Insolvency Service consultation: The Future of Insolvency Regulation
By Steven Wood, Practice Support Specialist (Insolvency)
20 January 2022
The Government has released a consultation paper setting out new proposals to reform the regulation of the insolvency profession. The most significant proposals are summarised below.
Single regulator
Legislation introduced by the Small Business Enterprise and Employment Act 2015 allows the transfer of regulatory functions to an existing regulator or alternatively the establishment of a new non-Governmental body as regulator.
The Government does not believe that transferring regulatory functions to an existing regulator would be effective in meeting the policy objective of tackling perceived problems within the current structure. Further, due to the low number of IPs/firms, the Government believes that setting up a new arms-length regulatory body could result in a disproportionate burden of cost.
The Government’s preferred option is therefore not to use the existing power but instead to seek primary legislation and create a regulator within the Insolvency Service, who will be a statutory office holder. The regulator would have powers in relation to education of IPs, authorisation, regulatory monitoring and investigation and disciplinary action against IPs as well as set regulatory standards.
The consultation proposals set out that the regulator would also have the power to delegate certain functions to other suitable bodies. The expectation set within the consultation is that the new regulator would, on a practical basis, only carry out standard setting and investigation/disciplinary functions and would expect to contract out delivery of the other functions, inferring that they anticipate that this contracting arrangement may be (of interest) to existing RPBs.
Firm regulation
The Government also proposes the introduction of the authorisation and regulation of firms that offer insolvency services, that is, the provision of persons to act as IPs (within the meaning of section 388 of the Insolvency Act 1986) in formal insolvency proceedings. The regulation of firms would run alongside regulation of individual IPs. The statutory regulation of firms would require legislative change. The Government consider that the ability to regulate firms would plug a gap in the regulatory system caused by the shift in the way the insolvency market operates, with an increase in Insolvency Practitioners being employed by larger firms, rather than practitioners working for themselves or within small practices.
Register of IPs and firms
The Government believes that a single system of registration should replace the current arrangements for licensing an IP. The Government proposes to introduce a requirement for IPs and firms to meet certain conditions (as IPs do now) before they can be entered onto a public register. IPs 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 IPs and administrative support staff to carry out the level of work undertaken.
The register would be a public record of all individuals and firms that offer insolvency services and only those on the register would be authorised to do so. The register would allow all users of insolvency services to check whether the IP/firm they are dealing with is authorised to act and to check whether an individual or firm has been sanctioned or had other action taken against them by the regulator.
Compensation
Under the Government’s proposal for a single regulator, the regulator would have a range of disciplinary sanctions to reprimand, fine, direct or withdraw individual or firm authorisation. The power to direct could include the ability for the regulator to require an IP/firm to pay compensation where there has been an error or for a service failure causing undue anxiety or distress. The consultation also seeks views on whether IP should be required to contribute to a fund which would pay compensation where required.
Reform of the bonding system
Part C of the consultation sets out proposals for reforms of bonding arrangements to improve existing safeguards for creditors against the fraudulent or dishonest behaviour of IPs. The Government’s review of the current arrangements has concluded that in the very rare instances where a bond claim is required, the system does not work as well as it should.
Responses
The consultation closes on 25 March 2022 and ICAS encourages its Members and Affiliates to respond to it directly.
ICAS will be responding to the consultation and also welcomes views and comments to feed into that response, which should be emailed to swood@icas.com in the first instance.
