies to carry out on behalf of the single regulator? Please explain your answer.

Question 12. In your opinion would the introduction of the statutory regulation of firms help to improve professional standards and stamp out abuses by making firms accountable, alongside insolvency practitioners? Please explain your answer.

Question 13. The Government believes that all firms offering insolvency services should be authorised and meet certain minimum regulatory requirements, but that additional regulatory requirements should mainly be targeted at firms which have the potential to cause most damage to the insolvency market. What is your view? Please explain your answer.

Question 14. In your view should certain firms be subject to an additional requirements regime before they can offer insolvency services? If so, what sort of firms do you think should be subject to an additional requirements regime? Please explain your answer.

Question 15. Do you think that regulation of firms should require a firm subject to an additional requirements regime to nominate a senior responsible person for ensuring that the firm meets the required standards for firm regulation? Please explain your answer.

Question 16. If so, would you envisage that the senior responsible person would be an Insolvency Practitioner? If not, please specify what requirements there should be for that role?

Question 17. Do you think that a single public register for Insolvency Practitioners and firms that offer insolvency services will provide greater transparency and confidence in the regulatory regime? Please explain your answer.

Question 18. What is your view on the regulator having a statutory power to direct an Insolvency Practitioner or firm, to pay compensation or otherwise make good loss or damage due to their acts or omissions? Please explain your answer.

Question 19. What is your view on the amount of compensation that the regulator could direct an Insolvency Practitioner or firm to pay for financial loss? Please explain your answer.

Question 20. Which option or options do you consider would be most suitable to fund a compensation scheme for the insolvency profession? Alternatively, do you have a suggestion on how a compensation scheme for the insolvency profession might be funded? Please explain your answer.

Question 21. Are there any further impacts (including social impacts) that you think need inclusion or further consideration in the Impact Assessment?

Question 22. What are you views on the above proposals for funding of insolvency regulation? Do you have any other suggestions for self-funding of regulation?

Proposals for reform of the current bonding arrangements

Question 23. Should the current minimum statutory requirements of a bond be extended as proposed to include the following (if you disagree, please explain your answer including any alternative proposal or any additional factors to be included):

1. An allowance for reasonable associated costs of a bond claim:
2. A period of run off cover that allows for claims to be submitted for a period after the Insolvency Practitioner has left office;
3. Interest to be claimable against a bond to be calculated on the amount of the loss from the date it was incurred (if so, which interest rate benchmark should the rate be tied to?);
4. GPS cover to be available for all of an office-holder’s appointments, including those where no SPS cover has been obtained.

Question 24. Would extending the statutory minimum requirements of bonds remove the need for Secretary of State approval of bond wording? What would be the possible impacts of this change?

Question 25. Should a minimum period of run-off cover be provided for in statute and should the period be 2 years? If not 2 years, what should it be? Do you see any disadvantages to applying a minimum period for run-off cover?

Question 26. Where a maximum indemnity period is applied by a bond provider:

1. should the maximum period an insolvency estate is covered be at least 6 years from the date of appointment?
2. should the Insolvency Practitioner be able to extend cover past the maximum period if they are still appointed on the case, with agreements from the bond provider?

Question 27. Should cancellation of cover due to non-payment of premium only be allowed where application for payment has been made and reasonable notice has been given to the Insolvency Practitioner and their regulator? If yes, what would be considered reasonable notice?

Question 28. Where a regulator has been notified that cover may be revoked due to non-payment of a premium, should the regulator be responsible for ensuring creditors of affected insolvency estates remain protected?

Question 29. The Government proposes to increase GPS cover to £750,000. Is this sufficient? If not please explain why.

Question 30. The minimum insolvency estate specific cover is currently £5,000. Government proposes this should be increased to £20,000. Would this level provide sufficient cover for small insolvency cases?

Question 31. Should the GPS be reformed to cover interest, investigation, parallel and bond claim costs of the successor Insolvency Practitioner?

Question 32. Should the specific cover obtained per insolvency estate be set at a higher level than the asset value to factor in interest, parallel and investigation costs and fees of a successor practitioner in bringing a claim? If so what percentage above the asset value is an appropriate amount, and why?

Question 33. Should the option of a Global Bond, where the distinction between GPS and insolvency estate specific cover (SPS) is removed, be provided for? If so, who would benefit from such a product and can you foresee any disadvantages?

Question 34. Would adding a requirement for Insolvency Practitioners to declare the level of cover specific to that estate as part of the initial report to creditors be helpful information for creditors? If so, should any changes to the level of cover also be reported?

