Guidelines for the monitoring of volume individual voluntary arrangement providers
Each Recognised Professional Body (RPB) is required to monitor the insolvency practitioners (IPs) that it authorises. Firms, which may be corporate entities, dealing with large volumes of Individual Voluntary Arrangements (IVAs) or Protected Trust Deeds (PTDs) operate business models that differ considerably from the ‘traditional model’ associated with practices dealing with a variety of insolvency appointments. For the purposes of this guidance, a volume provider is defined as any firm that controls greater than 2% of the total market (including new and existing cases), or greater than 2% of new cases over a rolling three month period. This guidance has been issued by the Insolvency Service to ensure greater consistency in monitoring volume providers. It replaces previous guidance last issued in 2007. It is designed to assist the RPBs in demonstrating compliance with the Regulatory Objectives.
In applying this guidance, RPBs should take a risk-based approach and use continuous risk-assessment techniques to determine which providers, where the majority of IP appointments are IVAs or PTDs, should be visited at least annually. Indicatively, the Insolvency Service would expect annual, (or even more frequent monitoring visits) to firms falling within the definition above and to any firms that are rapidly expanding or where there has been a material change to the business activities of the firm.
Where an annual visit to providers falling within the above definition has not been carried out, RPBs should justify and record those decisions.
RPBs should respond appropriately, and in a timely manner, to any concerns about particular volume providers, business models and new developments in this sector.
RPBs should have regard to the different business structure of volume providers. The high volume of cases means that each IP will be dealing with a much higher number of debtors than a traditional insolvency practice. The parallel system of regulation for debt advice and the insolvency exclusion from authorisation by the Financial Conduct Authority requires close cooperation between RPBs and the FCA, in terms of advice provided by introducers and by IPs who are authorised by the FCA to minimise the perception of any regulatory gap.
RPBs are expected to report any IPs in firms authorised by the FCA, and any work referrers who are also FCA authorised, where concerns have been identified about the quality of advice provided by introducers.
In all cases, the RPBs and the Insolvency Service expect the IP to have full oversight and control over estate accounts, with adequate safeguard arrangements in place which should include appropriate financial controls and may include insurance.
RPB inspection teams need to assess whether both the volume provider and its staff have the necessary capabilities to properly supervise all cases.
Risk factors to be considered
The IP will not necessarily be the owner or an equity partner of the volume provider, and may have no direct control over the development or management of the business. In this situation, the RPB inspection team must establish, understand and document the contractual relationships between the provider and its IPs, and must review employment contracts or relevant terms of engagement.
Where the provider has other businesses, either providing services directly associated with the IVA (such as re-mortgaging facilities) or other forms of debt and debt management, the RPB inspection team must ensure it identifies the organisational structure, understands the relationship between the businesses and document this. Particular attention must be given to the way in which work is referred between the businesses, any payments of commissions or for work carried out, and whether Category 1 and Category 2 disbursements are being appropriately classified and disclosed.
With many cases being processed, a volume provider is likely to have a higher ratio of non-JIE qualified staff and of cases per IP than in a traditional insolvency practice. The RPB inspection team must understand the processes and procedures in place to supervise and monitor the work of all staff and satisfy itself of due oversight by the IP.
Where a volume provider has acquired a block of new cases, for example by purchasing an existing IVA/PTD book, the RPB inspection team must assess whether the IP has the necessary resources and experience to deal with the increased case load and that there are appropriate arrangements to deal with compatibility issues, such as IT systems.
Systems and controls
The RPB inspection team must consider the systems and controls in place within the business. This will form a more significant part of the monitoring process than in a traditional insolvency practice. The conduct and strategy of each visit is for the RPB to determine based on its risk assessment of the volume provider. Where an area is not proposed to be tested during a visit, this must be recorded in the pre-visit documentation:
- recruitment process and qualifications of all staff
- level of training provided - this could include obtaining copies of any training manuals available
- basis of remuneration - if remuneration is based on commission or bonuses, what safeguards are in place to ensure the link does not compromise the position of advice to the debtor
- discussions with members of staff
- use of time records in PTDs
Appropriate advice and work sources
- review of any contract or agreement between the volume provider and introducers including payments and terms
- appropriateness of advertising
- listening to a sample of recorded conversations between the volume provider and debtor when the debtor is being provided with advice
- the RPB inspection team should satisfy themselves that the IP has considered any previous advice given by an introducer before their involvement, and that the IP has confirmed that the debtor has received appropriate advice
- Reviewing internal compliance monitoring of sources of work/lead generators/introducers to ensure quality of advice
- consideration of any “script” used by the volume provider
- consideration of any computer-based decision tree
- consideration of the options that the volume provider offers to the debtor, and the level of knowledge and understanding of each of these options
- standard letters issued to debtors at various stages of the process
- verification process for information provided by the debtor
- use of management information statistics kept by the volume provider
- the extent to which additional products are offered to debtors
Decision making and any meeting of creditors
- consideration of information provided to creditors
- the system used to log proofs and proxies
- how the volume provider deals with modifications, ensuring the debtor has agreed to them, and that the IVA is still viable
Handling of complaints
- consideration of the complaints policy of the volume provider
- consideration of the number and nature of the complaints received in the past 12 months and how many of those have been satisfactorily resolved
- the extent to which the IP is involved or aware of the number and nature of complaints
- the cashiering function, including banking arrangements
- identification of non-compliance
- compliance with modifications
- annual reporting procedures
- review of Category 1 and Category 2 disbursements, any associated commissions through use of other businesses and appropriate disclosure and transparency in dealings with debtors and creditors.
