CONSULTATION ON REFORMS TO THE REGULATION OF INSOLVENCY PRACTITIONERS FEBRUARY 2011
Contents Foreword 4 Executive Summary 5 Chapter 1: General Information 6 How to respond 6 Additional copies 6 Confidentiality and data protection 7 Help with queries 7 What happens next? 7 Chapter 2: Overview/Regulatory Framework 9 Regulatory Model in Great Britain 9 The OFT Report 10 Findings 11 Recommendations 13 Government s View 14 Structure and purpose of this document 15 Chapter 3: Independent Complaints Body 16 The current complaints process 16 OFT findings on the complaints system 17 Government response 18 Models for an independent complaints body 19 Single portal for complaints 22 Arbitration for fee related complaints 23 Location of the independent complaints/appeals body function 24 Funding 26 Summary of Questions Chapter 3 27 Chapter 4: Changes to the regulatory framework 29 Regulatory Objectives 30 2
The Structure of Regulation 30 Oversight regulator 31 Joint Insolvency Committee 33 Standard Setting Board 34 Insolvency Practices Council (IPC) 35 Summary of Questions - Chapter 4 37 Chapter 5: Detailed suggestions for changes to insolvency legislation 38 Consideration of each proposal 38 Summary of Questions - Chapter 5 49 Annex A - Summary of Consultation Questions 50 Annex B: Impact Assessment (IA) 53 Summary: Intervention and Options 53 Summary: Analysis and Evidence 54 Evidence Base 57 Annex C - The Consultation Code of Practice Criteria 89 3
Foreword The economic downturn has increased the profile of insolvency and the professionals who operate it. This increased media coverage has led to many questions about the current system of regulation for the profession and how effective it is at protecting the interests of vulnerable parties. Everyone who is affected by insolvency - whether they are employees, individuals struggling with debt, consumers who have lost deposits or suppliers who have not been paid are entitled to have confidence in the insolvency profession to deliver the best possible outcome in what are often difficult and challenging circumstances. We need to ensure that the regulatory system provides that confidence and, where necessary, can react swiftly and effectively where that confidence is undermined. I welcome the Office of Fair Trading s contribution to this important debate and value the recommendations put forward on how we should take this forward. My vision is that we should have a system of regulation that is transparent, efficient, and which acts to protect the interests of all those involved in insolvency proceedings. I am keen for all parties to engage in this consultation and look forward to hearing your views. Edward Davey MP Minister for Employment Relations, Consumer and Postal Affairs 4
Executive Summary (i) (ii) (iii) (iv) This consultation is being published in response to the Office of Fair Trading (OFT) study into the market for corporate insolvency practitioners. The report was published in June 2010 and made a number of recommendations to Government. It is vital that the market for insolvency functions properly, not just for those directly affected by proceedings but also for the economy as a whole. Customers need to have confidence in the regime as this is linked closely with availability of credit. The regulatory framework underpinning the market should promote competition and build confidence in the system. The OFT study was initiated following concerns from a range of parties, including IPs, that the current system was overly complicated and did not build trust in the profession. The study recognised that the market works well in the majority of cases but not all. The report highlighted the weak position of unsecured creditors, in particular in cases where secured creditors get paid in full and unsecured creditors are left to influence the remainder of the insolvency process. The OFT found that the current regulatory framework does not assist the unsecured creditor to exert influence over the process and the office-holder. We welcome the robust analysis carried out by the OFT and are supportive of the majority of the recommendations of the report, which makes three broad suggestions for change to address the problems associated with the weak position of unsecured creditors: Establishing an Independent Complaints Body; Setting clear objectives for the regulatory regime; and Detailed amendments to particular regulations. (v) (vi) (vii) (viii) Although focused on the corporate insolvency market, most of the recommendations extend to the market for personal insolvency as the regulatory framework is the same. This consultation seeks views on whether, and if so how, to implement the recommendations presented by the report. The consultation sets out different options to do this and asks specific questions regarding the proposals. The costs of reform will depend on the policy options chosen, and as this is at an early stage of policy development we do not have a preferred suite of measures. However, we estimate a net benefit of 46 million for a feasible set of policy choices. All the financial impacts of the proposals are set in the impact assessment at annex B. This sets out estimates of costs and benefits, which will be tested with stakeholders as part of the consultation process. We will carefully consider all responses received and where it is decided that changes will be made, we will consider the extent to which legislation (primary and secondary) will be required. 5
