Caroline Clark, insolvency compliance consultant, director of RMCSC and a fellow of the Insolvency Practitioners Association and R3, explains the proposed reforms to insolvency regulation and what impact they could have on insolvency practitioners.

Introduction

A strong insolvency profession has always been important for the growth and reputation of the UK economy. Until the Insolvency Act 1986 (IA1986) was passed the insolvency profession was seen as part of accountancy or law, however IA1986 established insolvency as a profession in its own right. The regulation of the insolvency profession was introduced at the same time. 

IA 1986 allowed the insolvency profession to be self-regulating, with professional organisations that form the structure of the profession carrying out the regulatory procedure. Insolvency regulation started in 1994 with the Joint Insolvency Monitoring Unit reporting to the Insolvency Practitioners Association (IPA) and the Institute of Chartered Accountants in England and Wales (ICAEW), and because of this regulatory procedure there have been many changes and improvements to the work of insolvency practitioners.

Compliance with legislation is now recognised as very important even if compliance with the legislation does not bring financial benefits for creditors. In 1994 when insolvency regulation started very few annual reports were sent to creditors because office holders said that they made commercial decisions, and the cost of the annual report did not bring financial benefits to creditors. Creditors are now routinely advised that office holders must carry out work that will not bring financial benefits to creditors.

Why did the government introduce a consultation on the Future of Insolvency Regulation?

A government consultation on the Future of Insolvency Regulation was open for responses from 21 December 2021 until 25 March 2022. The reasons for this were that despite many, positive changes brought in by the self-regulation of the insolvency profession, there were still many concerns:

• The insolvency profession is relatively small with around 1,200 – 1,500 office holding insolvency practitioners, however at one time it was regulated by eight different recognised professional bodies (RPB)s. Although this was brought down to four RPBs by the Small Business, Enterprise and Employment Act 2015 (SBEE 2015), this was still seen as too many.
• Self-regulation was not seen as independent. The integrity and high standards of the insolvency profession are vital for the success of the UK economy and independent regulation was seen as necessary by some stakeholders in the insolvency profession.
• The structure of the insolvency profession has changed since IA1986. In 1986 most insolvency businesses were partnerships that used very similar business models with highly qualified partners who worked on relatively small portfolios of insolvency cases and who were also responsible for the management of the firm. In 2023 most insolvency businesses are limited companies and finance may be provided by investment companies that do not understand insolvency compliance or regulation but that may be able to influence the office holders. 
• Volume individual voluntary arrangement (IVA) providers did not exist in 1994 when the self-regulation procedure was set up. There were concerns that existing insolvency regulation did not take the unique trading structure of volume IVA providers into account.  

What were the potential insolvency reforms?

The Insolvency Service suggested several possible reforms that were considered as part of the consultation procedure, including:

• A single regulator, part of the Insolvency Service, that would carry out the regulation of insolvency practitioners and then instruct the RPBs to grant or restrict insolvency licences as appropriate. 
• Future regulation that would include the insolvency firm as well as individual office holders.
• A financial compensation system for those who had suffered loss or distress because of the actions of an office holding insolvency practitioner.
• A single register of insolvency practitioners, membership of which would only be granted to insolvency practitioners whose work reached a satisfactory standard.

The proposed reforms reflected the concerns raised about the self-regulation of the insolvency profession. The consultation process, which included all the RPBs putting forward their opinions about the proposals and their own ideas, was also a good opportunity for the RPBs to review and consider their own work. Self-regulation has been very successful since 1994 but after 30 years any organisation or process should be reviewed to ensure that it is still fit for purpose.

The Insolvency Service is a very important stakeholder in the insolvency profession, but insolvency is a complex and unique profession and there were concerns that the Insolvency Service did not have the practical experience necessary to review and understand insolvency work as the single regulator.

The Official Receiver is also part of the Insolvency Service, and the Official Receiver takes appointments in compulsory liquidations and bankruptcies without being regulated. There were suggestions that if the Insolvency Service was the single regulator, then the Official Receiver should stop taking insolvency appointments or at least be independently regulated. 

What are the proposed insolvency reforms?

The Insolvency Service published the results of the future of insolvency regulation consultation procedure in September 2023.

Some of the final decisions reflect the changes in the insolvency profession over the last few years; future regulation will include both firms and individual insolvency practitioners, for example. New client account regulations were put into effect by the IPA from 1 January 2024 that reflect that not all insolvency firms are controlled by insolvency practitioners, and it seems possible that in the future officeholding insolvency practitioners will have to confirm or demonstrate that their decisions are not influenced by any third parties.

A register of insolvency practitioners will be set up in due course and although a compensation scheme was not introduced – it would be very difficult to set up a system that recognised the difference between distress caused by insolvency and distress caused by an office holder – there will be future consultation about this.

The Insolvency Service will not be appointed as the single regulator of the insolvency profession. The insolvency profession has succeeded in showing that self-regulation by the existing four RPBs is best for the profession, but other decisions about the future regulation of insolvency practitioners indicate that material changes are needed to the way that the self-regulation is carried out.

The RPBs will be expected to ‘deliver significant and measurable improvements to the quality of regulation’ but at the same time no new legislation will be introduced to change the model used for current regulation. It seems that the existing principles of insolvency regulation are acceptable but the way that self-regulation is carried out should be improved by the RPBs.

The Secretary of State is to take over the establishment of ethical and professional standards for the insolvency profession. This was previously undertaken by the RPBs, and insolvency practitioners will be aware of the updated insolvency practitioner code of ethics that was introduced in May 2020, for example.

The establishment of good ethical and professional standards is fundamental to the credibility and integrity of any profession, and it is disappointing that the insolvency profession is not seen as capable of doing this. The RPBs have recently changed their rules for continuing professional education (CPE) so that insolvency practitioners must now include at least one hour of ethical training in their annual CPE, and this can be seen as reflecting the decision about the importance of maintaining high ethical and professional standards.

It should also be noted that in June 2023 the Financial Conduct Authority (FCA) introduced a ban on providers of debt advice from receiving referral fees from volume IVA providers. This was immediately effective for new entrants into the market and effective from 2 October 2023 for existing debt solution providers. This dealt with the previous concerns about IVA volume providers outside the regulatory changes introduced by the Insolvency Service.

Summary

Since the various reforms to insolvency regulation were proposed in 2023 changes have already been introduced to client account regulations as well as to CPE and professional indemnity requirements. It seems that the RPBs have already started work to bring about the required improvements to the quality of insolvency self-regulation.

At the same time legislation is to be brought in to enable a single insolvency regulator to be introduced should this become necessary in the future. The threat of the single regulator will remain and now more than ever the self-regulation of the insolvency profession cannot be taken for granted.

About the author

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

See also

Place an insolvency notice

Changes and trust in the insolvency profession

Find out more

The future of insolvency regulation: Government Response (GOV.UK)

Insolvency Act 1986 (Legislation)

Small Business, Enterprise and Employment Act 2015 (Legislation)

Insolvency practitioner code of ethics (GOV.UK)

Images

Getty Images

Publication date

24 January 2024

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