Friday, March 25, 2022

Compliance On Call response to the Insolvency Service consultation - The Future of Insolvency Regulation

We submitted the following response to the consultation today. We kept our answers as short as we could. We thought you might enjoy comparing our thoughts to your own response or any others that have been made publicly available.

Proposals for reform of insolvency regulation

1. What are your views on the Government taking on the role of single regulator for the insolvency profession

The conflicts from the Insolvency Service taking on such a role undermine the potential benefits of having a single regulator. The Insolvency Service is a competitor of Insolvency Practitioners (IPs) across both the personal and corporate landscape and already has preferential treatment in terms of reporting, bonding, lack of regulatory supervision, etc. While we are not convinced that the use of a single regulator will address the objectives stated in the consultation (see 2. below), if there is to be a single regulator, it should be a new body, developed with assistance from the current regulators, who have recent experience of direct regulation. In contrast, the Insolvency Service stopped regulating insolvency practitioners directly in 2015 and had done a pretty poor job of doing so, when compared to the standards set by the other regulators at the time. Since the Insolvency Service no longer regulates IPs directly and its own Official Receivers (ORs) have never been subject to external regulation, this would be an ideal opportunity to put a new single regulator in charge, without the self-interest threats that the Insolvency Service would represent. Given that one of the stated reasons in the consultation for not retaining the status quo was the perceived conflict of interest of the RPBs between their regulatory and membership role, by having the Insolvency Service as the single regulator it would just swap one conflict of interest for another and would not lead to any overall improvement in the perception of regulation of the insolvency profession.

If the Government is to take on such a role, it should be outside the control of the Insolvency Service and the FCA, so that it acts as a necessary counterbalance to the competing interests that they already struggle to manage. The necessary insolvency knowledge and regulatory experience already exists within the current pool of regulators and it would be relatively cost effective to set up a new body combining the best aspects of the current regulation units under fresh, independent management, with a broad enough remit to finally hold ORs to account as well.


2. Do you think this would achieve the objective of strengthening the insolvency regime and give those impacted by insolvency proceedings confidence in the regulatory regime?

Having a truly independent single regulator might strengthen the insolvency regime, but the current proposals will not if it is simply a cosmetic shift, moving some high profile, but relatively low impact areas under the new regulator, with the old regulators continuing to monitor IPs and carry out the core regulatory functions. The consultation works under the mistaken assumption that it is possible to build confidence in a system solely through consistent disciplinary outcomes. Numerous attempts have been made over the years to try and evidence any genuine inconsistency between the regulators and our experience, as one of the few organisations to have seen regular evidence of each regulator’s performance, is that the regulators generally arrive at similar outcomes. Bad IPs are removed, poor practice is punished, and harm is generally avoided. Historically, if anything, the Insolvency Service was the soft option and we used to advise IPs, only slightly tongue-in-cheek, to consider changing regulator to them as they approached retirement, to ensure a quieter life with less regulatory interference!

A genuinely independent single regulator might improve the perception of consistency initially, but once the different circumstances of each decision started to show that it is not possible to produce one-size-fits-all outcomes, even in similar appointments or in the face of similar errors or misconduct, any outside observers are likely to perceive outcomes that they disagree with again. In short, even an independent single regulator will have to make the punishment fit the crime, so someone with a prominent lobbying voice who feels that they have not seen justice done will shout their complaints from the rooftops, ending any honeymoon period that a new regulator might benefit from.


3. Do you consider the proposed objectives would provide a suitable overarching framework for the new government regulator or do you have any other suggestions? Please explain your answer

The objectives are generally adequate, although new objectives might have to be introduced to extend them so that they apply to firms, assuming that they are brought within the regulatory framework. If there is any substantive weakness in the current system of insolvency practitioner regulation, it relates to the control of large firms in the personal insolvency market and the largest accountancy firms in the corporate market. The controls that are needed for such firms differ. Personal insolvency firms need to be required to ensure fair outcomes and appropriate advice, without “selling” inappropriate solutions to vulnerable debtors. The larger accountancy firms need to prioritise avoiding ethical threats from audit and other advisory services provided by the firms, including the heinous practice of providing “loan” or “on secondment” staff and other advisory and review services to financial institutions and others to secure their place on bank and other panels. Setting regulatory objectives that just apply to “IPs” or “firms” risks missing the difference between the markets in which they operate.

