Labour MP for Newcastle Central
Labour MP for Great Grimsby
University of Essex
31 March 1998
This is a response to the Insolvency Review Working Party’s (hereafter IRWP) report titled ‘Insolvency Practitioner Regulation - Ten Years On - A Review of Insolvency Regulation’. The 38 page report by the IRWP is a major disappointment. It is lacking in content, analysis, vision and concern for those affected by insolvencies. Its main thrust appears to be to preserve the status-quo and hang on to the regulatory powers of the present regulators. We reject the principal recommendations of the report.
Our concerns are explained below. We do not confine ourselves to the specific questions raised by the report, since to do so would be tantamount to acknowledging that the IRWP’s questions and preferences are the only legitimate ones. We also sketch out principles of ‘independent regulation’ as Labour’s Business Manifesto gave a commitment to introduce independent regulation for accountancy firms, the main suppliers of insolvency services.
We would be delighted to further discuss any of the points raised here and have no objection to our views being placed on the public record.
Episodes such as Maxwell, BCCI, Atlantic Computers, Maples, Exchange Travel, Polly Peck, Levitt, Barlow Clowes and many others clearly demonstrate that insolvency practices affect a wide variety of stakeholders ranging from shareholders, creditors, employees, bank depositors, pension scheme members and others. Consequently, there is considerable public interest in the practices and regulation of the insolvency industry. The public’s concerns have been given visibility by press, radio , television and parliamentary coverage. Against this background, the IRWP report on the regulation of the industry was expected to analyse the issues, develop durable institutional structures and publish an informed report.
The 38 page (and four appendices) interim report titled ‘Insolvency Practitioner Regulation - Ten Years On - A Review of Insolvency Regulation’ is a major disappointment. Despite the title of a ‘Consultative document’, it seeks to mobilise support for preconceived policies and only minimal change. It seeks solutions to problems within the framework of existing institutional structures. The alternatives are neither considered nor evaluated. It is an attempt to maintain regulatory structures which have failed and do not command public confidence.
NO PUBLIC REPRESENTATION
The report is liberally sprinkled with the rhetoric of serving ‘the
public interest’, a tactic designed to disarm and appease critics. Yet
it does not indicate what the term means. Just how the IRWP decided what
the public requires, is a mystery.
The IRWP was formed prior to the 1997 general election. It was the insolvency industry’s response to Labour Party’s commitment to introduce ‘independent regulation’ for accountancy firms (most insolvency practitioners work for accountancy firms). The IRWP was formed to pre-empt public debate and narrow public choices.
The IRWP consisted entirely of the representatives of the eight organisations responsible for regulating the insolvency industry. Other stakeholders were specifically excluded. Thus the IRWP cannot claim any mandate to speak for other stakeholders. None of the organisations represented on the IRWP owes a ‘duty of care’ to anyone affected by their regulatory role. The oversight of the industry is under public scrutiny yet those in-charge of the industry are in control of the IRWP’s agenda and deliberations. No doubt, they would claim that they had ‘public good’ in mind, but the truth is that anyone’s conception of ‘public interest’ is shaped by their education, family, business, professional and other contexts and inevitably favours some public choices and rejects others.
As will become clear (see later), the IRWP is mainly concerned with defending the status-quo. The IRWP’s agenda papers and minutes are not publicly available. There were no public hearings to enable people to express their concerns. Any submissions received by the IRWP are not publicly available. Inevitably, the report is the result of ‘private’ negotiations and bargaining amongst ‘insiders’.
NO WORTHWHILE INFORMATION
Any discussion of regulation requires that the public be given worthwhile information. Yet the IRWP report contains little useful information. The report shows some concern with the decline in the number of insolvency practitioners (mainly because firms continue to merge), but it fails to provide any statistics which might provide a broad overview of the industry. For example, there is no information about the composition (age, retired, gender, ethnicity) of insolvency practitioners, or whether insolvency is even the main business of the licensed practitioners.
There is no information about the number of jobs rescued/lost by various receivers, the average amounts recovered for unsecured creditors, shareholders or any other stakeholder. The number of complaints received by the Recognised Professional Bodies (RPBs), the number rejected, the nature of the complaints, the action taken by the RPBs, the average time taken to investigate complaints, or the real/alleged conflicts of interest. There are no examples of good and/or bad practices which any of the RPBs have promoted to tackled. In October 1997, the BBC TV programme ‘Here & Now’, highlighted that former director of J.S. Bass, Barry Chapman, had lodged a complaint with the Institute of Chartered Accountants in England & Wales (ICAEW) nine years ago, but the ICAEW had not even begun its investigation.
