Strengthening the regulatory regime and fee structure for insolvency practitioners

Transcription

1 Strengthening the regulatory regime and fee structure for insolvency practitioners The Law Society response March The Law Society. All rights reserved.

2 The Law Society welcomes the opportunity to comment upon the proposals about the regulatory regime and fee structure for Insolvency Practitioners (IPs). A relatively small number of solicitors practise as IPs and, we believe, provide a valuable service for creditors. They do so under arrangements whereby the Law Society acts as a Recognised Professional Body (RPB). The Society has delegated this aspect of its work to the Solicitors Regulation Authority its ring-fenced regulatory arm. The Society starts from the premise that: It is right that there should be competition among Insolvency Practitioners and that different professionals can bring different qualities to the market, which increases choice; The regulatory structure should be wide enough to accommodate the different regulatory regimes governing different professions, provided, of course, that basic standards of competence and probity are maintained. We are concerned that the Government s proposals will be too prescriptive and will create additional burden for RPBs and for individual Insolvency Practitioners. In addition, we are concerned about proposals which may be too prescriptive in respect of fees. It needs to be recognised that the outcome of insolvency proceedings can be uncertain, that there is a certain basic amount of work to be done individual cases and that this may, on occasion appear disproportionate to the amount recovered. In this case, the concept of value for money will be very difficult to achieve and may mean that a number of practitioners may feel that this market is no longer relevant for them. This would reduce choice and would not be in the public interest. Part 1 Regulation of Insolvency Practitioners 1) Are the proposed regulatory objectives and the requirements for RPBs to reflect them appropriate for the insolvency regulatory regime? We agree that the bulk of the regulatory objectives are suitable for IPs, subject to two caveats. First, we think that the subsections to objective 3 are not obviously linked to the over-arching objective and may need to be redrafted. More seriously, we are concerned about the final objective to ensure that fees achieve value for money. This appears to us to be a very nebulous concept in the area of professional services and one that is likely to cause considerable uncertainty. Value is an inherently subjective criteria. Different creditors may regard very different matters as giving value. Some may regard value as being the relationship between the amounts recovered and the fees charged; others may regard the amount of fees recovered as being unimportant compared to the distress and pressure put upon the debtor; others may want a Rolls Royce service with frequent expensive reports. Moreover, in respect of the first, the amounts recoverable are likely to be unforeseeable and may well not be linked to the amount of time spent on the work. This is not, so far as we are aware, a concept that is recognised generally in the field of professional (or any other) services and, if it is to be adopted here, there will need to be substantial guidance about what is involved. Clearly there needs to be transparency over fees and mechanisms for ensuring that there is not over-charging but the concept of value for money goes too far. 1

3 In respect of the RPBs, we have considerable concerns that the rules proposed may be too prescriptive and not fit well with the regime adopted by the SRA. As an approved regulator under the Legal Services Act 2007 (LSA), we are already subject to eight regulatory objectives. While some of the regulatory objectives suggested in the consultation document are compatible with the regulatory objectives in the LSA, such as objective 1, others may create more difficulties particularly as the objectives are detailed and prescriptive unlike those in the LSA. The SRA, as our frontline regulator has structured its regulatory system to meet the regulatory objectives set out under the LSA. Updating its regulatory structure to take account of new regulatory objectives will take time and will be costly. It is likely that the Regulatory Objectives under the LSA will cover the bulk of those envisaged in the consultation. Any additional ones should only be interpolated if they are essential to the nature of insolvency work and differ or are in addition to those relevant to the individual professional. We also believe that the Insolvency Service should be flexible about the way in which the obligations are implemented by the RPBs. Given that it is in the public interest for different professionals to practise in this field, it makes sense for their regulatory obligations to be managed in a way which is consistent throughout. Therefore, an outcomes focussed approach should apply to the work of solicitor IPs and, provided that the outcomes meet the relevant objectives, the SRA should be able have the flexibility to set out the regulatory regime in a way which is consistent with its regime for other practitioners. We are concerned that, as currently set out, the objectives are unnecessarily prescriptive and in some cases inappropriate. For instance, objective 4 relates to the maximisation of returns to creditors. This may be an objective for an insolvency practitioner but is not the role for a regulator. 2) Do you have any comments on the proposed procedure for revoking the recognition of an RPB? The Law Society recognises that the current regulatory framework leaves the oversight regulator with limited regulatory tools. However, we (and other RBPs) already have an oversight regulator in the form of the Legal Services Board (LSB). In the past, there have been occasions where the requirements of the LSB and the Insolvency Service have conflicted. While the difficulties were successfully resolved, we are concerned that with a wider range of powers, a regulatory sanction may have been applied to the Law Society for our failure to comply when, in fact, the SRA were restricted by the requirements of the LSB in what we were able to do. Before we can support any changes to the powers of the Secretary of State we would need to be assured that there was a framework in place to resolve conflicting demands of oversight regulators. Given our concerns regarding the nature and drafting of the regulatory objectives we cannot support the extension of the Secretary of State s powers to revoke recognition because of failure to comply with the objectives. We would also have particular concerns about the ability to impose a financial penalty, as there is limited information about the quantum of such a penalty and the basis it would be calculated upon. 2

