MP calls for new insolvency regulator over ‘massive’ conflict of interests

The All Party Parliamentary Group (APPG) for Fair Business Banking, represented by Kevin Hollinrake MP, Conservative for Thirsk and Malton, has called for a shake-up of insolvency regulation after a series of misconduct cases centred around conflicts of interest between banks and insolvency practitioners.

BDO is currently in the middle of a negligence claim for £250m over their administration of One Blackfriars Limited. Deloitte was fined £1.8m by the Institute for Chartered Accountants England and Wales (ICAEW) in January 2020 for failings in its administration of Comet in 2012, while Lloyd’s Banking Group was ordered to reveal details of its insolvency agreement with BDO after the impartiality of BDO was alleged to have been undermined.

“Ultimately, it’s a failure of the regulatory framework, and that’s a failure of Parliament. We can’t change human nature, what you’ve got to do is put in place the checks and balances to make sure that we deal with human nature. That’s what we’ve got to do, and yet we haven’t,” says Hollinrake.

Using BDO as an example, Hollinrake says panel agreements likely include a stipulation that insolvency practitioners refuse to sue the bank.

“BDO has said quite clearly they’d never sue a bank… Ironically, they point to a conflict of interest in their refusal to ever sue a bank. Well, that is a massive conflict of interest in itself because that’s what they’re there to do, they’re there to look after the interests of all creditors, not just the banks.

“Even if it’s creditor misconduct, even if the banks are guilty of abuse, even if the banks are guilty of a business going into administration, they’ll never sue the bank.”

Accountancy Age has seen documents which show how in two separate cases, BDO employees vacated their role as administrators when it became apparent that the company in administration had the potential to pursue a claim against a bank. The reason for their departure in both cases was that BDO had a “perceived conflict of interest”.

Commenting on the allegations, a BDO spokesperson said: “Our insolvency practitioners are regulated by the relevant professional bodies and have full regard to their professional obligations, including the requirements of independence.”

Hollinrake argues that the insolvency sector has systemic problems it must overcome. On the one hand, insolvency practitioners are essentially self-regulated, while on the other, most of their work comes from the banks which creates what he calls an “unholy alliance” between banks and insolvency practitioners, he says.

“The people who oversee insolvency practitioners are their own members. And they’ve got a vested interest, you don’t bite the hand that feeds and all their work comes from banks.

“It’s an unholy alliance where you’ve got the banks and the insolvency practitioners basically in cahoots. I don’t think they all the time deliberately go out to defraud people, it’s just the system,” he adds.

The Fair Business Banking APPG is calling for panel agreements to be banned and for a new insolvency regulator to be put in place. Currently, argues Heather Buchanan, executive director, policy and strategy of the Fair Business Banking APPG, insolvency practitioners lack proper accountability.

“They have a spectacular amount of power and trust that’s held within that office, baked into their actual appointment, with no counterbalance for their behaviour. It means that were one so minded – and most people do things very well – but if you were to get somebody on the other side of that, you’ve got somebody that holds a great deal of power and power of the court, without really any proper accountability,” she says.

The best solution, the Fair Business Banking APPG argues, is for a regulator that acts similarly to an employment tribunal.

“The employment tribunal regulates 27 million employees in the UK. There is no employment regulator, but if you’re an employee and you have a problem with your employer, you go to the employment tribunal. Your employer knows that, it knows it’s open court so the press can get access to it, so that sunlight becomes a disinfectant to bad behaviour,” says Hollinrake.

“Abuse will always happen, but just make sure that people will always have an easy route to justice and that stops it in the first place.”

Hollinrake says panel agreements create an inherent problem. He says panel agreements are a commonplace method of commissioning third parties to do work which works without problems in most circumstances. However, when the third party (in this case the insolvency practitioner) is appointed to do work for a bank but then should act independently and in the interests of a number of creditors, a conflict of interest is quickly created, for example when the third party may have to sue the very bank that appointed them to carry out the work. Therefore, panel agreements are simply incompatible with the insolvency sector, Hollinrake argues.

“Ultimately, financial incentives drive bad behaviour,” says Hollinrake. “If I’m getting paid lots of money by a bank, and we’ve seen lots of cases where banks have told the insolvency practitioner what to say despite the fact they’re supposed to be working for all creditors, because I’m not going to get any work again if I don’t. It’s just bound to facilitate bad behaviour. Ultimately, this is about money and it is bound to lead to abuse of a financial opportunity.”