The IRWP should have taken an opportunity to open the industry’s affairs to the sunlight of public scrutiny. But the report is remarkably short on any meaningful information. For example, following the Insolvency Act 1986, accountants and lawyers belonging to a select few trade associations enjoy a statutory monopoly of the insolvency industry. Yet the report gives no indication of the income received from this monopoly. It does not explain why practitioners enjoying a statutory monopoly do not owe a ‘duty of care’ to all the stakeholders affected by their actions.
ABDICATION OF RESPONSIBILITY
In recent years, the House of Commons Social Security Select Committee has criticised the level of fees charged by insolvency practitioners. There is public disquiet about the level of fees charged by BCCI administrators. They have charged nearly $300 million in fees. Last year, the case of Mirror Group Newspapers plc v Maxwell showed that one of the Maxwell administrators managed to recover assets of some £1.67 million. But the administrator charged a fee of £1.63 million, leaving only £40,000 for the long-suffering stakeholders. Mr. Justice Ferris described the conduct of the administrator as “shameful”. Yet over the years, the insolvency regulators have maintained an organised silence about such matters. Despite numerous complaints, none of the RPBs have ever investigated the looting of insolvent businesses.
Now, the IRWP has conveniently abdicated its responsibility by saying that Mr. Justice Ferris is looking at the issues. The truth is that he is only concerned with practitioners appointed by the courts.
The report is remarkably out-of-touch with the public opinion and recent regulatory developments. It does not even note that the Labour Party is committed to introducing ‘independent regulation’ of all accountancy firms. Public opinion is increasingly sceptical of self-regulation. It cannot easily be persuaded that trade associations can police giant multinational businesses - in the case of the insolvency sector, major law and accountancy firms. In all other sectors, the regulatory reforms are based upon the belief (and evidence) that ‘independent regulation’ is more effective, less wasteful and likely to provide more durable structures.
The above views have persuaded the government sweep away the multitudes of regulators in the financial sector and replace them with a single, statute-based, independent regulator, the Financial Services Agency (FSA). The FSA will also regulate that bastion of self-regulation, Lloyd’s of London. The food industry is being given an independent regulator. Various utility regulators are being combined. All this helps to reduce overlap, duplication, waste and buck-passing. It establishes clear lines of public responsibility. The IRWP report shows no awareness of public mood or the inevitability of independent regulation.
The report’s main concern is to preserve the regulatory empires of each RPB at almost any cost even though they do not owe a ‘duty of care’ to any person. Most deny the public any access to their Council meetings, agenda papers and Council minutes. Most do not even allow their own members to elect the leadership. Some allow their unelected President to cast as much as 25% of all the votes (e.g. the ACCA) and effectively ‘appoint’ the entire Council. Without discussing any moral or ethical aspects of regulation, the IRWP opposes any streamlining of the present regulatory bodies or dilution of their powers. Chapter Four of the report briefly looks at three regulatory alternatives. This occupies just 7, 14 and 18 lines respectively, hardly a worthwhile exposition of anything.
A REGULATORY MESS
The insolvency industry must be unique in that it has eight regulatory bodies dealing with just 1,800 licensed practitioners. The IRWP does not recommend any streamlining. Instead, it recommends an increase in the number of bodies involved. To enable each of the 8 regulatory bodies to hang on to their powers, it recommends the creation of an Insolvency Board, which in turn will be owned by a yet to be created body called, The Foundation’. So the bodies involved in regulation would be the 8 present regulators (the Institute of Chartered Accountants in England & Wales (ICAEW), the Insolvency Practitioners Association (IPA), the Law Society of England & Wales, the Institute of Chartered Accountants of Scotland (ICAS), the Association of Chartered Certified Accountants (ACCA), the Institute of Chartered Accountants in Ireland (ICAI), Law Society of Scotland, the Insolvency Service), the Joint Insolvency Monitoring Unit (JIMU) run by three chartered accountancy bodies, the ACCA monitoring unit, numerous overlapping committees, the Society for Practitioners in Insolvency (SPI), The Foundation, the Insolvency Board and others. The present confusion, lack of accountability, duplication, waste and buck-passing will worsen. None of this will command public confidence. Even major accountancy firms (e.g. Deloitte & Touche, Ernst & Young) are calling for end to self-regulation and wish to see the transfer of a regulatory body independent of the insolvency trade associations.
