We recently spotted a regulatory decision that gave us considerable cause for thought. The names of the IP and regulator are not too important and it doesn’t seem fair to repeat details here and put the offending IP through the wringer again, so we have distilled out the main points from the decision for you to think about.
Justifying the decision to instruct agents and the meaning of friendship
You need to justify any decision to instruct agents, especially if appointing someone to replace an existing agent. In the case in point, book debt collections were taken away from the insolvent company’s usual collection agents and transferred to a company run by a “close friend” of the office holder. The decision makes us think that you should prepare a file note before replacing an existing agent, making a good value-for-money or operational case for instructing the replacement.
We also then started to think about what makes an agent a “close friend”. We don’t know enough about the case to comment on it specifically, but it appears to us that many IPs use only two or three local agents for most of their work. This appears to be caused by the relatively small number of specialist agents who can deal with insolvency work in any one area and the tendency to trust someone that you have used over the years. Unfortunately, this could give rise to additional risks, because over the years you may have become friends with your agents and what started out as an occasional marketing meeting, meal or round of golf may have progressed to evenings out with the wives, or even holidays together. We don’t have the answers, but we pose the question, “what is a close friend?” We recommend that you take particular care when instructing replacement agents, especially where you have instructed your ‘usual agents’ and some degree of friendship may be perceived. Ensure that any decision to use them can be fully justified on value-for-money grounds and that you comment on any perceived conflict in their appointment.
Instructions to act
The decision referred to the need for contemporaneous notes of any instructions, including payment terms and reporting requirements. Many of you will not see the problem because you exchange engagement letters with your agents, but this can be overlooked in the heat of an urgent appointment and we recommend that you ensure that some form of engagement letter or email is produced every time, setting out the payment terms, the reporting requirements and any further instructions that may be appropriate to the case (e.g. any discretion to deal with small assets without referring back to the IP for approval).
Fee levels and the payment of money for assistance with preparation of the SA
It appears from the decision that the regulators may be starting to look much more closely at the justification for a particular agent’s fee and in particular the payment of money for assistance in preparing the SA. Before paying any such fee, the judgement suggests to us that you need to ensure that the fee reflects the difficulty of work done and is not, in the case of book debts, just a blanket % basis or the agent’s normal time costs. In particular, the decision commented that the fee paid to the replacement agents was far higher than the fee paid to the original agents. Furthermore, the tribunal had clearly looked closely at the dates and content of draft SAs and considered that there was not enough evidence that the agents had done any work to justify the fee claimed.
With this in mind, we recommend that you ensure that each job is priced up on its merits, with the potential difficulty of any collections taken into account. If you are making payments for any other work, such as assistance with the SA, it must relate to documented work that needs doing, with a clear audit trail of the work done and the time taken to show that there is benefit to the estate from using an agent.
The impact of the decision
The decision arose from a complaint, which as many of you know is very different from when something arises on a monitoring visit. However, we expect the monitors to be aware of the case and to look more closely at agent relationships for some time. To protect yourself, you should implement the above suggestions and ensure that you undertake appropriate checks on your agents’ fitness and propriety and financial stability, especially at a time when many may be affected by the same problems that the wider economy is suffering. Don’t rely on “We’ve always used them because they are the best in the area” as a defence when the monitors start to probe.