Question 35. Where a regulator takes action which may foreseeably result in revocation of an Insolvency Practitioner’s authorisation, should the regulator have a duty to ensure that the Insolvency Practitioner’s bond cover is maintained at a sufficient level, until such point as the action has concluded and either the practitioner is deemed fit to continue practising, their authorisation revoked and/or a successor practitioner appointed to their cases?

Question 36. Where an Insolvency Practitioner is appointed as special manager, does a surety bond provide sufficient security? If not, please explain why.

Question 37. Are the current rules requiring security for special managers fit for purpose (taking into account that they apply to all persons appointed special manager, including those who are not Insolvency Practitioners)? If not, what changes should be made?

Question 38. Do you agree that the proposed changes to the current requirements for bonding should be made now pending more significant changes to the regulatory regime?

Question 39. Considering the changes proposed to the bonding regime above, would the introduction of a single regulator present opportunities for more fundamental reform of the bonding regime? If so, please give reasons for your answers including any suggestions you may have on a proposed reform.

Question 40. Is the current balance in the UK between protection of creditors’ interests and cost to the insolvency profession the right one? If not, how might this be addressed?

Question 41. Do you think that a levy funded scheme should replace the existing bonding regime, and cover not only acts of fraud or dishonesty by an Insolvency Practitioner but also a broader compensation regime? Please explain your answer.

Annex B

Details of Insolvency Service regulatory themed reviews and reports of oversight monitoring visits

Themed reviews

Insolvency Practitioner Regulation: Review of Complaints Handling – published 20 September 2016

Review of the monitoring and regulation of insolvency practitioners - published 26 September 2018

Reports of oversight monitoring visits

Insolvency Practitioners Association

The Insolvency Practitioners Association (IPA) – Monitoring Report 2020 - published 15 October 2020

The Insolvency Practitioners Association Monitoring Report - published 26 September 2019

IPA Monitoring Report 2016 - published 10 August 2016

Institute of Charted Accountants England and Wales

Report on the Institute of Chartered Accountants in England & Wales complaints handling process – published 25 June 2021

Report on the Institute of Chartered Accountants in England & Wales complaints handling process – published in September 2019 and last updated 16 July 2020

Report on the Institute of Chartered Accountants in England & Wales: Monitoring and Authorisation of Insolvency Practitioners - Published 16 July 2020

Monitoring of Insolvency Practitioner Authorising Bodies: ICAEW Report 2015 – published 11 June 2015

Association of Certified Chartered Accountants

Association of Chartered Certified Accountants Follow-up Targeted Monitoring Report 2017 – published 19 July 2017

Association of Chartered Certified Accountants Targeted Monitoring Report 2016 – published 25 August 2016

ACCA Follow-up Monitoring Report 2016 – published 25 August 2016

ACCA Follow-up Monitoring Report Final - Published 5 October 2015

Association of Chartered Certified Accountants monitoring report - Published 26 February 2015

Institute of Chartered Accountants Scotland

Monitoring Report on the Institute of Chartered Accountants of Scotland published 25 September 2020

ICAS Monitoring Report 2015 – published 16 July 2015

Chartered Accountants Ireland

Chartered Accountants Ireland (CAI) Monitoring Report 2021 – published 13 August 2021

The Institute of Chartered Accountants in Ireland CARB Monitoring Report - published in December 2015

Annex C

Summary of responses to the Call for Evidence - Regulation of Insolvency Practitioners: Review of current regulatory landscape

The Call for Evidence on the regulation of insolvency practitioners ran from 12 July 2019 to 4 October 2019. There were 88 responses from a range of stakeholders (see Annex D). This figure can be broken down into the following categories of respondent:

Insolvency Practitioner	32
Recognised Professional Body (RPB)	5
Trade body	4
Creditor Organisation	2
Creditor affected by financial failure	7
Individual subject to insolvency proceedings	1
Company subject to insolvency proceedings	1
Government Department	2
Other organisations including charities	26
Other individuals	8

The following sections provide a high-level overview of the key or notable themes identified and concerns raised in narrative responses.

