The Future of Insolvency Regulation

On 21 December 2021 the Government launched a consultation into the future of insolvency regulation. The changes proposed in the consultation document will have a wide ranging impact on the insolvency profession (and its insurers) with the proposals including: the direct regulation of insolvency firms, the introduction of a single regulatory body with powers to order compensation against insolvency practitioners and firms, a new additional requirements regime, changes to the bond regime and a public register of insolvency practitioners and firms. Many of the changes proposed require primary legislation and so it may be some time before the changes take effect (if adopted). But there does appear to be some wind behind these proposals given they follow on from the Call for Evidence in 2019 and a more general focus on insolvency issues in the wake of the Covid-19 pandemic.

Target and areas of the consultation

The aim of the consultation is stated to be consistency and transparency in the regulation of the insolvency profession.  The foreword to the consultation broadly provides that the current framework, dating back to the Insolvency Act 1986, is no longer fit for purpose and is "top heavy" with four regulatory bodies supervising a relatively small professional pool of less than c. 1,600 insolvency professionals.

The main proposals in the consultation are:

• A new single independent regulator with the power to order compensation;
• The regulation of firms as well as individuals;
• A new public register of insolvency practitioners and firms;
• An additional requirements regime;
• Changes to and potential replacement of the bond regime.

Single independent regulator

The consultation proposes to replace the current regulatory framework with a single independent government regulator that sits within the Insolvency Service.  At present the regulation of Insolvency Practitioners is undertaken by 4 professional bodies recognised as performing that function by the Secretary of State, with the Insolvency Service acting as oversight regulator.  The Government considers that having 4 different bodies regulating the insolvency profession leads to likely inconsistencies, with a risk that the bodies compete to maintain membership and it is said that there is a perception of a lack of impartiality by such bodies.  

The new single regulator will have powers to authorise, regulate and discipline insolvency practitioners as well as setting professional, ethical and educational standards; this will include the power to regulate firms providing insolvency services.  It will also have the power to delegate certain functions to other suitable bodies and the consultation invites responses on which functions should be carried out directly and which might be delegated.

A new regulator would have the following statutory obligations – to have a system of regulation that (1) secures fair treatment for those impacted by insolvency and acts impartially and transparently with regard to those regulated, (2) encourages a competitive and innovative industry that acts with integrity, promotes the maximisation and promptness of returns to creditors, protects the public interest and offers high quality services at a fair and reasonable cost and (3) supports those regulated in complying with their responsibilities and ensures consistent and effective outcomes.

Regulating firms and individuals

Presently insolvency practitioners are regulated as individuals with no specific regulation of firms offering insolvency services.  The consultation says that this leaves a "gap" in the regulatory framework, citing problems stemming from this approach to regulation including "volume providers" in the individual voluntary arrangement sector and conflicts of interest at larger firms.  The introduction of regulation at firm level will require legislative change.

Additional requirements regime

For firms that have the potential to "cause the most damage to the insolvency market" there is a proposed additional requirements regime.  The criteria to fall within the regime is not set out in detail in the consultation but it is said it could include; size of the firm, level of turnover and number of appointments held by insolvency practitioners employed by the firm.  Firms falling within this category would be subject to additional requirements including; (1) a requirement to appoint a senior responsible person, (2) a requirement on the firm to demonstrate its suitability to conduct business, including an appropriate business model, (3) a requirement to provide confirmation that appropriate controls and governance are in place, to ensure that there are no conflicts of interest between the aims and policies of the firm and the duties and responsibilities of the Insolvency Practitioners they employ and (4) a process for enhanced monitoring.

Public register of individuals and firms

There is a proposal for the introduction of minimum requirements for authorisation of firms offering insolvency services and for firms and individuals to meet certain conditions before they are entered on a public register.  The minimum requirements are not set out in any detail in the consultation, but could include for firms having a registered office and/or place of business in Great Britain, being solvent and compliant with any Companies House filing requirements which may apply, having confirmation of relevant insurance cover in place and sufficient qualified and non-qualified staff to administer effectively the number of appointments being taken by practitioners at the firm.

The register will also hold details of whether individuals and firms have been sanctioned or had other disciplinary action taken against them by the regulator.

Compensation proposals

The four regulatory bodies cannot currently order compensation.  The consultation document considers then rejects expanding the jurisdiction of FOS to include complaints against insolvency practitioners.  

It is instead proposed that the new single independent regulator would have a range of disciplinary sanctions to reprimand, fine, direct or to withdraw individual or firm authorisation and to require an insolvency practitioner or firm to pay compensation for an error or mistake or for a service failure causing undue anxiety or distress.  The proposal sets out potential directions that would be within the jurisdiction of the regulator to order including: up to £250 for distress and inconvenience, restore a party or parties to the position they would be in had wrongdoing not occurred (which could be non-monetary) and repay or waive fees.  The consultation seeks views on whether there should be a cap on the amount the regulator could direct an insolvency practitioner or firm to pay for financial loss.

The consultation also seeks views on whether compensation should be paid from an established fund funded by the profession (rather than under professional indemnity policies). 

Other changes

Insolvency practitioners must have in force security known as surety bonds which form a safeguard for creditors against fraudulent or dishonest conduct.  The surety bond is made up of two parts: (1) an enabling bond required before an insolvency practitioner can accept an insolvency appointment (value of £250,000) and (2) an insolvency estate specific bond where the level of cover is defined by regulation with a minimum of £5,000 and a maximum of £5m.

There are various proposed changes to the bond regime including a new statutory requirement for surety bond terms (including allowance for reasonable associated costs of the bond claim, a minimum period of run-off cover and interest on amounts paid out), revision of monetary limits (changing the enabling bond to £750,000 and the minimum for the insolvency estate specific bond to £20,000 (maintaining the maximum of £5m)), requiring recognised professional bodies to take responsibility for ensuring cover is in place where the risk of no or insufficient bond cover is greatest and new requirements to include information on bonds in insolvency reports to creditors.  

The consultation also invites comments on replacing the bond regime entirely with a scheme for compensation (similar to that as operates for solicitors via the Solicitors Compensation Fund).

What next?

The consultation is open until 25 March 2022.  The consultation provides for fundamental changes to the way in which the regulation of the insolvency profession operates – a single regulator able to order compensation akin to an ombudsman service, expanding regulation to firms as well as individuals and new additional requirements for some firms.  As already noted, many of the proposed changes require primary legislation so whether the changes go ahead or not will depend to some extent on the political will (and time) to take these changes forward.  But it is an area that both the insolvency profession and its insurers will want to keep a close eye on.

https://www.gov.uk/government/consultations/the-future-of-insolvency-regulation/the-future-of-insolvency-regulation