Insolvency Reform

Joe Thompson

In September, the government published its response to its consultation taken in 2021 on the future of insolvency regulation, setting out a package of proposed reforms that, in their own words “represent the biggest change to the way the insolvency profession is regulated in nearly 40 years and future-proof the regulatory framework as the insolvency market continues to evolve”.

As formal regulation was first introduced in 1986, the insolvency sector has evolved considerably in that time, with larger, more complex firms emerging. The overall objective to the proposed reforms is to offer greater protections, transparency and economic confidence within the existing regulatory framework.

Kevin Hollinrake, Minister for Enterprise, Markets and Small Business has said:

“Our insolvency framework is rightly regarded as one of the best in the world: delivering economic confidence by supporting those in financial distress, tackling financial wrongdoing and maximising returns to creditors” but “there continue to be instances of poor conduct that have a direct impact on those closely involved, when that happens, it tarnishes the reputation of the whole profession, and undermines confidence.”

“This forward-looking package of reforms reaffirms the government’s commitment to ensuring the insolvency profession is effectively regulated, with a regulatory framework fit for the future. These reforms will deliver transformational improvements, modernise the regime, and, crucially, increase public confidence”.

There are several key points found in the response:

New rules requiring firms offering insolvency services to be regulated

Currently, only individual Insolvency Practitioners (IPs) are subject to regulation, so regulators cannot hold their firms accountable for failures when things go wrong.

Full authorisation and regulation procedures will be extended to firms in an effort to “close the gap in regulatory coverage and bringing insolvency regulation in line with other regulated and qualified professions” such as audit and legal services.

Firms who engage in offering insolvency services will become subject to appropriate regulation and scrutiny alongside the existing framework for regulating individual practitioners appointed in each case.

Reforms to introduce the creation of a public register

Listing all individuals and firms that are authorised to provide insolvency services and whether they are subject to sanctions by their regulator – “to strengthen transparency and better allow public to be able to make informed decisions”

No single independent regulator being introduced at this time.

There are currently four recognised professional bodies (RPBs) that currently regulate.

The four current UK RPBs are:

• the Insolvency Practitioners Association (IPA)
• the Institute of Chartered Accountants in England and Wales (ICAEW)
• Chartered Accountants Ireland (CAI)
• the Institute of Chartered Accountants of Scotland (ICAS)

For the time being Individual IPs will continue to have oversight of the profession. The government however, proposes to introduce a new legislative power to implement a single regulator should that prove necessary.

The need and options for introducing a single regulator will remain under review “to avoid large scale disruptive changes in the regulatory landscape”

Other smaller reforms that were considered and will be introduced following the consultation include:

Reform of the bonding scheme

IPs are currently required to take out  bonds on every case in which they are appointed, to provide a source of redress to cover losses suffered as a result of fraud or dishonesty committed by IPs.

These have not been substantively updated since 1986 and there have been calls for reform for some time. Minor amendments included increases in the monetary limits and statutory minimum requirements of bonds, with the Government advising to propose further reforms in due course.

Ethical and technical standards to be set by The Secretary of State

The Secretary of State will be given the overall responsibility to set ethical and technical standards for the insolvency profession, doing so in collaboration with experts from the sector and the RPBs.

New compensation and redress scheme

Further consultation to devise a new compensation and redress scheme For people affected by insolvency professionals’ mistakes or misconduct.

Although the Government says this is part of creating public confidence, natural concerns arise over the risk of unsubstantiated claims, ill-informed media coverage and the emergence of a PPI-style claims management industry placing a potentially unmanageable burden on smaller firms. The Government has committed to put forward further proposals in this area.

The reaction from the insolvency sector towards proposed reforms has been broadly welcome, but with some natural concerns expressed for avoiding unnecessary bureaucracy and costs, with more details of the final scheme needed to see how it would be implemented in practice.

While some of these measures can be introduced without new legislation, those that do require legislative change will be taken forward “when Parliamentary time allows” and following any further consultations that are appropriate.

Contact our Insolvency team.