Chapter 1: General Information How to respond 1.1 When responding please state whether you are doing so as an individual or whether you are representing the views of an organisation. If responding on behalf of an organisation, please make it clear who the organisation represents and, where applicable, how the views of members were assembled. 1.2 This consultation was published on 10 February 2011. The consultation period will run for 12 weeks, and the closing date for responses is Friday 6 May 2011. However, we encourage responses as early as possible to assist us in accelerating the process of considering replies. 1.3 A response can be submitted by letter, fax or email to: Paul Mayo Policy Directorate The Insolvency Service Zone B, 3 rd Floor 21 Bloomsbury Street London WC1B 3QW Tel: 020 7674 6929 Fax: 020 7291 6746 Email: policy.unit@insolvency.gsi.gov.uk 1.4 This consultation will be of interest to: all types of debtors including business and Government; trade organisations and advisers; providers of business finance; representative and regulatory bodies; consumers and employees; and academics. 1.5 We will be holding a number of consultation events and meetings with interested parties during the consultation period to discuss the proposals. Please contact us if you would like to be involved. 1.6 A consultation stage Impact Assessment is attached at Annex B, which estimates the costs and benefits of the policy options outlined in this consultation. We are particularly keen to receive further information on costs and benefits and would welcome any evidence which consultees are able to provide. Q.1 Do you have any comments or evidence on the costs and benefits set out in the attached Impact Assessment (Annex B)? Additional copies 1.7 This consultation can be found at: www.insolvency.gov.uk. You may make additional copies without seeking permission. 6
Confidentiality and data protection 1.8 Information provided in response to this consultation, including personal information, may be subject to publication or release to other parties or to disclosure in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the Environmental Information Regulations 2004)). If you want information, including personal data that you provide, to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals, amongst other things, with obligations of confidentiality. 1.9 In view of this, it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic disclaimer generated by your IT system, will not, of itself, be binding on The Insolvency Service. 1.10 The Insolvency Service will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties. Help with queries 1.11 Questions about the policy issues raised in the document can be addressed to Paul Mayo at The Insolvency Service (contact details as at paragraph 1.3). 1.12 If you have any comments or complaints about the way this consultation has been conducted, these should be sent to: Babatunde Idowu Consultation Co-ordinator Department for Business, Innovation and Skills Better Regulation Team 1 Victoria Street London SW1H 0ET Email: Babatunde.Idowu@bis.gsi.gov.uk Tel: 020 7215 0412 Fax: 020 7215 0235 1.13 A copy of the Government s Code of Practice on Consultation is attached at Annex C. What happens next? 1.14 The Government will consider the responses received and, where necessary changes are required to primary legislation, we would intend to bring forward proposals when parliamentary time allows. 1.15 Decisions taken in light of the consultation will be published along with a summary of the responses. It is likely that the Government will, on the basis of this consultation and continuing policy development, consult further on more detailed and refined proposals, in due course. 7
1.16 Stakeholders will be able to follow developments on these proposals following the consultation on the Insolvency Service website at www.insolvency.gov.uk. 8
Chapter 2: Overview/Regulatory Framework Importance of the regulatory framework 2.1 In any dynamic market based economy, companies and individuals will become insolvent. An effective insolvency regime is an essential backbone of a modern economy; ensuring that capital is reallocated to more productive businesses. Returning money to creditors encourages trade suppliers and financial institutions to offer credit on more favourable terms. It allows those individuals who have no prospect of settling their debts in full to repay what they can and then recommence an active economic life at the earliest opportunity. 2.2 The importance to the economy of the insolvency framework is illustrated by the fact that the total realisations made by insolvency practitioners amounts to at least 5 billion per year. 1 2.3 Underpinning the success of any insolvency regime is its regulatory framework, delivering fairness and certainty for users and supporting a confident, transparent and ethical profession. As with other professions, the insolvency profession is regulated to ensure certain minimum standards are adhered to. 2.4 In the case of insolvency, this is to ensure that insolvency practitioners (IPs), the professionals who are charged with resolving the financial affairs of businesses and individuals in financial trouble, provide a good level of service to the participants in the insolvency process, be they creditors, debtors or directors. 2.5 When this is done well, IPs, creditors and debtors all benefit. Users will benefit because they get a better service and improved returns and insolvency professionals because they operate in a transparent, competitive market. Regulatory Model in Great Britain 2.6 IPs act as office-holders to administer insolvency cases. They are paid fees for their actions out of funds available from realised assets in the insolvent estate. 2.7 The current regulatory system has evolved, in part, to address the fact that IPs hold a position of trust as regards creditors, debtors and the employees of the insolvent. They have a wide range of powers and have to balance the use of those powers with regard to their impact upon different customer groups. The decisions they take can have significant consequences for creditors and debtors, particularly the vulnerable. The regulatory system needs to be strong enough to ensure this position of trust is not abused, and in cases where it is, to ensure appropriate action is taken. 2.8 Underpinning the regulation of IPs in Great Britain is the dual regulatory approach, combining both self-regulation by the profession, and independent oversight regulation by the Government. Self-regulation is carried out by eight regulators i.e. seven industry bodies called Recognised Professional Bodies (RPBs) and the Insolvency Service (the IS) on behalf of the Secretary of State (the SoS) for Business Innovation and Skills 1 The OFT calculated that assets realisations amounted to 5billion per annum for corporate insolvencies. Adding in realisations for personal insolvencies will take this figure beyond 5billion although the total level of realisations for the personal side will be much lower than for the corporate side. http://www.oft.gov.uk/shared_oft/reports/insolvency/oft1245 9