A) The Regulatory Objectives

Statutory regulatory objectives introduced by the Small Business, Enterprise and Employment Act 2015 set out the factors that the Recognised Professional Bodies (RPBs) must consider when authorising and regulating Insolvency Practitioners. Under the regulatory objectives, RPBs are required to act in the way they consider most appropriate for achieving the following:

• having a system of regulating insolvency practitioners that secures fair treatment for people affected by their acts, is transparent, accountable, proportionate, and ensures consistent outcomes

• encouraging an independent and competitive insolvency practitioner profession whose members provide high quality services at a fair and reasonable cost, act transparently and with integrity, and consider the interests of all creditors in any particular case

• promoting the maximisation of, and promptness of returns to, creditors

• protecting and promoting the public interest

These regulatory objectives were designed to promote greater confidence in the regulatory framework through the fundamental principles of transparency, accountability, proportionality and consistency. The questions in the Call for Evidence were divided into three parts. The first sought views on whether the regulatory objectives have been effective in achieving their aims, requesting specific examples of good and bad practice across a number of areas including complaint handling, misconduct and redress and returns to creditors. The second part covered overall confidence in the regulatory regime. The third part discussed the possible creation of a single regulator and the potential for firm regulation.

Summary of responses – Questions 1 to 4

Question 1. Do you think Recognised Professional Bodies (RPBs) investigate complaints about insolvency practitioners in a way that is fair, and delivers consistent outcomes for all parties? Please share examples of good and bad practice.

Question 2. What level of confidence do you have that RPBs will deal with insolvency practitioner misconduct swiftly and impartially, using the full range of available sanctions set out in the Common Sanctions Guidance?

Question 3. Do you believe the sanctions that the RPBs can currently apply are adequate and sufficient to provide fair and reasonable redress when a complaint is upheld? If not, what sanctions do you believe an RPB should be able to apply?

Question 4. What evidence is there to demonstrate that RPBs collaborate to ensure there is consistency in monitoring and enforcement outcomes?

Complaint handling and sanctions

Some respondents commented that there was poor communication (an absence of regulator updates) between the complainant or Insolvency Practitioner and the RPB regarding the progression of complaints. One respondent noted “We have one client who has not heard from their RPB about a complaint for over a year.” Another respondent provided an example of how their organisation was asked by a complainant for advice on taking forward a complaint against an Insolvency Practitioner in December 2018. The respondent cited: “We advised them that the correct thing to do was to use the Complaints Gateway, which they did, and the complaint was then directed towards the RPB. At the time of writing, in October 2019, the only response they’ve had from the RPB is to confirm that they are ‘awaiting further information from the firm’.

Another concern raised by respondents in relation to complaints was that there is a considerable delay in the RPBs investigating and eventually concluding a complaint. Some RPBs stressed that the speed with which complaints are dealt with can be affected by a number of factors including, for example, ongoing litigation between parties or for any appeals process to be exhausted.

Regarding the sanctions applied by the RPBs, a number of responses suggested an effective deterrence to poor practice was the reputational damage a published sanction may bring. However, some respondents remarked that the name of the Insolvency Practitioner’s firm as well as the individual practitioner was not consistently published. A few respondents stated that it is often the same practitioners who are being sanctioned which indicates that the current level of sanctions being laid down are not acting as a deterrent. In respect of one Insolvency Practitioner a respondent noted that they had been “reprimanded and fined five times since December 2017, but at no time has action been taken to suspend their licence to practice, no compensation orders have been made and no information has been published to give assurance to clients that the [Insolvency Practitioner’s] performance will be subject to any additional scrutiny or monitoring.” Other respondents were also of the view that a suspension or removal of an Insolvency Practitioner’s licence was unlikely to occur and that the level of fines handed down were not always proportionate to the conduct reported.

Misconduct and redress

The Call for Evidence asked respondents whether they considered the sanctions that RPBs can apply are adequate and sufficient to provide fair and reasonable redress when a complaint is upheld. Some respondents felt the current system was unsatisfactory with respect to redress. Some suggested that a compensation scheme similar to the Financial Ombudsman Scheme (FOS) should be set up in the insolvency sector to provide fair outcomes for consumers. Some respondents stated that the lack of a compensation mechanism may disincentivise some complainants and suggested this may provide an explanation for the low number of complaints received.

Respondents emphasised that where poor advice was provided in relation to an Individual Voluntary Arrangement (IVA) (A statutory personal insolvency debt solution, whereby a debtor reaches agreement with their creditors to repay part of what they owe) by a provider who is regulated by the Financial Conduct Authority (FCA), the consumer was able to complain to the FOS and obtain compensation. However, where that poor advice was provided by an Insolvency Practitioner, there was no possibility of compensation through sanctions imposed on an Insolvency Practitioner by the RPB. Many respondents highlighted this disparity between the insolvency sphere and most other financial and professional sectors where redress is more readily available.

