Out-Law News | 22 Dec 2021 | 3:05 pm | 3 min. read
An overhaul of the way insolvency practice is regulated in Britain has been proposed by the UK government, including plans to bring businesses offering insolvency services within the scope of regulation for the first time.
Under the proposals, which are open to consultation until 25 March 2022, a single regulatory body sitting within the Insolvency Service would be responsible for regulating both insolvency practitioners and the businesses that offer insolvency services.
Currently, there is no firm-wide regulation of insolvency practice in Britain. Instead, four professional membership bodies share responsibility for the regulation of individual practitioners. The Insolvency Service serves as the oversight regulator under the existing regime.
UK business minister Lord Callanan said: “The way insolvency practitioners are regulated (as individuals) has not kept pace with changes in the way the insolvency market operates, with an increase in practitioners now working as an employee of a firm employing several insolvency practitioners, with little or no control over the firm’s governance. The current regime’s inability to tackle wrongdoing at firm level has created the potential for conflict between the interests of the firm and the statutory duties of the insolvency practitioner.”
“The current regime is also disproportionately complex, with four membership bodies and government all involved in regulating fewer than 1,600 individuals. This approach has created inherent weaknesses in the regulatory system, mitigating against common standards, consistency and effective disciplinary outcomes,” he said.
Andrew Robertson of Pinsent Masons, who specialises in transactional restructuring and formal insolvency matters, welcomed the plans for reform but warned about the potential implications of centralising regulatory powers within the Insolvency Service. The government recently extended the Insolvency Service’s powers to investigate and disqualify company directors who abuse the company dissolution process.
“The government proposals for tighter and more streamlined regulation of insolvency professionals have been in the offing for some time,” Robertson said. “Greater focus has been placed on the insolvency profession since large failings such as Carillion and BHS, which cost the government significant sums of money. This has been exacerbated further by the pandemic, which saw the Corporate Insolvency and Governance Act introduced quickly in June 2020 to protect businesses from insolvency and introduced new director led and debtor friendly processes, such as the restructuring plan and moratorium, which are designed to avoid formal insolvencies.”
“These new proposals seek to modernise the existing regulatory framework which has largely been in place since the Insolvency Act 1986 came into force. An overhaul of the regulations to bring them into the 21st century should be welcomed. However, the proposal to create a single regulatory body within the Insolvency Service, replacing the four current independent regulatory bodies, will be of concern to the industry generally,” he said.
“The Insolvency Service already works with government to set legislation in this area. It also takes formal appointments via the Official Receiver, effectively competing with the private sector for work. To implement proposals which allow the Insolvency Service to regulate the rest of the industry, whilst not itself being subject to the same level of scrutiny, raises legitimate questions as to whether or not this would centralise too much power within the Insolvency Service and create conflicts of interest in how it operates going forward,” Robertson said.
In its consultation paper, the government said that the new regulator would “have the power to carry out the full range of regulatory functions but would also have the power to delegate certain regulatory functions” to the existing professional membership bodies or other bodies.
The plans for reform also include proposals to establish a system of registration for insolvency practitioners and insolvency firms. A public register would list individuals and firms that meet the registration conditions, and, as well as providing details about their authorisation to act, the register would include details of sanctions imposed on practitioners and firms.
The Insolvency Service said: “Insolvency practitioners would have to be qualified to practise, meet requirements for training and hold requisite insurances. Similarly, firms would have to meet certain minimum threshold requirements before registration, which might include having their centre of main interest or registered office in Great Britain, being able to demonstrate their solvency and that they have sufficient qualified insolvency practitioners and administrative support staff to carry out the level of work undertaken.”
A new compensation scheme is also envisaged under the proposed reforms to account for cases where poor standards of service are delivered by an insolvency practitioner or firm. The government is consulting on plans to grant the new regulator the power to direct individual practitioners or firms to provide compensation “where an act or omission … has either had an adverse impact and/or caused some form of loss to a complainant”.
Further changes to the existing requirements on insolvency practitioners to hold bonds to cover losses in the event of fraud or dishonesty have also been set out in the government’s consultation paper.
The government said that the reforms it has proposed would require new legislation to be introduced. It has promised to further consult with the industry on any new regulatory model it intends to implement.
21 Dec 2021
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