The IRWP does not even acknowledge that the idea of the Insolvency Board
has been borrowed from the debates about auditor regulation where the accountancy
trade associations (but not those concerned with law) have proposed an
identical structure. The IRWP makes it clear that the Insolvency Board
will be a cosmetic and toothless body. It will have no powers to intervene
in the affairs of the RPBs or to investigate any individual complaint or
case. The report remains silent on how the Insolvency Board will be financed.
We are opposed to the use of any public money to finance self-regulatory
structures. In the absence of any public money, the Board will inevitably
be financed by the RPBs and their friends. It will be a prisoner of these
organised interests. The public will continue to suffer. Under the IRWP
proposals, the Board will not owe a ‘duty of care’ to anyone. It is clear
that the Board has no independence from the insolvency industry. It is
simply a desperate attempt by the insolvency trade associations to retain
The IRWP opposes any alternative regulatory suggestions on the grounds that it might adversely affect the present trade associations which act as regulators. For example, it does not like any kind of independent regulation because, as a result, the practitioners might be exposed to what it describes as a ‘double jeopardy’ (page 29). It fears that an independent regulator might take disciplinary action against a practitioner and report contends that then for the same episode, a trade association (one of the current RPBs) might also take action. Thus the negligent person is disciplined twice.
This is a strange argument and is only concerned with the narrow self-interests of the RPBs. What the public needs is a regulatory structure which is durable, effective, represents a plurality of social interests and commands public respect. If as a result of the creation of a single independent regulator, the current RPBs have to merge, or be wound up, or some find some other role for their existence (e.g. as lobbyists), then that is their problem. The public does not have to find a role for them. It is also possible that once a practitioner has been licensed and monitored by an independent regulator s/he might no longer wish to be a member of any of the present professional bodies which will wither on the vine. There is no moral, ethical or economic logic in developing regulatory structures merely to prolong the public influence of ‘private’ bodies that have outlived their usefulness.
AN OMBUDSMAN IS NEEDED
Anyone disagreeing with the way an insolvency has been handled has to go to the courts. Such legal processes are expensive and time consuming. The issues about stakeholder rights and abuses by insolvency practitioners arise precisely at a time when many stakeholders roughed up by the insolvency experience are not in any psychological or financial position to go to the courts. In addition, many of the present complaints are also about the failures of the RPBs. Ordinary stakeholders are in no position to challenge them. An independent Ombudsman with the ability, power and resources to investigate complaints (regardless of who the regulators are) is needed. But the IRWP opposes such suggestions. It argues that such a structure would be costly, ineffective and might raise public expectations. This myopia is based upon concerns with ‘private’ costs of regulation and neglects ‘social’ costs which are borne by society generally. The IRWP objections do not provide any assurance to some 12 million adults who do not have the financial resources to gain access to the courts. In liberal democracies, all legitimate structures need a series of checks and balances to ensure that they are responsive to people’s needs and concerns. There is no logical, moral, ethical or economic reason for exempting the insolvency industry.
MORE COMPETITION IS NEEDED
We share the IRWP concerns about the low number of insolvency practitioners (around 1,800). Yet, neither the RPBs nor the DTI have developed any processes for addressing this. They are also quiet about the fact that most of the insolvency work is done by trainees and not by qualified and licensed people. In many cases, the licensed practitioners, especially from major firms, are simply the fronts for securing appointments.
Through mergers, the number of accountancy firms continue to be reduced. The present Big-Six already employ more than 40% of all insolvency practitioners and handle all major insolvencies. Their monopolistic position should be investigated by the Office for Fair Trading.
Subject to suitable safeguards (e.g. liability insurance, bonds and securities), banks, financial services and other businesses should be invited to enter the insolvency market and provide greater competition. The Royal Bank of Scotland claims that by putting receivership appointments to tender it has reduced the costs by some 60%. This suggests that many practitioners have been earning monopolistic rents. These should be eliminated by encouraging greater competition. There is no economic, moral and ethical case for having reduced competition in the insolvency sector.