Insolvency Practitioners, while acting as office-holders, are exempt from FCA authorisation under the Financial Services and Markets Act 2000 (Exemption) Order 2001. An Insolvency Practitioner who is not authorised by the FCA, if not acting as an office-holder, can only advise consumers if they are doing so “in reasonable contemplation” of an appointment. Several respondents suggested that the removal of the exemption could lead to a more harmonised approach where debtors are better protected in the event of poor practice.

A minority of respondents stressed that the introduction of redress could have an impact on competition. A large accountancy firm felt that small practices may be less willing to accept cases where the general public are unsecured creditors and likely to complain about perceived failings. In this regard, some respondents including R3 expressed concerns that a compensation scheme could create a financial incentive for people to make complaints against Insolvency Practitioners.

Consistency of disciplinary outcomes

Some respondents cited the introduction of the Common Sanctions Guidance as enabling a greater level of consistency in outcomes from investigated complaints across those RPBs, including the level of sanction, and the impact of the sanctions through publicity. However, several respondents commented that they did not feel that the manner in which the RPB’s handle complaints delivered consistent outcomes.

In response to whether the RPBs ensure there is consistency of outcomes, R3 noted that there is a perception amongst their members that different regulators take different approaches to the enforcement of the same rules. A few respondents also observed a significant difference in outcomes between RPBs regarding complaints, but this could be attributed to a number of factors. A creditor organisation stated that certain members felt that some RPBs are more stringent than others in their application of the common sanctions and that this lack of consistency discourages them from making complaints.

The RPBs and some other respondents cited the meeting of the Joint Insolvency Committee (JIC) and the quarterly meetings of Inspectors of all RPBs as evidence of collaboration between RPBs. On this issue, one respondent remarked that information sharing is limited to published outcomes and typically takes place after the outcome has been determined. A few respondents were of the view that an absence of prescribed and formal rules around collaboration was a problem that resulted in inconsistencies and led to unfairness for practitioners. Many respondents stated that they were unable to comment on whether there was evidence of collaboration between RPBs due to a lack of visibility and transparency on what is discussed and when, and what the outcomes of those discussions are.

Summary of responses - Questions 5 to 7

Question 5. Are RPBs doing enough to promote an independent and competitive insolvency practitioner profession that considers the interests of all creditors? Please share examples of good and bad practice.

Question 6. In what ways have the RPBs used the introduction of regulatory objectives to improve professional standards within the insolvency profession?

Question 7. When dealing with insolvency practitioner conduct, how transparent are RPBs in their decision making?

Independence and Transparency

Several respondents expressed concern that the current system lacks independence, with some querying whether the RPBs could be truly impartial in regulating their own members.

The RPBs highlighted in their responses that the presence of lay members within their governance and decision-making structures helped to ensure impartiality within the system. However, some responses commented that repeat offenders do not seem to face increasing sanctions, and new complaints against the same Insolvency Practitioner appear to be considered only on their own grounds.

Respondents stressed that when making decisions on disciplinary sanctions, RPBs should take more account of past offences, which would deter re-offending. The lack of detail in relation to how disciplinary decisions have been reached and detail around published sanctions was raised by many respondents, including a number of creditor organisations.

Many respondents stated that they found it difficult to comment or could not comment on whether the RPBs were transparent and objective in their decision making due to (in their view) the limited information available regarding how RPBs investigate complaints. One respondent in the credit union sector stated that their members did not know that they could make complaints about Insolvency Practitioners, and those that did lacked knowledge of how to make a complaint.

Others stated that the RPBs do not publish enough information on their risk frameworks, their view of current and emerging risks, or their range of supervisory and other tools. It was also suggested by some that information published by RPBs on sanctions falls short in comparison to other regulators such as FCA. Many respondents thought that providing more detail would foster transparency and help to improve stakeholder confidence in the process. A number of responses also highlighted that RPBs could do more to reach out to creditors and creditor groups to explain how complaints can be made and how they come to their disciplinary decisions.

Professional standards

The majority of RPBs highlighted that they were compliant with the regulatory objectives prior to their introduction since there was already a regulatory framework in place. One RPB noted that they had used the objectives to support and extend their activities and cited the adoption of a risk profiling system as an example. The RPB’s response was supported by several Insolvency Practitioner firms. However, many respondents commented that they were not sufficiently aware of how the RPBs are using the introduction of regulatory objectives to improve professional standards. A minority of respondents stated that the RPBs had done little to improve standards within the profession since the objectives were introduced.