( BIS ), whilst oversight regulation is carried out by the SoS again through its agency the IS 2. 2.9 The dual model approach is widely recognised as an efficient and effective model of regulation, combining both the expertise of the profession and the independence of a third party (in this case the IS) which monitors the regulators to ensure that they continue to apply the relevant standards. 2.10 Other key features of the system are a complaints system, allowing users of IPs to complain where they are not happy with the level of service they have received, legislation which sets out the processes governing insolvency procedures and with which all IPs must comply, and common standards which are designed and agreed by a standards committee. These codes can be quite prescriptive in nature although the Code of Ethics is principles based. 2.11 Regulatory discipline is provided through the regulators having powers to punish their member IPs for transgressions, and the IS s power to revoke an RPB s status if it fails to set and maintain appropriate standards for its member IPs. A final feature is the Insolvency Practices Council, which provides an independent voice for the beneficiaries of the regulatory system (see paragraphs 4.37 to 4.43). 2.12 Although the recent OFT report into Corporate Insolvency 3, which this consultation responds to, identified a number of improvements that could be made to the regulatory system, it did not identify problems with the fundamental structure of insolvency regulation. This is a view that the Government shares. Q.2 Is the current structure of IP regulation the right one? How could it be improved? The OFT Report 2.13 The OFT launched a market study into corporate insolvency in November 2009. The study was initiated following concerns raised by, amongst others, Government, industry and commerce, regarding the market place for corporate insolvency and the regulatory framework under which IPs practise and charge fees. 2.14 Significant amongst these concerns were those raised by the Business and Enterprise Select Committee in their report on the Insolvency Service, which was published in July 2009. It observed that: it may be inevitable that insolvency practitioners' remuneration is perceived as unduly high by many creditors. There must, however, be sufficient opportunity and information to allow creditors to ensure that fees are reduced where that perception is justified. 2.15 The Committee went on to suggest that the Government consider the case for strengthening the control of the remuneration of IPs beyond the limited power currently exercised by creditors. 2 All future references to the Insolvency Service refer to its role acting on behalf of the Secretary of State for Business Innovation and Skills 3 http://www.oft.gov.uk/shared_oft/reports/insolvency/oft1245 10
2.16 The OFT published its findings in June 2010 in a report entitled The market for corporate insolvency practitioners. 2.17 The study focussed on the appointment, actions and fees of corporate IPs in the two main insolvency procedures, administration and Creditors Voluntary Liquidation ( CVL ). These account for 75 per cent of IP fee income. 2.18 The report focused on these procedures as the OFT believed that other procedures (including company voluntary arrangements, administrative receivership or compulsory liquidation) did not in the aggregate generate sufficient IP fees to merit attention and/or were procedures whose characteristics were such, that any harm to users of IP services were likely to be small. 2.19 Although the OFT report focused on the market for corporate insolvency practitioners, as the framework applies to all regulated insolvency procedures, its findings are also as relevant for the personal insolvency market. This consultation and responses to it should also be considered in this light. Findings 2.20 The OFT find dissatisfaction amongst both IPs and creditors with aspects of the regulatory system leading it to be inconsistent and ineffective, and which contributes to undermining confidence in the profession. In spite of this, the OFT found that the regulatory framework performs well for secured creditors, but is less good at promoting and protecting the interests of unsecured creditors leading to some negative impact upon them. As unsecured creditors are responsible for a significant amount of credit in the economy, the fact that the regime does not protect their interests fully is a problem that we think needs to be addressed. 2.21 To understand why unsecured creditors find themselves in a weak position it is necessary both to understand the ranking of payments in insolvency and how the market operates for both secured and unsecured creditors. 2.22 Creditor claims in insolvency proceedings are ranked according to priority. Secured creditors are those who hold some security (a charge) over the assets of the debtor and are ranked ahead of unsecured creditors. Unsecured creditors (who, by definition, do not have the benefit of any security interests in the assets of the debtor) are usually small and medium sized businesses (suppliers) and employees. This system of ranking creditor claims means that the IPs fees, which are paid first in insolvency ahead of the claims of creditors, can erode or exhaust what would otherwise be available to creditors, particularly unsecured creditors as the lowest ranking creditor group. 2.23 In terms of the market, secured creditors are able to exercise a degree of control over the level of fees as, according to the OFT report, they effectively choose the IP and agree the fee scale. The market power of secured creditors is further enhanced by the fact that they tend to be repeat customers in the insolvency market. This means that IPs, in order to secure repeat business, are more likely to concur with their wishes. This also means that secured creditors are usually far more knowledgeable about the complex nature of insolvency proceedings and, as such, know how to exercise influence. 2.24 By contrast, the role of unsecured creditors in appointing IPs and controlling their remuneration is more diffuse and often reliant upon the collective action of creditors. 4 4 Whilst unsecured creditors have the power to appoint IPs in some insolvency procedures, they do not in administrations. 11