Specific educational courses for insolvency practitioners are a relatively recent development. Even then most of their education remains technical. There is no public spirit either in their education or training. Aspiring practitioners are not expected to show any concern with the welfare of those affected by their actions. They all live in a democratic society which claims to promote equality. Yet none are asked to reflect upon the fact that the entire insolvency regulation and legislation is based upon the residues of a feudal era, a period when those with wealth enjoyed more power and prestige. This continues to be the basis of legislation (e.g. in defining the order in which creditors are paid). None are required to reflect upon the fact that despite enjoying a statutory monopoly, they fail to publish any meaningful information about their affairs or owe a ‘duty of care’ to the various stakeholders.
We call for the development of an educational scheme which produces socially responsible and reflexive practitioners. To reduce public confusion and to develop internationally recognisable qualification, we urge the government to develop NVQ Level 6 or 7 qualifications. This should overcome the squabbles of the present RPBs each of whom continues to engage in ‘beauty parades’ to argue that somehow their own qualification is superior.
PROPOSALS FOR INDEPENDENT REGULATION
None of the Recognised Professional Bodies (RPBs) regulating the insolvency sector were created to safeguard the interests of the stakeholders affected by insolvency. The RPBs were created to secure monopolies for practitioners and to represent their economic interests. As the President of the Society of Practitioners of Insolvency (SPI) candidly put it, “SPI must always acts in its members’ interests” (Insolvency Practitioner, Sept 1997, page 3). Wider stakeholder interests have been neglected.
We reject the IRWP’s preferred model of regulation i.e. the Review Board and suggest that Labour’s commitment to ‘independent regulation’ should be achieved by the following principles.
1) For regulation to be genuinely independent, the processes of regulation must be independent of established vested interests in the form of accountancy and law firms and their trade associations. This requires the setting up of a single ‘new body’ - An Insolvency Commission - that would be responsible for accrediting, licensing, monitoring and disciplining all insolvency practitioners. This body would be statute-based. It would be independent of the insolvency industry, accountancy and law trade associations and the Department of Trade Industry (DTI).
2) Unlike the present, RPBs, the Insolvency Commission would have an executive comprising members directly concerned with the interests of all those affected by insolvency, including creditors, shareholders, directors, consumers and environmentalists. Its executive could be nominated by the President of the Board of Trade. The criteria according to which someone has been nominated shall be publicly declared. The DTI Select Committee shall have a right to examine, take evidence and/or scrutinise the appointment of any person to the Commission.
3) The Insolvency Commission would also be accompanied by an independent Ombudsman with powers to hear and investigate complaints. The Ombudsman shall have a right of access to all the files and working papers of the practitioner. Of course, the parties affected could still seek judicial reviews should they so wish.
4) No member of the executive committee of the Insolvency Commission shall be in full or part-time employment, or have any commercial interest in any organisation which is to be regulated by that body. No member of the executive committee shall hold any office of any insolvency, accountancy or law trade association during the term of his/her office with the Insolvency Commission.
5) The Insolvency Commission needs input from insolvency practitioners. They will not be the direct representatives of any particular insolvency, accountancy or law trade associations. There would be no seats for anyone directly representing any insolvency, accountancy or law trade association. The Commission would have insolvency practitioners on it. But they will neither be in majority nor in such significant numbers, as to enable them to exercise control or exert disproportionate influence. Indeed, no stakeholder group would be in majority. This means that all issues would need to be negotiated by the various parties. They should be resolved on the basis of what is socially desirable rather than what some technical logic or in-built representation suggests.
6) As far is possible, all the proceedings of the Commission shall be in the ‘open’. Its minutes and agenda papers should be publicly available for a small subscription. The public and press must be able to attend, record, observe and report its meetings. Such processes will help to secure social legitimacy and will also make its ‘capture’ difficult. At the commencement of each meeting, each member shall state whether the issues under consideration present any conflict of interests, and if so they should be publicly declared. Each members shall state that s/he has not reached any private agreement with any other member or any external party over the issues being concerned.