In relation to the standard setting process, several respondents queried whether members of the profession could maintain impartiality where they are directly involved in the drafting of standards which they may be called upon to apply in practice. Some respondents stressed that the standards by which Insolvency Practitioners providing IVAs operate are still developed largely by the industry itself, through the Joint Insolvency Committee and the IVA Protocol Standing Committee, and that this does not reassure consumers that their interests have been safeguarded.

Summary of responses - Questions 8 to 11

Question 8. Does the current system of regulation provide for the effective scrutiny of Insolvency Practitioner fees? If not, what improvements would you suggest?

Question 9. What are RPBs doing to promote the maximisation and promptness of returns to creditors? Please share examples of good and bad practice.

Question 10. Is there confidence that people who are in financial difficulty and wish to enter a statutory solution are routinely offered the best option for their circumstances?

Question 11. Are RPBs doing enough to promote the public interest and protect the public from harm? Please share examples of good and bad practice.

Fees and returns to creditors

RPBs currently have procedures in place, as part of their monitoring processes, to identify malpractice in the fees charged by Insolvency Practitioners. The regulatory objectives impose an explicit requirement for bodies to encourage their members to provide services at a fair and reasonable cost. Some respondents said that the requirement for fees to be “fair and reasonable” alongside the introduction of fee estimates and refinements to SIP 9 have provided for effective scrutiny of Insolvency Practitioner fees.

However, a number of respondents suggested that the regulatory objectives do not go far enough to protect consumers and creditors with regard to fees. Concerns were raised in relation to the charging of upfront fees when an IVA fails early. Respondents commented that this leaves little or no return to creditors and the debtor often in a worse financial position. A suggestion was made that the RPBs should publish an Insolvency Practitioner firm register which distinguishes between firms that charge up-front fees and firms that do not since this would provide greater transparency. Several respondents were supportive of the view that IVA firms should publish details of all fees on their websites. Since the Call for Evidence, a number of providers have now moved to a fixed fee model.

A few responses stated that there was no guidance on fees provided by the RPBs and respondents considered that this could lead to variation in interpretation and therefore unfairness for creditors. It should be noted that since the Call for Evidence an amended SIP 9 has been produced to provide guidance on fees, the primary principle of which is that fees should be fair, reasonable and proportionate. The RPBs have collaborated to issue guidance in respect of the amended SIP 9.

Some stakeholders felt that the Insolvency England and Wales Rules 2016 (decision making procedures) had made it more difficult for creditors to engage with the fee approval process. A creditor organisation suggested that if the initial fee estimate is exceeded, the RPBs should be mandated to carry out a full review to establish whether the fee was fair. Other respondents were of the view that creditors have a statutory role in the fee approval process and that, as such, the RPBs should not intervene.

Confidence that those in financial difficulty are routinely offered the best statutory solution for their circumstances

RPBs should ensure (through complaints handling, general monitoring activities and case investigations) that Insolvency Practitioners are providing impartial and accurate advice to debtors. Many respondents referred to poor advice being given in respect of IVAs/PTDs. The credit union sector provided evidence that debtors were being pushed into the most profitable route for the Insolvency Practitioner rather than what is in the best interests of the debtor. Other respondents including the debt advice sector stated that the consequences of entering an IVA, or of failing to keep up the payments in the IVA, were not adequately explained to the debtor and documentary evidence to show that appropriate advice had been given was lacking.

Several case examples were provided by organisations in the debt advice and charity sectors where individuals have entered into an IVA but where other debt solutions may have been more appropriate in the circumstances. Many respondents cited similar concerns and examples in Scotland where there has been a disproportionate increase in Protected Trust Deeds in comparison to the other debt solutions available.

Examples of bad practice given by one debt advice provider included situations where:

• “clients have been inappropriately placed into an IVA while on benefits
• clients have been escalated into an IVA because they have no funds to pay the £90.00 fee for a debt relief order (DRO)
• clients have been talked into making IVA applications by IP firms without being given full advice and information about all of their other options
• clients have been inappropriately placed into an IVA when they would have been eligible for a DRO
• clients are entering into repayment agreements at rates they can’t afford”

Several respondents expressed concern about lead generation activity on behalf of IVA providers. A creditor organisation stated “in excess of 80% of new IVA applicants are introduced to IVA Providers via Lead Generators who sit outside the scope of the current regulatory framework. Such organisations charge large introduction fees to IVA Providers and we have experienced numerous occasions where a consumer has been presented for an IVA by two different IP firms at the same time but with different proposed outcomes.”

