Deregulation Bill: Clause 17 (Authorisation of Insolvency Practitioners)

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1 Deregulation Bill: Clause 17 (Authorisation of Insolvency Practitioners) Clause 17 of the Deregulation Bill introduces partial licences for Insolvency Practitioners (IPs). This briefing sets out R3 s views on the Government s justifications for introducing this new licensing regime for IPs. What is a partial licence? There are approximately 1,700 IPs in the UK. Each currently trains, and is licensed, in corporate and personal insolvency. The proposal in Clause 15 of the Deregulation Bill would allow IPs to qualify for a corporate insolvency licence, a personal insolvency licence, or the current full licence (both types of insolvency); thereby providing the choice of three rather than one licence. The Government says partial licences will benefit insolvency practices of all sizes and the personal insolvency market by; increasing competition in the IP market; lowering training costs and lowering insolvency fees. Summary of R3 s views R3 supports the Government s agenda for deregulation and believes the majority of the insolvency proposals in the Deregulation Bill will achieve that goal. However, we have serious concerns that the benefits of choice of three insolvency licences rather than one will be strongly outweighed by the costs. R3 also believes that the Government will not achieve its desired aims through partial licences; partial licences will have a negative impact on businesses and individuals seeking financial advice, and the quality and competiveness of the UK insolvency regime (currently ranked 7 th best in the world according to the World Bank). IPs, lawyers, accountants, doctors and other professionally qualified individuals achieve their initial qualifications through training which encompasses all areas of their discipline they then go on to specialise. This clearly works well throughout the professions. Under these new proposals, IPs will no longer need to do this they will jump straight to a specialism this could significantly cut corners in training and undermine professional standards within the insolvency profession. R3 is particularly concerned at comments made in a recent speech by the minister responsible for insolvency which suggest that partial licences will lower standards in the profession (partial licences will) reduce a little the high bar on entry to the profession (Jenny Willott MP, Parliamentary Under Secretary for BIS, 3 rd April 2014) R3 would like to see the proposals dropped from the Bill and calls on the Government to review alternative recommendations to achieve its objectives for deregulation. R3 s concerns General IPs do not know from the outset whether they are dealing with a solely corporate or personal insolvency case e.g. a small business insolvency can often involve personal guarantees and viceversa. This will confuse debtors and creditors who are seeking an IP for insolvency advice. 1

2 The UK s insolvency regime is the 7 th best in the world according to the World Bank (December 2013) based on amount and speed of returns to creditors. Partial licences could undermine that world ranking. Lack of evidence-based policy making The Government has informed R3 that partial licences are not being introduced to fix a problem ; we have been informed that there is no evidence of under capacity in the market and no evidence that the current licensing regime is causing concerns about the advice that IPs provide. If the current regime works well, we question why the Government wants to introduce this proposal. The original proposals for new licences (as put forward in the Legislative Reform Order in 2008 and subsequently withdrawn) were that a person could be authorised just to do voluntary arrangements (individual or corporate). These proposals were based on an increase in demand for more Individual Voluntary Arrangements (IVAs) that demand has since been met through IVA-specialist businesses (focus on processing a high volume of consumer IVAs under supervision of just one or two IPs). Those proposals were replaced with these new partial licence proposals (outlined originally in 2010), allowing specialisation in individual and corporate insolvency (not just voluntary arrangements). The majority of the insolvency profession oppose the proposals. R3 is aware of no evidence or demand for the introduction of a corporate licence. The Government has informed R3 that this licence is to be introduced for symmetry i.e. if there is a personal insolvency licence there should be a corporate licence too. In its report on the draft Deregulation Bill published on the 19 December 2013, the Joint Committee on the Draft Deregulation Bill expressed concern at the lack of stakeholder consultation on the proposals (the Government had only carried out informal consultation before the draft Deregulation Bill was published). The Committee claimed consultation was inadequate, and recommended that the Government carry out further consultation. The Government subsequently published (on the same day as the Bill received its First Reading 23 January 2014) a short consultation asking for responses to the final proposals. Government justification: Partial licences will benefit insolvency practices of all sizes and the personal insolvency market Small practices: 90% of smaller practices say they would not train a partial licence holder and 80% say they would not employ one they need to be trained in both corporate and personal insolvency for commercial reasons. Contrary to the Government's assertion, 82% of smaller practices do not believe that they will significantly benefit from lower training costs. 2