We would suggest having specific objectives for those firms that operate in different parts of the insolvency profession. Those specialising in volume consumer debt appointments could have more debtor focussed/TCF aims, while larger firms in the corporate arena, or any firms taking large corporate appointments, could have aims more tied to independence and ethical code obligations, especially around self-review and self-interest threats. We think that it is important to avoid increasing the general regulatory burden on smaller firms and non-specialists, as has been seen recently when SIP 9 was amended to address perceived abuses in the volume IVA market and inadvertently increased the disclosure required by smaller firms unconnected with volume consumer debts cases.

Research undertaken by R3 has shown that a large number of IPs work in micro-businesses, i.e. businesses with less than 10 employees, and that is certainly evidenced by our client base. The overall impact of regulation and changes in regulation on those businesses is far greater than on larger businesses, something that is reflected in the Government’s better regulation framework guidance. When looking at any changes to the regulatory regime for the insolvency profession, the make-up of the businesses that operate within the profession is something that certainly needs to be taken into account, and at present we do not consider that it is reflected adequately in any of the options proposed.


4. Do you consider these to be the correct functions for the regulator in respect of Insolvency Practitioners and in respect of firms offering insolvency services? Please explain your answer.

We do not think that regulatory functions should be sub-contracted to other bodies. That will weaken the whole concept of a new independent regulator and perpetuate any perceived inconsistency. We think that a new body that uses former regulatory staff, but under new unified management and with a new remit would provide a more effective and independent regime.


5. Are there any other functions for which you consider the regulator would require powers? Please explain your answer.

A single regulator should have a power of intervention, allowing appointments to be moved to a place of safety, protecting debtors and estate funds in appropriate circumstances.


6. Do you agree that the single regulator should have responsibility for setting standards for the insolvency profession? Please explain your answer.

No. The Insolvency Service should set policy and standards, albeit not if it were to be the single regulator. Any single regulator should monitor, providing direction, discipline, and enforcement to ensure that the set policies and standards are maintained. It is important that policy and standard-setting are kept separate from enforcement and monitoring to avoid conflict of interest and provide a sensible balance to any regulatory framework. This would also allow the single regulator to confirm that the ORs maintained similar standards when they hold appointments. This is necessary because the Insolvency Service has repeatedly shown its inability to avoid the conflict of interest between its policy setting, operational, and RPS functions.

If the Insolvency Service were to be the single regulator then it would be necessary to form a new standards setting body to retain the necessary separation of functions for the reasons already stated. The Official Receivers would also have to stop taking liquidator and trustee appointments or move their operations function into a new commercial body, operating outside, and subject to the Insolvency Service’s policy making and regulatory functions.


7. Do you agree that it would help to improve consistency and increase public confidence if the function of investigation of complaints was carried out directly by the single regulator? Please explain your answer.

No. Decisions are already as consistent as they can be, given the different circumstances that each complaint arises in. Although those outside the profession perceive some disparity, that is usually caused by their failure to understand the circumstances or the applicable outside factors. Similarly, their complaints about delay and a lack of publicity arise because complaints have to be properly and fairly investigated, with care taken to avoid adverse publicity or inappropriate disclosure that might harm complainants or the wider insolvency profession. Put simply, if someone alleges that an IP has done something wrong, it does not necessarily follow that their firm, appointments, staff, and suppliers should all suffer public scrutiny and criticism before any complaint has been properly investigated and the outcome is known. Even when a case is decided, it may be appropriate to keep details quiet for a time to allow an orderly transfer of appointments where the decision is a licence removal. As long as there is a requirement to investigate fully and fairly, there will be vocal complainants who don’t understand, many of whom seem to have the ear of political lobbyists and members of parliamentary committees.

Having said that, if there is a single regulator, it makes sense for them to investigate complaints. We just don’t think that there is a causal relationship between a single investigating body and any sort of consistency or perceived confidence in outcomes.


8. What are your views of the proposed disciplinary and enforcement process and the scope to challenge the decision of the regulator? Please provide reasons to support your answer.