Some respondents suggested that the “best” solution as an objective test was problematic as ultimately the decision is made by the debtor/consumer and they may be influenced by a number of factors.

Promotion of the public interest and protecting the public from harm

The regulatory objectives require the RPBs to protect and promote the public interest. One way this might be done is proactively to use intelligence received via complaints or otherwise to direct their activities towards any actions of Insolvency Practitioners likely to cause harm to the public interest. A number of respondents suggested that the RPBs could do more to protect the consumer/debtor from harm and adapt to the changing insolvency landscape, and that the current powers and remit of RPBs is inadequate for this purpose. For example, respondents expressed concern that the RPBs were unable to overturn the decision of an Insolvency Practitioner. Respondents noted that a consequence of this is that creditors’ and complainants’ confidence in the system is undermined, leading to a lack of engagement with the complaints process. Several respondents in the debt advice sector suggested the RPBs would be more effective if they had similar powers to the Financial Ombudsman Service.

One respondent pointed to the low level of complaints as indication that the RPBs were doing enough to protect the public. In contrast, other respondents cited that a low number of complaints was not necessarily an indication of a healthy market. It was suggested that IVA clients may often be unaware that they have grounds for a complaint or are too afraid to complain while their IVA is still ongoing in case it is cancelled as a result of the complaint. Some respondents suggested that complaint levels may be affected by a poorly communicated or overly complex complaints process.

B) Confidence in the regime

This section sought views on whether the regulatory objectives have helped to achieve higher levels of confidence in the regulatory regime.

Summary of responses to questions 12 to 15

On the scale of 1 to 5, to what extent do you agree with the following statements? (1 being strongly agree, 5 being strongly disagree)

Please provide an explanation for your score and supporting evidence if possible.

Question 12. “The regulatory objectives are fit for purpose”

Question 13. “The RPBs function in a way that delivers the regulatory objectives and this has increased confidence in the system”

Question 14. “There are matters of significant concern, which are currently affecting confidence in the regime, which are not addressed adequately by the regulatory objectives”

Question 15. “There is confidence that government oversight sufficiently holds the RPBs to account to deliver the regulatory objectives”

Not all respondents fully answered these questions. Some did not answer at all, some completed the scaling exercise and provided written comments or did not complete the scaling exercise and simply provided written comments. The majority of respondents that provided a response to question 12 (“are the regulatory objectives fit for purpose?”) considered that the regulatory objectives were fit for purpose but some queried whether they were being applied appropriately by the RPBs. A few respondents were of the view that the objectives were developed in 2015, and that they should be adapted and developed to accommodate the current insolvency landscape, particularly to account for the different activities Insolvency Practitioners undertake and the differing regulatory risks of those activities. One respondent commented that “although the regulatory objectives provide a high-level framework, it is not clear how these crystallise into a set of outcomes that would guide RPBs or allow them to be held to account.” Some respondents observed that the regulatory objectives are focussed on the interests of creditors at the expense of other parties including debtors. One respondent stated that the objectives and other guidance issued such as the Code of Ethics “do not create a clear duty to debtors, or help IPs reconcile their duties to debtors with their obligations to creditors.”

Responses to question 13 (“the RPBs function in a way that delivers the regulatory objectives and this has increased confidence in the system”) revealed a disparity between the insolvency sector and those providing not-for-profit debt advice. Some respondents (including R3, the RPBs and Insolvency Practitioners) considered that there had been an improvement in regulatory standards in recent years since the introduction of the objectives. Debt advice providers strongly disagreed that the RPBs had delivered the regulatory objectives in a way that increased confidence and raised concerns with the practices of high volume PTD/IVA providers. These respondents stated that there was less confidence in the regulatory regime because the current regulatory structure is not equipped to tackle developments in the market and that this broader issue would not be addressed by improvements in RPB performance.

With regard to question 14 (whether there were significant concerns not addressed adequately by the regulatory objectives), an organisation in the debt advice sector commented: “we have significant concerns in the sales funnel for IVAs at the start of the process but equally see consumer detriment at every stage. We see repeated problems where it is abundantly clear that no corrective action has taken place and we have no reassurance that the complaints we make to the IP firms are reported to the RPBs.”

