I've left writing my Blog for a couple of weeks to let me get some more visits under my belt. This means that I can tell you more about what I have found without compromising the confidentiality of my clients.
Before I write more posts about the individual issues I have found, I wanted to spend a little time addressng the key compliance areas and why they are important to your regulatory bodies and the monitors who visit you. First of all,I have to make it clear that almost any issue can become a key compliance issue depending on the circumstances in which it arises. For example, a relatively minor breach of SIP 12 would be the failure to include the time of a meeting in the minutes. However, if this is found to be a systemic fault across all case types, it could become a key issue. Buried in rule 12 is the statement that minutes of meetings are prima facie evidence of what took place at the meeting. If the time is not recorded you cannot show that the meeting was held between 10am and 4pm as required by the rules in several situations. If this evidence is missing across a wide variety of cases, this is clearly going to be more significant than an isolated departure from the SIP.
Although such re;atively minor issues can become significant, there are certain areas that will always be more important, even if the breach found is isolated. Many of these can be grouped into three areas.
Bonding
You are required to bond for the estimated assets in the estate. This will often be the statement of affairs value, but where you depart from this for any reason, you should record your calculation on the case file. You may need evidence to show why certain assets estimated in the statement of affairs are unlikely to be realised, but you may equally need to explain why assets valued at £60,000 have been bonded for £100,000 if that is the top of your next premium band. You need to record when you obtained the bond, of particular importance in CVA's and IVA's where you are now required to bond as nominee for the full estimated value of the arrangement. I, like you, can only attribute this requirement to the IP Regulations, as there is no other logical reason to bond for assets over which you have no control and which do not vest until after an arrangement is accepted.
The fact remains that you must obtain the bond as nominee and inform your surety when you are appointed supervisor, so you must keep this evidence on file. The Insolvency Service has recently clarified the status of the Regulation 13 case record (formerly regulation 17). You are not required to keep it as a separate document, but you must be able to extract the items listed in schedule 3 when required, so your bonding records should be evidenced on the case file, not just in a central bonding file. You also need to set up a system to confirm the adequacy of any bond obtained. In voluntary arrangements, this may require an annual review if you are required to conduct income and expenditure enquiries that could lead to increased contributions. In other case types, you need to remember that it is the estimated asset value that your bond must cover and the following example shows the sort of problem this can lead to. You might obtain an intial bond in a PRU case for £50,000, the next highest premium band sufficient to cover the £20,000 equity value indicated by PRU. During negotiations this value may vary while you establish the bankrupt's beneficial interest in the property. While there is a significant degree of uncertainty, it would be reasonable to leave the bond value unchanged, however if the bankrupt's representative is indicating a settlement in excess of £50,000, even though you still think a higher offer should be forthcoming you should increase the bond as the estimated realisable value has now exceeded the cover. Similarly, if the negotiations centre on a range around £40,000 to £50,000 so that you do not increase the bond, you must still have a review system in place once the funds are received as interest receipts after the settlement may push the bond requirement into the next band.
The regulators place high importance on bonding issues because of the very high risk factor associated with them. Although few bonds are subject to claims each year, the value of any claims that do arise are often very high and the reputational risk to the regulator and the profession if assets are irrecoverably lost makes this a key compliance area. A standard Compliance On Call visit or series of visits will look at both individual cases for bonding issues and include an overall review of the adequacy of bonding and the appropriateness of any review system.
Client Monies
At the risk of giving away my theme too early to hold your interest, the reason that the regulators are concerned about client monies is also linked to the reputational risk to the profession and the individual regulator if third party funds are put at risk or lost. In addition to the requirement to comply with regulators' own client money regulations, you are required to comply with SIP 11. As one of the shorter SIPs, it should be easy to comply with, but I still find too many situations where it is not dealt with correctly. The errors that arise sometimes relate to the designation of estate and general clients' accounts; where some deficiency in communication between the bank and the IP results in funds being held in accounts that do not appear to be 'trust' accounts.
Sometimes, the errors arise from an IP taking a short-cut to make his case administration easier. Rather than keeping separate accounts for cases with only one asset and a couple of creditors, the IP may try to run the estate through his general clients' account. Although this may seem eminently sensible to a commercial IP, this involves mixing estate and general clients' funds and is therefore a significant risk area for his regulator.
Another error that crops up is when an IP wants to pay disbursements separate from his office account, making them easier to identify and recharge later. The correct approach would be to open a separate disbursements account, funded by a 'float' from the office account. Unfortunately, some IP's instead put the float into thier general clients' account and pay disbursements from there. Apart from the fact that this mixes office and clients' funds, it also runs the risk that the float may be inadvertently exceeded so that the balance on the clients' account is insufficient to cover the clients' funds. There are no prizes for guessing what such 'unauthorised borrowing' from clients' funds could be called!
The other common problem that arises on clients' accounts is when funds are put in there for clearing, say when a cheque has been inadvertently made payable to the IP rather than the estate, and then not put into a designated account quickly enough. The less serious cases just show poor reconciliation and account management procedures, while more extreme examples may result in monies not being paid into the ISA in time, contrary to the regulations, or the IP paying himself fees or disbursements direct from the clients' account, possibly without the necessary disclosure.
Remuneration (and disbursements)
Most IP's now comply with SIP 9 and are familiar with the tabular layout required in reports where drawings exceed £10,000. Despite knowing what they should do, it is still common to find IP's failing to evidence the disclosure on individual cases. Sometimes, category 2 disbursements are taken without disclosing the practice's policy and obtaining an appropriate resolution. Worse still, some IPs still take remuneration on the statutory scale without first seeking approval from a committee or meeting of creditors. The most common 'new' error is those IP's who attempt to have their remuneration as liquidator approved by the creditors in an administration before they become liquidator in the subsequent CVL (see more detailed Blog below).
The additional publicity resulting from the decision in Re Cabletel means that remuneration disclosure and approval is still very much a 'hot' issue and the regulators will view any remuneration or disbursement approval issue with considerable concern. The key to all of this is, again, the reputational risk to the profession and the individual regulator.
Summary
Although I have listed three key areas above, any deficiency that can lead to criticism of the regulator or the profession is going to be a key issue. Please ensure that your commercial judgement does not lose sight of the wider regulatory perspective. Regular reviews by Compliance On Call would help to ensure that the external viewpoint is given due consideration and prevent you from contravening a key compliance area because of the day-to-day demands of your practice. In future posts, I will show how many other compliance areas can become key in the right (or wrong!) circumstances.
