Fee & regulatory reform: Insolvency Service inspired by FRC

A PROFESSION that benefits from the failure of others is always going to need extra regulation and strict controls, for perception’s sake as much as driving the highest governance.

In this vein, the Insolvency Service wants to introduce a fining system upon licensors, licensees; and cap insolvency fees – in a radical move away from the current norm. The service claims that its mooted changes would actually make it more in line with the way other regulators work, and that capping fees is to drive the insolvency industry towards efficiency – a message that, it appears, may have been lost in translation.

A two-part consultation was launched earlier this month, firstly looking at how the service can work more akin to the Financial Reporting Council, which oversees the reporting profession, and to focus purely on sanctions and reprimands; with the second part looking at how insolvency fees are calculated, and to consider capping them.

The regulation of the profession has been a bone of contention across insolvency for some time. Currently the Insolvency Service regulates licensors, but also issues licenses itself. Although the service is stepping away from this responsibility, its current form is viewed by many as confusing and contradictory.

This consultation seeks to change their role to that of a pure watchdog of the profession and, similar to the FRC, work to reprimand and sanction both the recognised professional bodies (RPBS) that licence practitioners, and the practitioners themselves.

However, this move has been criticised. The ICAEW, the largest RPB, has asked for evidence that this change is necessary.

Currently the service visits RPBs, which include ACCA and ICAS, to check the work of practitioners and its regulation of them. “We are inspected by the Insolvency Service every two to three years and no issues are raised,” says Vernon Soare, ICAEW’s head of policy. “What is the evidence for these new powers and how will it assist them in attaining a better deal for unsecured creditors?”

“It is unusual for an oversight regulator not to have significant powers,” says Anne Willcocks, head of external communications and policy at the Insolvency Service.

“We recognise the powers of the RPBs but the consultation suggests a suite of powers similar to the FRC,” she adds.

However, Soare suggests there is no evidence this is needed. The institute is now set to canvass members before officially responding to the consultation.

Meanwhile, Leonard Curtis partner Andrew Duncan is concerned about the burden it would place upon the service: “I can see the benefits of strengthening the regulatory regime and making it more consistent, but I am not convinced that passing the oversight to a government department that is already overstretched will be workable or lead to significant improvement in the way insolvency matters are handled.”

If it’s not broke, don’t fix it

The UK has the seventh most successful insolvency regime in the world, according to the latest World Bank ranking – ahead of the US, France and Germany. These proposals could jeopardise that ranking warns insolvency trade body, warns R3 vice-president Giles Frampton.

Frampton is most concerned with the fee-capping aspect of the consultation. In some circumstances fees should be fixed or based on assets realised, suggests the service. But this would only affect cases where there is no creditor committee, explains Willcocks, such as Company Voluntary Liquidations (CVLs) and bankruptcies.

“We need to make sure that creditors are getting a fair deal and not losing out through excessive charges by practitioners. That is why an effective framework, which everyone has confidence in, is essential to a strong and efficient insolvency industry,” says Jenny Willott, business minister at the launch of the consultation.

One of the ambitions behind the idea to cap fees is to drive efficiency, explains Willcocks. According to Professor Elaine Kempson, who carried out a review of practitioner fees last year, there is no “single easy fix” in this situation to reduce fees in certain insolvencies.

The service believes that a cap could instigate a chain reaction similar to that of the Individual Voluntary Arrangement protocol, which capped IP fees in this process. Following its introduction the market slowly moved towards more efficient and faster turnaround methods – and subesquently IVA factories came into prominence.

“In IVAs, the IPs could see efficiencies and drive these through,” Willcocks said. She adds that one of the concerns raised by Kempson’s report was that IPs are not as efficient because there “are not enough incentives towards efficiency”.

However, it is argued that practitioners and factories were walking away from IVAs that were viable but not cost-effective – leaving the creditor and debtor at a loose end.

“Factories will look at cases on an economic ground,” says Soare. “If it is not going to provide a profit, then they won’t take it on from a commercial perspective,” he adds.

Curtis’ Duncan warns that fee caps will hit the smaller practitioners harder and act as a “disincentive” to IPs, which otherwise could have resulted in a recovery.
Vernon Soare says: “We could have scenarios where the fee set at the start is high to mitigate the risk of uncertainty.”

Sitting down together

All the parties want better creditor engagement, generally, in the insolvency process – so they understand the insolvency work being undertaken and can relate that to the fees they are being charged. For the service, this is a key aim of the consultation.

While Soare appreciates the service’s aim, he believes the consultation fails to address a key issue – the lack of funds available in many insolvencies. As such, fee-capping and tougher regulation will not address that.

The latest consultation is based on two reports, one by the Office of Fair Trading and one by Professor Elaine Kempson. Both have been heavily criticised for failing to truly understand the profession and how fees are calculated. Soare says the ICAEW was not visited by the OFT or Kempson.

Stakeholders have until 28 March to respond to the consultation.