The study found that the current regulatory regime did not do enough to rectify this lack of market power on behalf of unsecured creditors. 2.25 Due to these factors, the OFT study found that the market for corporate insolvency works reasonably well when secured creditors only recover part of the money owed to them in an insolvency. In this case they have a continuing interest in using their market power to keep IPs fees in check in order to maximise their own returns. 2.26 Unsecured creditors receive minimal benefit from the exercise of the secured creditors power as in these cases the only payment from the estate they may receive is where payment is made to them from the proceeds of assets subject to a floating charge through the operation of the Prescribed Part 5. 2.27 By contrast, when secured creditors are paid in full they lose their financial incentive to control the IP s fees. Since they are unable to exercise significant control or influence the process, unsecured creditors suffer financial harm in such cases. The OFT study found unsecured creditors faced paying fees, on average, approximately 9 per cent higher than those paid by secured creditor in like for like cases. This result is produced using the OFT s preferred regression specification and is robust at the 98 per cent confidence interval. 2.28 This specification also controls for other factors that may affect the level of discount including the level of assets realised during an administration, which is found to be strongly negatively correlated with the level of the discount. Theoretically this relationship seems correct, as practitioners confirmed to the OFT that low levels of asset recovery force IPs to give large discounts as there are likely to be insufficient resources to cover their fees, whilst conversely large realisations allow discounts to be set lower. 6 2.29 The OFT study found that as a result of the lower discount, unsecured creditors overpay around 15 million in fees per annum in the administration process. 7 2.30 In addition to this harm, the OFT report also highlighted concern that the lower recovery rates for unsecured creditors as a result of the overpayment also restricts the amount of trade credit that creditors would be prepared to advance, which would ultimately impact negatively on economic growth. 2.31 The report identifies a broad range of issues to be addressed to enhance the power of unsecured creditors in insolvency proceedings and improve the effectiveness and efficiency of the regulatory regime more generally. This would help address the harm suffered by unsecured creditors. These can be categorised into three broad themes: Complaint handling 2.32 The report highlights that the current system lacks a fully independent framework for handling complaints and an accessible fee level complaints element. This, the OFT argues, discourages complaints by unsecured creditors. Large unsecured creditors, who 5 S.176A of the Insolvency Act 1986 provides for a share of net realisations of assets subject to a floating charge (the Prescribed Part) to be distributed to unsecured creditors. 6 To see the full methodology underpinning this result see the OFT report, paragraphs 4.87-4.99 http://www.oft.gov.uk/shared_oft/reports/insolvency/oft1245 7 Due to the paucity of data the OFT are unable to calculate the level of market harm inflicted on unsecured creditors in creditors voluntary liquidation, which represent around 25% of IP fees from all corporate insolvency procedures, and around half the level of fees from administration. However they anticipate that as the procedures and regulation in administration and creditors voluntary liquidation are relatively similar, the level of market harm per procedure is likely to be relatively similar. Therefore the 15 million figure is likely to be a significant underestimate of the level of overpayment. 12
are repeat users of insolvency procedure, indicated to the OFT their willingness to make more use of an improved system. The Regulatory System 2.33 The report identified that the current system lacks focus on deliverable outcomes, is overly complicated as well as unresponsive to issues. The study found a number of problems with the current regulatory regime, including a lack of appropriate tools for the oversight regulator to call upon, differing powers amongst the direct regulators, a lack of regulatory objectives to work towards and inefficiencies in the standard setting process. It did not identify the number of direct regulators as a problem in itself. Specific Regulation 2.34 The report suggests that the current powers and remedies available to unsecured creditors are insufficient or too complicated to enable such creditors to play an active part. Recommendations 2.35 The OFT report identified three proposals to address the problems created by the weak position of the unsecured creditor: Establishing an Independent Complaints Body to oversee or consider all complaints including reviewing IPs fees. In the opinion of the OFT, this would: increase efficiency and consistency as regards the handling of after-the-event complaint and review; restore creditor trust in the regulatory regime; and provide a cheaper route to considering complaints about fees than using the courts. Improvements to the regulatory structure including: the establishment of clear objectives that all parties delivering IP regulation can collectively work towards; giving the oversight regulator sufficient powers to ensure effective policing of the regulatory regime; and reforms to the way standards are set to provide speedier and more focussed delivery. The report proposes three objectives to act as the foundation of the regulatory system: 1. Promoting growth by maximising long-term returns to the body of creditors; 2. Correcting market failure by protecting the interests of vulnerable creditors; and 3. Ensuring an independent and competitive IP industry These objectives are intended to ensure that, wherever possible, action taken by the regulators is the most appropriate action in any given case, therefore promoting confidence and trust in the system. Such objectives would, in the opinion of the OFT, provide a structure of accountability for IPs and provide regulators with a framework in which to measure and target actions. 13