7) The Insolvency Commission shall advance and defend stakeholder interests. It would be responsible for drawing up and revising insolvency regulations by establishing committees to undertake this work. Its members could be seconded from diverse constituencies (including insolvency practitioners) to undertake this work. The formulation of all rules and regulations shall be preceded by full consultation, inter alia discussion documents, draft documents, public hearings etc.
8) All the policies shall be made by the executive committee and be based upon a simple majority. Details of voting shall be appended to each document finalised by the body. Dissenting views and opinions, if any, shall be attached to any policy document issued.
9) The Commission shall specify the training and education aspects of insolvency practitioners. The Insolvency Commission shall have the powers to prescribe and revise recognised qualifications. These could be provided by established accountancy or law trade associations, but not necessarily limited to these trade associations. A variety of organisations could offer this recognised qualification.
10) The Commission may expand (subject to suitable safeguards) the number of insolvency practitioners by inviting banks, financial services companies and other established businesses to enter the insolvency market. This would help to eliminate excessive fees and provide much needed competition in the insolvency sector. Accountants and lawyers routinely enter other jurisdictions (including financial services) and can hardly object to other organisations entering their jurisdictions. If competition is considered to be a good thing then accountants and lawyers should also have it.
11) The Commission shall be responsible for monitoring all licensees. It will have powers to publicly name and shame firms with poor record. Any practitioner criticised will be required to state the steps that s/he is taking to remedy the problems highlighted by the regulator. The Commission shall have full powers and resources to investigate the overall standards of any licensed firm to enable it to determine whether the firm is a ‘fit and proper’ to undertake insolvency work.
12) The Commission shall develop policies which enable practitioners to avoid conflicts of interests. For example, individuals acting as ‘reporting accountants’ on a business should not be able to subsequently accept the position of a receiver, administrator and/or a liquidator. The Royal Bank of Scotland has already demonstrated that this results in excessive costs and unnecessary volume of insolvencies.
13) All insolvency practitioners shall be required to publish meaningful information about their affairs. They shall also owe a ‘duty of care’ to all individuals who are stakeholders at date of their appointment.
14) Before, the completion of an insolvency, the practitioner shall be required to state the various bids etc. received for assets. The practitioner shall be required to show that s/he accepted the best bids. This should curb the present abuse where the practitioners continue to reject bids. Subsequently, the practitioners have been known to form private companies which then buy the business or its assets at knock-down prices.
15) At the completion of an insolvency, stakeholders and/or their representatives shall have full access to all the working papers of an insolvency practitioner.
16) The Commission shall have adequate resources and rights to investigate matters of the public interest. These include incidences of real and/or alleged failures and conflicts of interests. All investigations should be completed on a timely basis. Its annual report shall explain the reasons for any investigation which is not completed within 12 months of commencement. The President of the Board of Trade shall make a written and/or oral statement to the House of Commons explaining the reasons for the delay. The body shall owe a ‘duty of care’ to all parties affected by its operations.
17) The Commission shall be able to suspend/withdraw licences and levy unlimited fines for non-compliance with its rules. It can also mount civil and criminal proceedings where necessary. It shall have a statutory right of access to any document, record and notes to enable it to determine whether the licensee is a fit and proper person. It shall also have a statutory right of information and explanation from any person involved with the conduct of the insolvency under investigation. Anyone who knowingly or recklessly misleads the regulator shall be deemed to have committed a civil and/or criminal offence.
18) The Commission shall fully co-operate with other regulators (e.g. Inland Revenue, Financial Services Authority) and exchange information in its possession.
19) The Commission could be financed through a number of ways. Rather than the licensing fees being disbursed over eight RPBs and their numerous overlapping structures, the fees could go solely to the Commission. This could be supplemented by sale of literature (e.g. insolvency regulation), donations, contribution from general taxation and levies. For example, the cost of filing the annual accounts and returns for major companies could be increased.
20) The Commission should be responsible to the DTI and answerable to Parliament for its activities. The DTI Select Committee should examine the operations of the Commission at regular intervals and make suitable recommendations.
We reject the main regulatory proposals of the IRWP. The current structures are ‘captured’ by the insolvency industry and have no independence. The same applies to the proposed Board.
We recommend that the DTI should set up a new independent regulatory
body - Insolvency Commission - to regulate insolvency practitioners. This
body would be independent of the insolvency trade associations. Only such
a body and related reforms (see above) can represent the wider public interest
and gain the confidence of those affected by insolvencies.