Some respondents suggested that the rate at which IVAs are failing was an indication that IVA providers are not properly assessing the suitability of an IVA. Analysis conducted by the Insolvency Servicein 2018 was referenced concerning the number of IVAs that had failed within 1 to 2 years. The following significant concerns were cited by one respondent in the credit union sector but were echoed by many other respondents:

• “The escalating number of IVAs and PTDs is not being the [sic] subject to any scrutiny, because RPBs appear to be focusing on only individual complaints, and not the ‘bigger picture’.

• There is a clear and obvious conflict of interest in industry self-regulation.

• The Complaints Gateway does not have the profile, nor the powers, to adequately address the problems identified in this response.

• There is significant consumer detriment happening, particularly to people in vulnerable situations. Even where a complaint is upheld, there is not [sic] compensation being paid to those who been impacting by the wrongdoing.”

A number of respondents held the view that the scope of the current regulatory regime is too narrow to accommodate issues arising in the modern market and that this points to the need for additional regulatory measures to be put in place. One respondent noted that the RPBs are not able to regulate effectively those Insolvency Practitioners who are employed by the large volume companies in part due to “the conflicts between the IP’s professional requirements, and their contract with their employer” but also because large firms are also better resourced to undertake and defend against legal action.

There were mixed views in response to question 15 (“There is confidence that government oversight sufficiently holds the RPBs to account to deliver the regulatory objectives”). Many respondents considered that the powers gained by the Secretary of State in 2015 to sanction poor performance of RPBs, monitoring visits and reviews did provide a sufficient degree of oversight and challenge. A small number of respondents were of the view that Government’s approach as oversight regulator was perhaps too prescriptive and compliance-driven which may hinder RPBs from regulating effectively. Some responses (including but not limited to those in the debt advice and charity sectors) stated that they did not have confidence in Government’s oversight of the RPBs. One respondent noted that although oversight reports indicated areas where the RPBs needed to improve, it was not clear how improvements were monitored or ensured.

C) Single Regulator/Future regulatory framework

This section sought views on what the future regulatory framework could look like and Government’s role within any new regime. Question 16 of the Call for Evidence specifically referred to the reserve power within the Small Business, Enterprise and Employment Act 2015 (SBEE Act). This power provides for a single regulator to be a new body established by regulations, or an existing body (including, for example, an existing RPB or a body outside the insolvency profession). The SBEE Act power does not allow for the single regulator to be a government body. The questions in this section of the Call for Evidence were framed in an open way, inviting suggestions for alternatives that would ensure confidence in the profession, and consequently a wide range of responses were received.

Summary of responses to questions 16-18

Question 16. Does the reserve power provide sufficient flexibility in the options for a single regulator? If so, which option would most effectively deliver the regulatory objectives?

Question 17. Should government look to create a different type of regulatory framework that better suits the current insolvency system (for example firm regulation in certain sectors)? If so, what type of framework would best deliver improvements to public confidence?

Question 18. Should government have a role within any new or improved regulatory framework?

Question 19. How might any future single regulator, or alternative framework, be funded?

A Single Regulator

Just over half of stakeholders who responded to the Call for Evidence opposed the creation of a single regulator and responses tended to run along expected lines. The RPBs, Chartered Institute of Credit Management, R3 and many insolvency practitioners argued that a single regulator would not in itself improve the regulatory regime but would create upheaval at a sensitive time for the UK economy, and that the current system encourages competition and respects diversity within the insolvency framework. There were also concerns that a single regulator would be expensive to set up, with comparisons to the cost of setting up the Office for Professional Body Anti-Money Laundering Supervision (OPBAS). Some respondents commented that the extra cost of setting up and running a new body whose sole purpose would be the regulation of Insolvency Practitioners would eventually filter down to the insolvent estate and therefore to creditors.

Respondents from the insolvency profession argued that a single regulator would impose a substantial financial burden on what is a relatively small profession if Insolvency Practitioners were required to self-fund a new regulatory body. Respondents highlighted that this could potentially mean that many small practices would be driven out of business as those with low value or a low number of cases may feel penalised and discouraged from continuing to act. Some respondents expressed concern that this would have the effect of reducing competition in the marketplace. Other respondents, including RPBs, commented that any change to the existing regime would need to ensure that professional expertise already in place would not be lost.