These objectives would apply equally to personal insolvency proceedings and were suggested by the OFT with both corporate and personal insolvency in mind. Amending some of the detailed insolvency provisions To enhance the position of unsecured creditors in corporate insolvencies the report suggests amending the legislation governing the process of administration and liquidation. The OFT believes that these amendments would give unsecured creditors more opportunity to influence the actions of IPs as well as providing unsecured creditors with more relevant and focussed information. Government s View 2.36 We believe it is time to review the landscape, both to protect unsecured creditors (as highlighted by the OFT), but equally to reform the structure of regulation to ensure it is cohesive and responsive and that strong and effective oversight is provided in both regulation and standard setting. 2.37 The OFT study raises some important issues and we are keen to explore these further with stakeholders. We recognise the importance of ensuring that unsecured creditors have sufficient and appropriate powers to influence the insolvency process, including the fees and actions of IPs. We also recognise that the system of regulation must balance the power of all participants in the process, including IPs, debtors and creditors. It is also essential that the regulatory regime is focused and delivers against the Government s commitment to simplify, and where possible reduce, unnecessary regulation. 2.38 This consultation document sets out the Government s response to the OFT market study into Corporate Insolvency Practitioners. The document seeks views on the proposals set out by the OFT as well as seeking views on additional suggestions for reforms to the regulatory regime for IPs. 2.39 We are keen to consider this debate further and are open to suggestions as to whether these proposals should be implemented and, if so, how. 2.40 In order to make any reformed system work it will be important that unsecured creditors, particularly large creditors, engage fully with it. Our proposals provide enhanced opportunities for unsecured creditors to challenge the behaviour of Insolvency Practitioners, but unless creditors are prepared to use them, such as taking part in creditors meetings, the problems identified by the OFT will go unchallenged. Furthermore, as the OFT report made clear, as a result of the lack of a significant financial incentive, these powers are unlikely to be utilised by small unsecured creditors acting alone. As such it is important that two of the main government unsecured creditors, HMRC and Redundancy Payments Services, are supportive of this consultation and have committed to making full use of any new powers granted to unsecured creditors. Additional Information 2.41 Many of the measures set out in this document, if adopted, will require primary legislation. Subject to the outcome of the consultation we would intend to bring forward proposals when parliamentary time allows. 2.42 The OFT focussed their findings on England and Wales, but acknowledged that the same issues are relevant to Scotland and Northern Ireland. This consultation covers the 14
regulation of IPs in England, Wales and Scotland. Chapter 3 deals with the complaints system and suggests that fee assessments could be brought within this. The proposals as regards fee assessments would not extend to matters devolved to the Scottish Government, as discussed at paragraph 3.26 and 3.27. Some of the detailed changes to legislation relating to liquidations set out in Chapter 5 concern matters that are currently devolved to the Scottish Government. This matter is discussed in more detail in Chapter 5. 2.43 The proposals set out in this consultation document, if implemented, would have implications for Northern Ireland. Northern Ireland intends to clarify its position at a later stage. Structure and purpose of this document 2.44 This document sets out these recommendations and the variations on how they can be achieved and invites comments on what the best approach would be. The layout is as follows: Chapter 3 considers the creation of an independent complaints body and its suggested remit; Chapter 4 considers the future regulatory regime including the setting of overarching objectives; Chapter 5 considers detailed changes to insolvency legislation. 2.45 A consultation stage Impact Assessment can be found in Annex B. 15
Chapter 3: Independent Complaints Body The current complaints process 3.1 The IS requires the RPBs to have in place accessible, effective, fair, and transparent procedures for dealing with complaints. Each of the RPBs is responsible for investigating complaints against their own IPs but the processes that each of the RPBs employ are slightly different. Generally, the RPBs will not consider complaints about fees charged by an IP as this is seen as a court function. 3.2 Complaints against IPs may be made by creditors, debtors, directors of insolvent companies and others affected by an IP s actions such as suppliers of goods under retention of title clauses. Complaints may range from the IP s conduct in a particular insolvency to conduct in another part of their professional or private life. 3.3 An important feature of all of the complaints systems is that they are free to complainants, with the costs being borne initially by the RPBs and recovered from IPs through membership and/or authorisation fees. 3.4 All serious complaints are considered by panels of IPs, usually with some lay representation. Many of the RPBs separate the investigation of complaints from the decision as to what the penalty should be for poor behaviour. All the RPBs have arrangements in place to ensure that IPs sitting on investigation and disciplinary panels are independent of the IP who is the subject of the complaint. 3.5 All of the RPBs have a range of penalties that they can impose on IPs, including warnings, fines, publicity, and licence restriction or removal where misconduct has been found. Where an IP disagrees with the findings of the RPB there are internal appeal procedures that may be utilised. Where a complainant disagrees with the finding of the RPB they may require the matter to be referred to a reviewer of complaints. This is usually a senior lawyer experienced in insolvency law and practice, who is independent of the RPB but chosen and remunerated by them. 3.6 The IS, as the oversight regulator, will investigate complaints about how an RPB has undertaken the investigation of a complaint against one of its IPs with a view to establishing whether the RPB s procedures were fairly applied, but has no power to substitute its decision for that of the RPB. 3.7 In order to help complainants direct their complaints to the relevant RPB, IPs are required to provide on their communications the name of the body that authorises them. The IS website contains a directory of IPs and a publication about how to make a complaint about an IP to help direct complainants to the correct body. 3.8 The complaint system is not an alternative to the legal remedies that may be available to creditors and others under insolvency legislation. The RPBs generally do not have the power to order the IP to remedy any act or omission or provide redress where misconduct has been found. Only the court has the jurisdiction to make such an order. 16
