The Insolvency Service has proposed reforms to insolvency regulation in England, Wales and Scotland. Caroline Clark, director of RMCSC and a fellow of the Insolvency Practitioners Association and R3, explains the proposals, which are open to consultation until 25 March 2022, and how they could shape the future of insolvency regulation.

Background to the regulation of insolvency practitioners in England, Wales and Scotland

While insolvency has been a part of business life for as long as trade has existed, the insolvency profession in the UK was only established in 1986 when the Insolvency Act 1986 (IA1986) became law. A new profession was established, that of insolvency practitioners. Insolvency practitioners had to pass difficult professional exams to qualify and were also to be regulated in the same way that other professionals are regulated, such as solicitors and accountants.

Setting up the regulatory process for the insolvency profession was not a simple matter. There was a great deal of debate about whether the insolvency profession should be self-regulated (practitioners regulating themselves) or whether a regulatory authority should be set up that was completely independent of insolvency practitioners. It was ultimately decided that insolvency practitioners should be self-regulated.

The regulatory process started in 1994 and the Joint Insolvency Monitoring Unit (JIMU) was set up to carry out monitoring visits and report to the licensing authorities. However, since 1994 there have been some changes to the regulation of insolvency practitioners. The licensing authorities are known as ‘recognised professional bodies’ (RPBs) and include the Insolvency Practitioners Association (IPA) and the Institute of Chartered Accountants in England and Wales (ICAEW). JIMU no longer exists and the RPBs carry out their own monitoring visits.

Why is there now a consultation on the future of insolvency regulation?

There have been concerns about the adequacy and effectiveness of the regulation of insolvency practitioners since 1994. Stakeholders in the insolvency profession include creditors and members of the government. These people may have different backgrounds, abilities and interests but they are similar in as much as they tend not to be insolvency practitioners. The work carried out by insolvency practitioners may therefore be misunderstood and this can lead to unjustified complaints about insolvency practitioners.

Not all the concerns about the adequacy and effectiveness of the regulation of insolvency practitioners can be dismissed as misunderstandings, however. The structure of the regulatory process was seen as very ‘top heavy’ with as many as eight RPBs for about 1,600 insolvency practitioners, and it has always seemed to some stakeholders that the insolvency regulatory process could not be trusted if it was carried out by the insolvency practitioners themselves and was not independent.

The review of the insolvency regulatory process started with the Small Business Enterprise and Employment Act 2015 (SBEE2015). The number of RPBs was subsequently reduced to four but the possibility of further changes to insolvency regulation was left as an option for the future. It was also noted that the insolvency profession had changed since 1986 when the regulatory process began – for example, volume individual voluntary arrangement (IVA) providers did not exist in 1986 and there were concerns that the regulatory process did not take all these changes into account.

Therefore, on 21 December 2021 The Insolvency Service launched its consultation into the future of insolvency regulation in order to address these ongoing concerns about insolvency regulation, as it seemed that the changes introduced since SBEE2015 were not enough.

What could the future of insolvency regulation look like?

The Insolvency Service has so far just made proposals for the future of insolvency regulation and has set up a formal consultation process to enable the opinions of stakeholders in the regulation of insolvency practitioners to be included in the final decisions. The proposals are lengthy and detailed, but the main changes proposed for the future include:

• A new, single regulator based in The Insolvency Service

The Insolvency Service describes this single regulator as ‘independent’, and it would indeed be independent of the insolvency practitioners who would be subject to the regulation. It has been pointed out that if the single regulator was part of The Insolvency Service, then it would not be truly independent as the Official Receiver is also part of The Insolvency Service, and The Official Receiver is arguably in competition with insolvency practitioners and is not regulated.

• The role of the RPBs would be changed

RPBs would no longer be responsible for making decisions about granting, restricting or removing insolvency licences. RPBs may carry out these roles in the future at the instruction of the single regulator and RPBs may have some aspects of insolvency monitoring reviews delegated to them.

• Establishing a single register of insolvency practitioners

Membership of an insolvency practitioners register would be taken away from insolvency practitioners whose work did not reach the required standard.

• Introducing a method of regulating firms as well as individual insolvency practitioners

This would be a difficult and complex procedure to establish as insolvency appointments are individual, not to a firm. Many insolvency firms are owned and run by the office holding insolvency practitioners and regulating these firms would be effectively the same as regulating the individual insolvency practitioners.

• Introducing a compensation system

This is so that those who had suffered inconvenience, anxiety or distress as a result of the actions of an insolvency practitioner might receive some financial compensation. The detail of how this would work has again not been provided.

How can you respond to the consultation and does this matter?

The Insolvency Service has made important proposals for the future of insolvency regulation that are very likely to make massive changes to the very structure of the insolvency profession. As such, it has set up a formal consultation process to enable the opinions of stakeholders in the regulation of insolvency practitioners to be included in the final decisions.

There is every reason to think that The Insolvency Service will take all replies to the consultancy process into account and replying to the consultancy process is the best way for insolvency practitioners to influence the future of insolvency regulation.

It does matter a great deal that replies are sent to the consultation process. If after nearly 30 years the self-regulation of insolvency practitioners is finally seen as being not fit for purpose then it is in the interests of all insolvency practitioners to make sure that the future system of insolvency regulation is better. As noted above there are a lot of uncertainties in The Insolvency Service’s proposals and replying to them is an opportunity to point out some of the difficulties caused by these uncertainties.

The future of insolvency - consultation details

The consultation process is open until 25 March 2022 and comprises 41 different questions. These questions, together with other information about the consultation process can be accessed on GOV.UK. You can also respond to the consultation using the details below:

Email: IPRegulation.Consultation@insolvency.gov.uk

Telephone: 0300 304 8127

Write to:

IP Regulation Consultation Team

Insolvency Service

Floor 161 Westfield Avenue

Stratford

London

E20 1HZ

About the author

Caroline Clark is director of RMCSC, a fellow of the Insolvency Practitioners Association and R3, and has an MBA. She established RMCSC in 2013, providing consultancy advice for insolvency practitioners about compliance with insolvency and anti-money laundering legislation.

See also

Gazette Firsts: The history of The Gazette and insolvency notices

Does insolvency legislation support the stakeholders in the insolvency profession?

How will The Administration Regulations 2021 affect the sales of assets in administrations?

Insolvency practitioners' remuneration following the introduction of the new SIP 9

Find out more

The future of insolvency regulation (GOV.UK)

Insolvency Act 1986 (Legislation)

Insolvency Practitioners Association (IPA)

Institute of Chartered Accountants in England and Wales (ICAEW)

Small Business Enterprise and Employment Act 2015 (Legislation)

Image: Getty Images

Publication date: 3 March 2022

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.