Regulator risks its reputation, insolvency profession warns

Insolvency has become a dirty word as far as commerce and even the general
public are concerned. The profession has found itself the target of public
uproar as the industry makes money for its rescue or recovery services.

Business minister Ian Lucas has called for pre-pack administrations to be
revised because of unfavourable public perception, while there has also been
numerous claims that fees charged by insolvency practitioners (IPs) are too
high.

The Insolvency Service, the regulator of the profession, has found itself
taking on extra duties to instil public confidence. But has it gone a step too
far?

Currently, IPs file pre-pack transparency reports directly to the Service,
yet they serve one of eight recognised professional bodies (RPBs). There are
concerns this situation causes confusion to the process, and interferes with
IPs. The Service should monitor the RPBs, not their individual members, some
advisers argue.

Chris Laughton, recovery and insolvency partner at Mercer & Hole, says
there should be a “tightening-up” of regulation. He believes it is important for
public perception that the industry is well managed – which can only be achieved
by the Service concentrating its efforts on regulating the RPBs, and not
interfering with the day-to-day practice of IPs.

“At the moment the Insolvency Service is stepping in on high profile issues
such as SIP 16, frankly it does not do anything for the Insolvency Service’s…
reputation,” he said.

The current approach by the Service seems inconsistent, according to John
Alexander, partner at CBW and head of corporate recovery and insolvency. “It is
up to the RPBs to monitor the performance of its members,” he said.
“It is not a matter for the Insolvency Service, they shouldn’t be getting into
that sort of detail.”

But Laughton and Alexander are not speaking for everyone in the profession.
Peter Burton, head of regulatory policy at the ICAEW, the largest RPB, disagrees
with them. Burton believes the transparency reports for pre-pack
administrations, known as SIP 16, affect all RPBs. So in theory to achieve an
overall picture of pre-packs and SIP 16s it is better to send them to a
centralised authority.

The service may have to answer these concerns sooner rather than later as the
Office of Fair Trading may recommend reducing the number of RPBs; separating the
regulatory and representative functions, which currently only affect the
Insolvency Service; and perhaps establishing a new regulator.

At the end of 2009, the OFT launched a market study into corporate insolvency
to bring greater clarity and to amend or introduce changes to the benefit of
public perception and the industry.

David Stallibrass, project director of the market research, said: “There is
no other profession, in the medical industry or law, where the ration of
regulators to people is so high.”

The Service declined to comment on changes to the way it regulates the
profession or the possible establishment of a new regulator.