OFT findings on the complaints system 3.9 The OFT found that, despite the existing regulation of IPs, unsecured creditors remain unable in many situations to constrain IPs fees and actions. They found that by reserving fee assessment to a court process; one of the major concerns of unsecured creditors is excluded from the main complaint system making a complaint was prohibitively expensive unsecured creditors were deterred from challenging high fees as any perceived benefit was outweighed by cost. 3.10 The OFT also found that over half of unsecured creditors did not know how to complain about the insolvency process; and that there was a lack of trust in the complaint process. 3.11 Some of the concerns expressed by unsecured creditors about the effectiveness of the existing complaint system were shared by IPs themselves. In a survey of IPs by the OFT, 41% of those who responded did not believe that the current regulatory system dealt effectively with rogue IPs; and 45% believed that it dealt with poor behaviour inconsistently. 3.12 The OFT found that the lack of confidence shared by both creditors and many IPs in the existing complaint system was mainly due to the lack of independence of the system from those who are the subject of complaints. Whilst the procedures of the RPBs include some lay representation, the committees investigating and adjudicating on complaints are made up primarily of IPs. Creditors referred to the procedures as uninviting and told the OFT that there was little point in making a complaint when you re fairly confident that nothing will happen, or when there are so many hurdles. 3.13 The OFT found that the legal and associated costs of IPs who come to court to have their remuneration assessed are allowable out of the assets of the insolvent, even if the court decides that the remuneration claimed is excessive. 3.14 In order to address these areas of harm the OFT suggest the establishment of an independent complaints body (funded by the profession) that has the ability to review fees. The OFT consider that the existence of such a body would increase the efficacy and consistency of after-the-event review, restore creditor trust in the regulatory regime, and allow a cost-effective route for fee assessment. The OFT were confident that having an independent element to the complaints system would mean that more unsecured creditors would make complaints - they would have more trust in the process and, to deter repeat poor IP performance, would be more likely to make well-argued complaints. 3.15 Paragraphs Error! Reference source not found. to 2.31 in this document set out the background to the OFT finding that unsecured creditors struggle to influence levels of IP fees. The OFT recommended that where it was found that an IP had overcharged fees, the complaints body should have the power to order that any overcharge 8 be returned to creditors. The OFT thought that a body with these powers would help to restore the balance of power between IPs and unsecured creditors, and trust in the regulatory process. Creditors would have a cheaper and more accessible route for challenging high 8 When referring to overcharging, it is apparent that the OFT included the charging of fees which had been properly approved in accordance with insolvency legislation and professional standards, but where the hourly rate charged by an IP in a CVL that followed an administration was higher than in the administration. 17
fees than the court route and would be encouraged to make well-argued complaints when they saw inappropriate behaviour by IPs. 3.16 The OFT did not recommend a redress based complaint system (such as an ombudsman scheme) other than in relation to cases where an IP was found to have overcharged fees. A redress based complaints system is one in which complainants could be compensated, or else made better-off, for any harm imposed upon them as a consequence of any wrongful action. 3.17 Whilst the OFT s report concentrated on the corporate insolvency market, we think that the broad thrust of their findings in respect of complaints handling is also applicable to the personal insolvency market. On this basis it is our intention that the proposals put forward in the remainder of this Chapter will apply to all IPs, irrespective of the sector they choose to work in. Government response 3.18 The Government is minded to accept the OFT s finding that an independent complaints body would address the main problems identified in their study. We are also minded to agree that the complaints body should have the power to deal with complaints about IP fees, even where the complaint relates to fees that have been approved in accordance with insolvency legislation and prevailing professional standards. This means that complaints could be made to the complaint body by a minority creditor who thought that the fees were too high, even though the majority of creditors had approved the remuneration and the IP had fully complied with all of the requirements of Statement of Insolvency Practice 9 (remuneration of insolvency office-holders). We recognise that in some complex insolvencies a challenge by way of application to the court may be an appropriate route, and consider that some flexibility should be retained as to the route used in such cases. 3.19 In order to deal with fee assessment disputes, an independent body s powers would need to be conferred by legislation. We also recognise that to be able to assess fee disputes effectively, the relevant persons would need experience and expertise in this area. 3.20 The Government is minded to agree with the OFT s view that where an IP has been found to have overcharged, creditors should be left in the same position as if the IP had not overcharged. This would involve the IP reimbursing the insolvent estate to the extent of the overcharge, and the costs of the IP in defending the claim (e.g. his legal and associated costs) not being met from the insolvent estate, whether the complaint was made through the complaints body or through the court. 