4 3) Do you have any comments on the proposed scope and procedures for the Secretary of State to issue a direction to an RPB? See comments under question 2 4) Do you have any comments on the proposed scope and procedures for the Secretary of State to impose a financial penalty on an RPB? See comments under question 2 5) Do you have any comments on the proposed scope and procedures for the Secretary of State to publicly reprimand an RPB? See comments under question 2 6) Do you agree with the proposed arrangements for RPBs making representations? See comments under question 2 7) Do you have any comments on the proposed procedure for the Secretary of State to be able to apply to Court to impose a sanction directly on an IP in exceptional circumstances? We are concerned that by allowing the Insolvency Service to both oversee RPBs and directly regulate IPs it will provide a form of dual regulation for IPs, with IPs that have been exonerated by their regulator of any misconduct, finding that they are then reinvestigated by the Insolvency Service. The Insolvency Service s role is as an oversight regulator and, as such, it should not be able to interfere in individual cases. We are unaware of evidence that would justify such a power. 8) Do you have any comments about the proposed procedure for the Secretary of State to require information and the people from whom information may be required? See comments under question 7 9) Do you agree with the proposal to provide a reserve power for the Secretary of State to designate a single insolvency regulator? Given, the implications of such a move, we do not believe this is a power that the Secretary of State should hold in reserve. If the Secretary of State believes that a single regulator is the most effective option, then this should be fully debated and consulted upon. 3

5 10) Do you have any comments on the proposed functions and powers of a single regulator? Given the paucity of information about this option, we are unable to make any comment. Part 2 Insolvency Practitioner fee regime 11) Do you agree with the assessment of the costs associated with fee complaints being reviewed by RPBs? The impact assessment concentrates on the potential costs of regulation on the Insolvency Service rather than the costs to the RPBs. The SRA s current remit does not include considering whether fees are value for money. We believe the costs of undertaking such a new role will be considerable and will include creating an additional regulatory framework, training staff and providing advice and guidance to the profession. These costs will be passed on to the profession and ultimately to creditors. There will also be additional costs for the profession in complying with a new regulatory regime. We are particularly concerned about the costs of handling complaints about fees as opposed to those that relate to an element of poor service. The Law Society has experience of running a scheme that allowed applicants who considered that a bill was too high to have the quantum assessed. Our experience was that, for some clients, the use of the bill checking procedure became standard practice rather than a tool to challenge overly high bills. The cost of running such a process could be extensive and we are concerned that this has not been factored into the cost assessment. 12) Do you agree that by adding IP fees representing value for money to the regulatory framework, greater compliance monitoring, oversight and complaint handling of fees can be delivered by the regulators? The focus on fees ignores a wider problem that the legislative position of unsecured creditors leaves them in an inherently weaker position. We recognise that larger secured creditors, particularly repeat users are able to secure lower rates. However, this is not unique to this market and we do not think that these proposals, in isolation, will do much to improve the position of unsecured creditors or increase the returns they see in an insolvency process. We have indicated our concerns about the concept of value for money in our answer to question 1 and we do not believe that this is a practical requirement for practitioners to comply with. Clearly there need to be controls to ensure that there is transparency and honesty in charging. However, it will place an entirely inappropriate burden on practitioners who may undertake reasonable work in good faith only for it to be questioned after the event. We are unaware of any business that has its fees checked on this basis after the event. If there is evidence to suggest that greater compliance monitoring, oversight and complaint handling of fees is necessary, then we believe that other concepts would create less uncertainty. For example, requirements to keep creditors informed of progress and costs, monitoring to avoid over-charging etc could be achieved by other means. There is a real danger that the proposal will lead to regulators micromanaging the fees charged by IPs and creating a prescriptive regime. This will limit 4