3 Case study: Small practice IP specialises in personal insolvency As someone who has always specialised in personal insolvency, I do not see how partial licensing will work. What I do strongly believe, is that partial training in one or the other is very dangerous and will not benefit anyone in the industry in fact I think that the reverse can be said. As someone who had only ever done personal work before I did my exams, I felt that I really benefited from having the wider picture of all insolvency processes and subsequently understood how the jigsaw all fitted together. In my mind, one process compliments and interlinks with another. The majority of my work is personal but I still constantly have to deal with queries about company insolvency issues which I would be ill equipped to do without some knowledge of the various processes. A good understanding of all procedures is essential. Large practices: A number of large practices (including a number of the Big 4 accountancy firms) say that they share the same concerns as R3. Aspiring IPs: The Government has informed R3 that aspiring IPs are interested in partial licences. However 85% of R3 s student members say they would qualify in the current licence. Furthermore, R3 understands that the Government expects students who qualify in a partial licence to become fully authorised later on in their career this will therefore not reduce training costs over the long-term. Case study Student one: I can see the cost savings of this, but practically, I don t think this would work. It would be like going to the doctor with a headache and him then saying he only deals with feet. It is damn hard to get through JIEB and just because of that, it shouldn t be made easier to pass by doing one exam at a time. Due to its difficulty, this is what upholds the quality and professionalism of the modern appointment taker. IPs need to be a master of all trades, particularly due to the often overlapping of some areas. Student two: I think the standard of the profession is very high on the basis of the strict entry requirements to obtain a licence, a partial licence would de-value the profession as it would make it easier to obtain a partial licence, and clients would probably be unaware of the difference between partially licenced and fully licenced IPs. Personal insolvency market: Debt advice charities (IVA-specialists) often only employ a couple of IPs to deal with their hundreds of voluntary arrangements this is therefore already cost efficient for that organisation. R3 also understands that they do not pay for the IP to be trained and therefore will not benefit from any reduced training fees. 3

4 R3 understands that IPs employed by debt advice charities are concerned about the negative impact partial licences will have on the profession; they do not agree with the Government that the current licence is a burden on their work or on an IP s professional development. R3 also understands that IPs working for debt advice charities would not lower their fees if they had a partial licence (see fees section p5). During the House of Commons passage of the Bill, the Government referred to individuals who cannot afford to go bankrupt; a partial licence holder would not reduce the costs of bankruptcy. It is expensive to go bankrupt because the court and statutory fees for bankruptcy are too high for people with limited means. R3 has a number of recommendations to assist debtors access the most appropriate personal insolvency solution for their circumstance. Government justification: Partial licences will, increase competition, decrease training costs, lower fees and deregulate access to the IP profession Competition: There is no evidence to suggest the need for more IPs in the market (the Government has confirmed this to R3). There are actually a number of redundancies taking place within the insolvency profession because of the decline in the number of insolvencies - for example insolvency firm Begbies Traynor cut 11% of its workforce between the summer of 2012 and summer of The Insolvency Service itself has experienced a 40% staff cut in recent years because of a fall in the number of insolvencies. Take up of the licence is expected to be small (there are only 1,700 IPs in the UK) given the commercial benefits of being fully qualified. Training costs: BPP (the main education provider for IPs) currently charges 2,892 for each exam (three exams in total). Taking less than three exams will in theory reduce the cost of the exam. However there has been no discussion between the Government, profession and insolvency exam board as to what the exams will look like, let alone what they will cost. We expect the savings to be negligible due to the expected increase in regulatory costs through the introduction of two new licences, which will probably be passed on to IPs and subsequently the creditors. The costs of Continuing Professional Development (CPD) will not be reduced because IPs already tend to concentrate on CPD which corresponds to the nature of their current work. Given the nature of the IP market and career development of individuals (over more than 30 years), it is almost certain that an IP will not specialise in either corporate or personal insolvency for their entire career (the Government agree) so partial licensees will almost certainly need to re-train this is therefore a cost and time burden on the IP, who could have just trained for the full qualification at the start of their career. 4

