The government has, today, published its long-awaited response to its consultation on the Future of Insolvency Regulation.
The consultation covered a range of questions on how to strengthen and rationalise regulation of the insolvency profession.
Need for consultation
Insolvency of businesses and individuals often leads to controversy. By definition, an insolvency means that there are insufficient assets to meet all liabilities of the person or business in question. The decisions as to whether to pay employees, consumers and other creditors; whether the business should be saved (and if so in what structure); and the value a buyer should pay for remaining assets, are often fraught with difficulty. Insolvency law and regulation is the way that the government and courts can create a structure which best enshrines societies values on these issues. The recent consultation is an attempt to update the regulatory structure to better reflect developments over recent decades.
No single regulator - for now
The decision to not fuse the powers of the four existing regulators into one regulatory body, at least for now, is a surprising conclusion. A single regulator could have created greater consistency in dealing with complaints and rule enforcement, a clearer channel for consultation on future rule changes, and a figure head for representation of the insolvency profession to the public. While there were differences between the government and the profession on whether the regulator should be the Insolvency Service (an existing government agency), an existing professional regulator, or a new stand-alone body, there seemed to be general support for the concept of a single regulator, and the failure to introduce one now seems a missed opportunity. That has stymied some other proposed reforms.
The government’s response feared the cost of creating a stand-alone body and a risk of conflict of interest if it handed powers to one of the existing regulatory bodies who would then set and enforce rules and represent its members. However, it is proposed to give government the power to introduce a single regulator in the future in the form it prefers, the risk being that there will be no debate on the choice of regulator and details of the operation.
Broad principles-based objectives
The failure to introduce a single regulator was given as the reason to not introduce broad principles-based statutory objectives for insolvency procedures to sit alongside statutory rules.
Regulation of firms
In the absence of the introduction of a single regulator, the expansion of regulation to firms is the most significant change promised. Currently insolvency practitioners must be regulated as individuals. That does not reflect the complexity of larger cases or high volume firms. A new framework for regulation of firms is, therefore, welcome. It will, however, be interesting to see whether the regulatory burden for firms under the new regime will accelerate the move of larger accountancy firms to move away from insolvency work.
Protection of the public
Other changes to help the public include:
- Greater transparency with an enhanced register of insolvency practitioners showing regulatory sanctions;
- A framework for compensation; and
- An increased requirement for insolvency practitioners to give insurance backed bond before taking appointments.
While greater protection for the public is welcomed, the increased cost which these protections imply may have the inadvertent effect of pushing more business below the limit at which professional advice can be borne, leading to greater risk.
If you would like to discuss any of the above in further detail, please contact Jeremy Whiteson or Sophie Burke.