3.21 The Government believes that complaints about fees made through a new complaints body should be without charge to the applicant (irrespective of whether the IP was found to have overcharged or not). 3.22 As with any application to court, the applicant will face legal and associated costs. While the court has discretion to order that the costs be paid by the insolvent estate or the office-holder, the default position is that they be paid by the applicant. The Government proposes that the legislation should highlight the court s discretion to award the complainant's costs against the insolvent estate (therefore being borne by all creditors) or the IP. 18
3.23 If in the court route, the IP is found not to have overcharged, the Government proposes that the court should have the discretion to award the complainant's legal and associated costs against the insolvent estate. 3.24 Where the IP is found not to have overcharged, we consider it reasonable for the costs of the IP in defending the allegation to be met from the estate, where there are funds to do so. 3.25 Finally the Government s view is that if complaints handling is to be removed from the RPBs then it will be necessary for decisions taken by the complaints body to be imposed on IPs. This could be achieved by the RPBs being required to implement and enforce decisions of the complaint body. Sanctions for not doing so, or not doing so quickly enough, are one of the enhanced powers that we believe should be given to the oversight regulator (see chapter 4). 3.26 In regard to Scotland, personal insolvency generally and the process of winding up are both matters which are devolved to the Scottish Government (though, as also noted at paragraph 5.5, the Scotland Bill that was introduced into the UK Parliament on 30 November 2010 includes provision to re-reserve windings up taking place in Scotland). It follows that at present in both cases aspects of the remuneration of the relevant insolvency practitioner is devolved. 3.27 The Accountant in Bankruptcy in Scotland currently has the power to fix fees charged for sequestration and protected trust deeds. We would envisage that the complaints system, while covering the regulation of IPs in Scotland generally, would not cover fee complaints relating to personal insolvency. We will be considering the scope of the new complaints regime in light of responses to the consultation. Q.3 Would the creation of an independent complaints body be the best way to improve confidence in the handling of complaints and/or appeals? Q.4 Should such a body have the power to review the fees and remuneration charged by IPs? Q.5 Should all fee complaints be reviewed in this manner, or should some (such as more complex cases) be reserved to the court? Who would decide the criteria in individual cases? Q.6 How should the costs of a fee related complaint be paid where i) the IP is found to have overcharged and ii) where they are found not to have overcharged? Models for an independent complaints body 3.28 The OFT put forward two ways in which an independent complaints body could operate, namely as: an independent first tier body, taking complaints directly from complainants (an independent complaints body) ; or an appeal body after the RPBs have considered the complaints themselves (an independent appeals body). 19
Initial discussions with regulators and the profession have suggested an alternative to these models: an independent decision making body, consisting primarily of lay members but with some IP input, with the investigation of complaints remaining with the RPBs (an independent decision-making body). 3.29 Any complaints/appeals body would need to be resourced with investigative staff to carry out investigations into complaints, and a secretariat to arrange meetings, deal with administrative matters and communicate decisions to the RPBs. The structure of the new body could be such that it operated with a board of lay members drawn from other professions, creditor and consumer groups to consider appeals and pass judgment. It may be helpful to have some IP input into the board for advisory purposes on the law and practice of insolvency. 3.30 The three different models, and permutations of them, are discussed in greater detail below. Model 1 Single first tier independent complaints body 3.31 A single independent body dealing directly with all complaints (including those relating to fee assessment) from creditors and others about all IPs would mean that the RPBs would no longer deal with the investigation or adjudication of complaints. This would be similar to the complaints system operated by the Financial Ombudsman Service 9 (FOS) and in terms of quality of work and conduct complaints, how the Scottish Legal Complaints Commission (SLCC) operates. As with both the FOS and the SLCC under this model decisions would be appealable to the courts. 10 3.32 The benefits of this model would, in the Government s opinion, include: a clear, single, route for complainants, although other models could be adopted to provide a singular route, see paragraph 3.42; consistency in judgment; economies of scale, albeit limited as most RPBs handle complaints not just related to IPs so will not be able to close their complaint handling function; and increased confidence in regulation as model is fully independent; Disadvantages of this model include: being in opposition to the general Government policy of reforming and reducing the number of non departmental Government bodies; significant set up costs for a body that would be handling potentially large volumes of complaints from the outset; and the courts would be the route of appeal against decisions, increasing costs and court workloads. 3.33 There would need to be close liaison between the complaints body and the RPBs, as the RPBs would need to impose the regulatory and disciplinary decisions of the complaints body on its IPs. We do not think it appropriate for the internal appeal procedures of the RPBs to be used if a complainant or IP wishes to challenge decisions of the complaint body. Therefore the route of appeal, if for some reason it was not the court route, would 9 We are only drawing similarity here with a single tier body: FOS is not a regulator. 10 In the case of the FOS only consumers have an automatic right of appeal to the court with businesses being bound by the FOS in cases where awards against them are less than 100,000. 20