5 Fees: There is no evidence to suggest that IPs' fees will be reduced. As outlined above, the IP market is already competitive (with a number of redundancies recently made) and for many accountancy firms insolvency has become a low margin activity. Furthermore, an IP who holds a partial licence will still be regulated to the same extent as an IP with the current licence, and they will still be personally liable for all insolvency cases, therefore an IP is unlikely to charge a lower fee. Deregulation: The proposal sits within the Deregulation Bill however introducing two licences is not deregulatory. It will mean extra costs for the insolvency regulators and new monitoring requirements. R3 recommendations for insolvency fees The insolvency profession recognises that insolvency fees should always be scrutinised, and if appropriate, challenged. R3 has made a number of recent recommendations to improve returns to unsecured creditors and address concerns around fees: R3 s 2013 proposal to reduce the expense involved in paying very small dividends was adopted by the Government s Red Tape Challenge. This will reduce IPs fees. The Government should drop its proposal to remove the requirement for IPs to hold creditor meetings. This contradicts the Government s objective of improving unsecured creditor engagement. The Insolvency Service could better direct its useful information to creditors. The profession is also pro-actively working on solutions to improve engagement. Increased unsecured creditor engagement by HMRC (24% of all unsecured debt) would help set fee levels for all unsecured creditors. Creditors to be given an estimate of IPs costs at the outset - this was recommended in a previous Government report but has not been taken forward. Greater use of the provisions of the amendments introduced by the 2010 Insolvency Rules: Some statutory work (e.g. sending progress reports to creditors) could be quoted on a fixed basis. IPs could also be required to report work with more detail e.g. break down time into constituent parts such as communicating with x number of creditors to establish a meeting. R3 recommendations for reforming personal insolvency R3 is concerned that personal insolvency solutions have not kept up with the dramatic change in personal debt and insolvency levels; the number of new personal insolvencies has almost trebled from 35,600 in 2003 to 102,000 in 2012/13. This means that more individuals may enter inappropriate insolvency solutions, or do not get the debt relief they need. It also means that creditors can be exposed to reckless debtors racking up debts they cannot afford to pay. 5

6 R3 proposes a number of recommendations (p7) to address these concerns. These recommendations are supported by a number of debt advice charities and wider stakeholders. R3 is the leading trade body for the UK insolvency profession - representing 97% of Insolvency Practitioners. From senior partners at the Big Four accountancy firms to practitioners who run their own small and micro-businesses, our members have extensive experience of both corporate and personal insolvency. In 2012, Insolvency Practitioners (according to a survey carried out by ComRes): Saved 750,000 jobs in the UK Advised more than 95,000 businesses, with just under 50% (45,000) continuing in some form Assisted UK businesses with combined turnover of more than 270billion For further information contact Georgina.Dowling@r3.org.uk or Follow us 6

7 Debt relief procedure The problem R3 s proposals All procedures Lack of consistency in calculating income and expenditure Universal use of the Common Financial Statement or similar across all debt relief solutions to calculate an individual s surplus income Bankruptcy Cost of entry is a barrier to entry ( 700) Payment by instalments Debt Relief Orders (DRO) Individual Voluntary Arrangements (IVA) Current system doesn t adequately consider and deal with an individual s behaviour in run up to bankruptcy Minimum income threshold for Income Payment Orders/Agreement is too low, jeopardising individuals ability to cope with financial shocks or emergency expenditure Entry thresholds for assets ( 300) and debts ( 15,000) are too low, needlessly acting as a barrier to entry There is a disincentive for individuals to improve their financial situation or declare a change in their circumstances whilst subject to a DRO Revocation of the order is not a strong enough deterrent to individuals who seek to mislead or leave out information on their application form Increase Debt Relief Order thresholds A three tier bankruptcy process: Three year standard term (rather than current 12 months) Three to 15 year term for the most culpable individuals 12 month term for the least culpable individuals Increase the minimum income threshold to 50 per month Increase the asset threshold to 2,000 Increase the debt threshold to 30,000 Offer individuals the option to transfer into bankruptcy if their circumstances change such that they are no longer eligible for a DRO Retrospective effect of revocation of the order where the individual has provided false information or deliberately sought to mislead or leave out information on their application form An individual can be made subject to a Debt Relief Restrictions Order A DRRO should only be imposed for reasons of the individual s (DRRO) at the same time that their DRO is revoked, subjecting them to behaviour prior to the DRO and not simultaneously with the DRO restrictions for an extended period but without any debt relief revocation of the DRO Creditor modifications are a barrier to entry Introduce simplified IVAs Lack of incentive for individuals to enter this solution to repay a proportion of their debts Reduce the impact of an IVA on the individual s credit rating in comparison to bankruptcy or a DRO 7