In contrast, creditor groups, credit unions and the non-profit debt advice sector were supportive of a single regulatory body in place of the current system of RPBs. Respondents argued that a single regulator would improve confidence in the impartiality and independence of the regulatory system, remove concerns around consistency and allow for economies of scale. Several respondents suggested that insolvency regulation should be transferred to the FCA to improve public confidence and highlighted what they regarded as its effectiveness in the debt advice space, including the merits of its investigatory and supervisory powers.

Many respondents considered that the reserve power did provide sufficient flexibility in the options for a single regulator in allowing for a new or existing body to undertake the role. Some considered that it was not sufficiently flexible as it did not appear to allow for the option of the role of single regulator to be taken on by the government.

Government’s role

In response to the question about Government’s role within any new regime of regulation, the majority of respondents suggested that Government should retain its existing oversight role. One respondent stated that there could be a potential conflict in the Government acting as regulator, since the UK and Scottish governments are themselves providers of insolvency services. Some stakeholders argued against extending Government’s current role and queried whether Government would have the skill set and depth of resources to act in a regulatory capacity.

Alternative regulatory framework

Responses regarding whether Government should look to create a different type of insolvency framework largely related to the current workings of the IVA and Protected Trust Deeds (PTD) (A statutory personal insolvency debt solution for Scottish residents, whereby a debtor enters into a legally-binding agreement with their creditors to repay part of what they owe) market. An Insolvency Practitioner acting in an IVA/PTD is personally appointed and they, rather than their employer, are responsible for the conduct of the case. Several respondents considered that the current regulatory framework is failing to tackle inappropriate practices at employer firms, with practitioners required to follow the practices, procedures and cultures of their employers, that may conflict with their personal professional obligations as an Insolvency Practitioner. Stakeholders highlighted that this is a particular problem in the IVA and PTD market. Some respondents commented that the regulatory framework for Insolvency Practitioners providing IVAs is not designed to deal with large volume providers and a high-risk financial product where the market is aimed at financially distressed consumers.

As a remedy to this problem, some respondents suggested that firms could be authorised alongside the individual Insolvency Practitioner for the IVA sector. This approach was strongly supported by, but not limited to, the credit union and debt advice sectors and some RPBs. An IVA provider firm acknowledged that public confidence in the insolvency market could be enhanced by the creation of a system of redress and compensation. A limited number of respondents expressed concern over the potential implications of adopting regulation by firm, citing the costs for small businesses, and that firm regulation should not replace individual licensing of Insolvency Practitioners.

In relation to how the regulation of firms might be funded, several respondents pointed to the merits of the FCA model, where an annual fee is paid by the firm according to the risks in their business which allows for the recognition of a firm’s size and the type(s) of business it conducts.

The Government is grateful for the responses provided by stakeholders and has considered these carefully in the process of drafting the current consultation.

Annex D

List of respondents to the Call for Evidence

Regulatory bodies

• Association of Chartered Certified Accountants (ACCA)

• Chartered Accountants Ireland (CAI)

• Financial Reporting Council (FRC)

• Insolvency Practitioners Association (IPA)

• Institute of Chartered Accountants in England and Wales (ICAEW)

• Institute of Chartered Accountants in Scotland (ICAS)

Accounting, advisory and insolvency firms

• Begbies Traynor

• Compliance on Call

• Creditfix

• Ernst & Young LLP

• Ernst & Young LLP - Restructuring

• Grant Thornton UK LLP

• IVA Watch Ltd

• KPMG Restructuring LLP

• The Debt Advisor Ltd inc the Business Debt Advisor

Credit unions

• ACE Credit Union Services

• Association of British Credit Unions Ltd

• Capital Credit Union

• Essex Savers Net Credit Union Ltd

• National Credit Union Forum

• No. 1 Copper Pot Credit Union

• Partners Credit Union Ltd

• Scottish League of Credit Unions

• Scotwest Credit Union

• UK Credit Unions Ltd

Debt advice providers and charities

• Citizens Advice

• Citizens Advice Scotland

• Debt Camel

• Money Advice Trust

• Shelter

• StepChange

Government, academia and statutory bodies

• Financial Services Consumer Panel

• HM Revenue & Customs

• Pension Protection Fund

• University of Aberdeen – Centre for Commercial Law

Trade and professional bodies

• British Property Federation

• Building Societies Association

• Chartered Institute of Credit Management (CICM)

• Joint Insolvency Committee (JIC)

• R3

Insolvency practitioners*

Individuals*

*the names of individuals, including individual creditors and insolvency practitioners, have not been included