be for the complaint to apply for a judicial review. The complaint would need to have grounds to bring a judicial review however, and this may be a high hurdle to overcome. Q.7 What are your views on the single first tier independent complaints body model? Do you agree with the benefits and disadvantages that we have set out? What are your thoughts on the relative importance of the positives and negatives? Model 2 Independent appeals body 3.34 The OFT found that creating trust in the complaints and disciplinary regime could be achieved by an independent appeals body, as an alternative to a fully independent single tier body. Under this model the RPBs would continue to investigate complaints in the first instance, with appeals dealt with by the new body. It is expected that the RPBs would be influenced by prior decisions of the appeals body in coming to determinations; and greater trust in regulation would be engendered by complainants. The benefits of this approach include: consistency in judgment at the appeal stage; expectation of increased consistency in judgement by RPBs in their initial judgements over time in reaction to the judgements of the appeals body; because the existing bodies (RPBs) would deal with first tier complaints, the new body having a reduced workload and therefore being cheaper to set-up and operate than a single body. 3.35 In the opinion of the Government, the disadvantages of such a model include: Not fully independent in so far as an RPB is ruling on a complaint in the first instance Greater likelihood of inconsistency in complaints handling than under a single body 3.36 The OFT proposed that, were an independent appeals body formed, it might be preferable for creditors to be able to refer complaints relating to fees directly to the appeal body, rather than sending them first to the RPB. The Government thinks this would be an unnecessary complication to the process and that all complaints should follow the same path for the sake of simplicity and to ensure that complainants better understand the process. Referring fee complaints directly to the appeals body would also be likely to increase the burden on the courts, as they would be the route of appeal should a party wish to appeal a decision of the new independent body. We wish to avoid this due to the costly nature of court proceedings. 3.37 The RPBs would need to adjust their existing processes to allow complaints to be made about the level of fees charged by IPs. This could be undertaken either by each RPB separately, or a collective arrangement entered into. A collective arrangement would be expected to bring benefits of greater consistency and one way to do this might be to establish fee panels acting across RPB boundaries to rule on what an appropriate range of fee should be when complaints are received. 3.38 Appeals could be made to the appeals body by either complainants or IPs, after the complaint had been dealt with by the RPB. We envisage that the appeals body would replace existing internal appeal routes available under the current system, where IPs are able to appeal decisions of the RPBs investigation, disciplinary and membership committees and complainants are able to request that their complaints be reviewed by independent reviewers appointed by the RPBs. 21
3.39 An appeal against the decision of the appeals body, if none is specifically provided for, would be for the dissatisfied party to apply for a judicial review. Q.8 What are your views on the independent appeals body model? Do you agree with the benefits and disadvantages that we have set out? What are your thoughts on the relative importance of the positives and negatives? Model 3 An independent decision making body, with the investigation of complaints remaining with the RPBs 3.40 This model would leave the investigation of complaints with the RPBs who would prepare reports for the decision making body. The body would therefore not require any investigative staff; and accommodation and other overhead costs would be limited. The benefits of this model are: that the set up and running costs of the decision making body would be modest The disadvantages of this model are that it would be perceived as less independent than either model 1 or model 2 Q.9 What are your views on the decision making body model? Do you agree with the benefits and disadvantages that we have set out? What are your thoughts on the relative importance of the positives and negatives? Model 4 Independent Decision Making Body overlaid with an investigative appeal function 3.41 A further alternative has been put forward to deal with concerns about the perceived independence of the decision making body, as set out in model 3, if the body were not able to undertake investigations independent of the RPBs. It is suggested that these concerns could be addressed were this model to be undertaken in conjunction with model 2 (an independent appeals body with an investigative function) overlaying it. Such a permutation would provide for a strong element of independence at the first tier with full independence at the second (appeals) tier. Q.10 What are your views on the decision making body overlaid with an investigative appeals function model? Do you agree with the benefits and disadvantages that we have set out? What are your thoughts on the relative importance of the positives and negatives? Single portal for complaints 3.42 If the appeals or decision making models were adopted in any of the variations discussed above, either of those bodies could also operate as a single point of contact for all complaints. This would mean that all complaints would initially be received by the appeals or decision making body, before this body forwarded the complaint to the relevant RPB. The advantage of this is that it would provide a clear, single, route for all complainants. This is important as the OFT study identified that less than 50% of creditors thought the existing complaints system was clear. 22