- how husband/wife or inter-locking IVAs are dealt with
- dealing with property
- payment of dividends
- timely closure of cases – either through completion or failure
- how the volume provider deals with variations, ensuring the debtor has agreed to them, and that the IVA is still viable
The monitoring visit must include a detailed review of estate accounts and the procedures for access and authority for making payments. This must include, but is not limited to the following matters.
- Can monies be traced through any virtual or header account to ensure segregation from other monies?
- Is estate money adequately protected; for example, is the estate account not available for set-off and considered trust monies, and not in any way being used as collateral or leveraged in order to support other business activity within the firm?
- Can all of the estate monies be accounted for? This must be evidenced to the RPB inspection team.
- Has satisfactory evidence been provided of the reconciliation between any virtual estate account balances and the estate bank account statements?
- Do all IPs have satisfactory access to, and control of, the estate accounts; if not, are the safeguards satisfactory?
- What is the procedure for making payments e.g. remuneration, disbursements, dividends or any other expenses from the estate account? How many signatories are required and up to what limit?
- A review of any separate distribution accounts.
- How often are checks and audits of the estate accounts carried out by the IP or appropriately qualified contractors?
Monitoring records must evidence that an adequate review of the estate accounts has been carried out.
Claims Management Companies and PPI or other compensation
The majority of consumer IVAs will be affected by claims for PPI or other similar compensation. The RPB inspection team must review procedures for dealing with PPI or other similar compensation.
The RPB inspection team should review the contractual arrangements with any claims management companies employed by the volume provider, reviewing a copy of the terms of engagement or contract, and be satisfied that the procedures adopted by the claims management company result in the both debtor and creditors being treated in a fair and reasonable manner, including the level of fees charged, and that any investigations are carried out promptly in accordance with regulatory standards and any published guidance.
The RPB inspection team must understand and document whether there is any connection between the IP / volume provider and any claims management company and in the case of any connections must ensure adequate disclosure and compliance with the Insolvency Code of Ethics.
While the analysis of the business model, systems and controls is extremely important, case files must be examined to test whether those processes work in practice. The case sample size must be determined by, but not limited to:
- the risk profile of the volume provider,
- the extent of automation of systems and controls,
- the ratio of consumer to trading debtors,
- the proportion of proposals rejected and the failure rate As a minimum the case sample selected by the RPB inspection team should cover the following:
- a sample of new cases to ensure current systems are being adhered to
- a sample of older cases to ensure cases are progressing satisfactorily and that information contained within the annual reports are appropriate
- a sample of failed IVAs to assess whether they were viable and appropriate at the initial stage
- a sample of low income contribution IVAs (contributions between £50 and £100 per month) to assess whether they were viable and appropriate at the initial stage
- a sample of IVAs rejected by creditors following the issuing of the proposals to assess whether they were viable and appropriate at the initial stage
- a sample of recently closed cases
- a sample of cases where a period of more than six months has elapsed since the debtor’s final payment to assess the reasons for the case remaining open and whether the case is being adequately progressed Where sampling or any other intelligence identifies common or recurring potential breaches or deficiencies (e.g. breach of a particular SIP) the RPB inspection team must establish whether these are isolated incidents or indicative of systemic failings
Purchases of IVA books and caseloads
When acquiring cases in bulk from another IP or firm, a risk-based assessment must be carried out, and documented, by the RPB to determine whether the IP is properly able to supervise every additional appointment. Checks must include assurances that all relevant IT systems of purchased IVA books are fully integrated and accessible.