6 competition in the market as those IPs who do not rely on the work as their main source of income may leave the market. 13) Do you believe that publishing information on approving fees, how to appoint an IP, obtain quotes and negotiate fees and comparative fee data by asset size, will assist unsecured creditors to negotiate competitive fee rates? Solicitors are already required to provide best possible information, both at the time of engagement and when appropriate as their matter progresses, about the likely overall cost of their matter. We believe that a similar principle should apply to all IPs. We do not think that creating further prescriptive rules about the type of information that should be provided is helpful and indeed, research has indicated that prescriptive rules on the information that needs to be provided has led to lengthy reports that are not always helpful to creditors. 14) Do you think that any further exceptions should apply? For example, if one or two unconnected unsecured creditors make up a simple majority by value? As noted above, we do not believe that creating prescriptive rules on how fees are charged is the right approach. 15) Do you have any comments on the proposal set out in Annex A to restrict time and rate as a basis of remuneration to cases where there is a creditors committee or where secured creditors will not be paid in full? See comments above 16) What impact do you think the proposed changes to the fee structure will have on IP fees and returns to unsecured creditors? We do not have any evidence to provide on this question. 17) Do you agree that the proposed changes to basis for remuneration should not apply to company voluntary arrangements, members voluntary liquidation or individual voluntary arrangements? See comments under question 14 18) Where the basis is set as a percentage of realisations, do you favour setting a prescribed scale for the amount available to be taken as fees, as the default position with the option of seeking approval from creditors for a variation of that amount? See comments under question 14 5

7 19) Is the current statutory scale commercially viable? If not what might a commercial scale, appropriate for the majority of cases, look like and how do you suggest such a scale should be set? We do not have any evidence to provide on this question. 20) Do you think there are further circumstances in which time and rate should be able to be charged? See comments under question 14 Impact Assessment questions: 21) Do you agree with this estimation for familiarisation costs for the changes to the fee structure? There is limited assessment on the costs to RPBs or IPs in implementing the proposed changes. As noted above, we believe that the cost could be significant. 22) As a secured creditor, how much time/cost do you anticipate these changes will require in order to familiarise yourself with the new fee structure? No comment 23) To what extent do you expect the new fee structure to reduce the current level of overpayment? No comment 24) Do you agree with the assessment that the requirement to seek approval of creditors for the percentage of assets against which remuneration will be taken, will not add any additional costs? N/A 25) Do you agree with these assumptions? Do you have any data to support how the changes to the fee structure will impact on the fees currently charged? We are surprised that the assessment provides no evidence as to how these changes might affect the fees charged. Given the reasoning behind making these changes is that they will lower the charges, we would expect some evidence of this to be provided. 6

8 26) Do you agree or disagree in adding a weight in the relative costs and benefits to IPs and unsecured creditors? If you agree, what would the weight be? No comment 27) Do consultees believe these measures will improve the market confidence? No, as these changes do not tackle the wider issues regarding the position of unsecured creditors. 28) Do consultees believe these measures will improve the reputation of the insolvency profession? See comments under question 27 7