ICAS welcomes the UK government's response to consultation on the future of insolvency regulation
The government has released its long-awaited response to its consultation paper on the future of insolvency regulation.
The consultation, which ran between December 2021 and March 2022, sought views from the insolvency profession and other interested parties on a number of proposals for the future of insolvency regulation. Our previous article summarised the most significant proposals contained within the consultation paper.
We responded to the consultation on 24 March 2022.
The government has collated responses and reached the following conclusions in relation to some of the key areas covered by the consultation paper:
The government proposed to seek primary legislation to create a single regulator within the Insolvency Service. The intention was for that regulator to replace the four recognised professional bodies (RPBs) that currently perform this function, including ICAS.
However, the government has decided against the creation of a single regulator. It has further concluded that the creation of a standalone single regulator would be cost-prohibitive and potentially disruptive. Consequently, the current regulatory framework will remain in place, with the government instead focusing on improving it by introducing other measures whilst also working closely with the RPBs to measurably improve regulatory outcomes.
The government will, however, legislate to introduce a new power to enable the creation of an independent single regulator of Insolvency Practitioners (IPs), and firms offering insolvency services, should it be deemed appropriate in the future.
The government has decided that it will not update the current regulatory objectives at this time beyond any minor amendments required to reflect the introduction of the regulation of firms offering insolvency services.
The government’s response states that it intends for the Secretary of State to be given the overall responsibility to set ethical and technical standards for the insolvency profession, in collaboration with experts from the sector and the RPBs. How this will operate in practice will require clarification.
Due to the “overwhelmingly supportive” responses to the proposals on the regulation of firms, the government intends to legislate for the following when Parliamentary time allows:
- A framework that includes a basic set of qualifying principles for the statutory authorisation and regulation of all firms (other than sole trader IPs) to sit alongside the authorisation and regulation of individual IPs.
- A prohibition on firms offering insolvency services unless they are properly authorised.
- A requirement for each authorised firm to appoint a senior responsible person, who will be registered as such with the firm’s regulatory body.
- An appropriate sanctioning mechanism.
- The facility to recover proportionate costs of regulation from regulated firms.
In advance of legislation, the government will work with the RPBs to assess what steps towards firm accountability can be taken within the parameters of the current framework.
Register of IPs and firms
The government plans to introduce a register to improve transparency and public trust in the profession and intends to legislate to introduce a mandatory public register for all licensed IPs and firms authorised to offer insolvency services, accessible to the public.
The register will not replace the current licensing regime but will include details of determined regulatory sanctions against firms or individuals. These sanctions will remain on the register for a period proportionate to the severity of the sanction.
The government has concluded that a system of redress and compensation is an important feature to instill confidence in a modern framework. It therefore intends to undertake further work to determine how such a scheme could operate, and detailed proposals will be presented to stakeholders as part of a future consultation.
Reform of the bonding system
The government will implement the following amendments. through secondary legislation. when Parliamentary time allows:
- Increasing general penalty sum cover from £250,000 to £750,000.
- Prescribing that, where a maximum indemnity period is applied by a bond provider, this must be at least six years from the date of appointment, with the ability to extend with the agreement of the bond provider.
- Prescribing that a bond may only be cancelled due to non-payment of the premium once application has been made to the IP and at least 60 days’ notice has been provided to the IP and their regulator.
- Extending the current minimum requirements of a bond to include an allowance for reasonable associated costs of a bond claim, a period of run-off cover for a minimum of two years after an IP has left office, interest to be claimable against a bond to be calculated on the amount of the loss from the date it was incurred and general penalty sum cover to be available for all of an IP’s appointments, including those where no specific penalty sum cover has been obtained.
The government intends to consult on wider reform of the bonding regime in due course.
The implementation of a single regulator was a controversial proposition from the outset. We are pleased that the government has listened to the concerns raised by ICAS and others regarding the proposed changes to the UK’s regulatory framework for insolvency. We are strongly supportive of the decision not to proceed with the establishment of a single regulator for the insolvency profession. The establishment of such a regulator would have come with significant risks, large scale disruption and at a huge cost.
As stated in our consultation response, while we acknowledge and support the need to continually review, develop, and amend the regulatory framework over time, we believe that this should be a process of evolution, rather than revolution.
We support the commitment to extend regulation to firms that offer insolvency services to supplement the existing arrangements which only cover individual IPs, something which we have been seeking for more than 12 years.
We’re committed to working with The Insolvency Service and the other RPBs to identify how firm regulation can be implemented effectively and as swiftly as possible. We will together continue taking steps to further enhance the first-class worldwide reputation that the UK insolvency regime has.
We further welcome the proposal to establish a statutory register of IPs and firms offering insolvency services.
However, we have concerns about the proposal to give the Secretary of State overall responsibility to set ethical and technical standards for the insolvency profession. The government has committed in their response to a process which involves the RPBs and profession experts. Given standards are currently set through the Joint Insolvency Committee, an independent body involving The Insolvency Service, the RPBs and other stakeholders, with majority control by lay members, it is difficult to identify where the benefit will be. It is likely that any new process will introduce unnecessary costs, inefficiency and delay to the standard setting process.
Perhaps this point is emphasised by the two years lost to deliver closer working and tangible changes to existing insolvency regulation alongside the RPBs while the consultation was carried out.
Register for the ICAS Insolvency and Restructuring Conference 2023 and hear from Claire Hardgrave, Head of Insolvency Practitioner Regulation, The Insolvency Service.