The underlying reasoning for the perceived inconsistency in outcomes is flawed. It refers to “habitual offenders” without looking at the environments in which they work. Many IPs deal with complaints satisfactorily without regulatory intervention. Most of the IPs that have a complaint upheld do so just once or twice in their careers. The so-called “habitual” offenders work in volume IVA environments where a single system error or policy decision can have an impact across a large number of appointments, thus resulting in a disproportionate number of complaints. Rather than dealing with such instances as “habitual”, they should be recognised as “whole firm” or “system” errors, with the emphasis on dealing with the underlying process and providing a solution for anyone harmed by it, rather than punishing an employee IP, as if they were directly responsible. There are also some cases where a single decision or set of circumstances leads an otherwise compliant IP to breach several regulatory requirements in a single appointment. They might combine to require a more significant penalty, but there might also be times when they should be treated as a single “offence” and punished accordingly, rather than being unfairly layered or compounded.

The consultation refers to a segregation of processes between undertaking investigations and making disciplinary decisions based on the results of those investigations, which is a pre-requisite to any fair disciplinary model. Taking it back a step there also has to be a segregation of processes between monitoring and discipline. Monitoring should be forward looking, concentrating on the ability and appropriateness of the IP to undertake their functions and be suitable to hold a licence. Discipline is backward looking, considering whether the IP has done something that breaches the legislation, Code of Ethics or required practice. Reports following routine monitoring visits should be considered by a section within the regulator that deals with licensing and not one that deals with discipline. While there will be occasions where the matters found on a monitoring visit are such that they should be referred for investigation and disciplinary action taken if they are found proven, that is not something that should routinely be undertaken, and the criteria for such a referral will need to be set and publicised for the process to be both fair and seen to be fair. It would, however, be appropriate for an intelligence led investigation to report direct to the investigations department rather than the licensing department.

Our major concern with the proposed system is that it appears to be that it would fall to just the “regulator” to decide whether a complaint had been made out by the investigator, and to decide whether any disciplinary sanction proposed by the investigator was appropriate, albeit after taking into account representations by the IP or firm complained about. The current “committee” system operated by the RPBs has far better protection for the IP as it needs a consensus of views from committee members with a range of different backgrounds before a finding can be made. Having a decision made by one “regulator” would neither be fair, nor be seen to be fair, since there would be no disconnect between the prosecutor and the judge . A tribunal system would be required to consider the reports prepared by the investigators.

Again, despite what we consider to be flawed logic, the proposed appeals procedure appears to be appropriate. Our preferred approach would be for the single regulator to be independent from the Insolvency Service, which would have the benefit that the Insolvency Service could act as the “Appeals Officer”, which would give it the opportunity to ensure that regulatory outcomes were better aligned with government policy objectives. As mentioned in an earlier response, we would also suggest that the single regulator should have a power of intervention, so that if a firm or IP is considered to be in irreparable default that could potentially damage debtors, creditors, or the integrity of the insolvency profession, the single regulator could appoint a new firm or IP to intervene and take over the appointments as a protective measure, either temporarily or as a permanent solution.


9. Are there any other functions which you think should be carried out directly by the single regulator? Please explain your answer

All of the functions should be carried out directly by the single regulator, and none of them should be delegated. As mentioned in an earlier response, we would also suggest that the single regulator should have a power of intervention, so that if a firm or IP is considered to be in irreparable default that could potentially damage debtors, creditors, or the integrity of the insolvency profession, the single regulator could appoint a new firm or IP to intervene and take over the appointments as a protective measure, either temporarily or as a permanent solution.


10. In your view should the specified functions be capable of being delegated to other bodies to carry out on behalf of the single regulator? Please explain your answer.

No. If there is to be a single regulator, they should be solely responsible. Using a single regulator as a screen to simply carry on existing monitoring and other arrangements would be disingenuous. If the existing regulators are doing a good enough job, don’t make cosmetic changes just to deflect criticism from lobbyists. If the current regulators are not doing an adequate job, it would not be appropriate to use them to carry out the same functions.


11. Are there any other functions that you think should be capable of being delegated to other bodies to carry out on behalf of the single regulator? Please explain your answer.

As above, we do not think that a new regulator, if required, should delegate any tasks. If the existing regulators are considered capable of doing the work to an appropriate standard, there should be no need to change the system. If they are not, how can they be trusted to carry out the same tasks under delegated authority. It would be better to maintain the status quo, with additional direction or statutory requirements around specific areas that are perceived to need improvement.


12. In your opinion would the introduction of the statutory regulation of firms help to improve professional standards and stamp out abuses by making firms accountable, alongside insolvency practitioners? Please explain your answer.

Yes, subject to some specific concerns. The suggested changes are being introduced to address two relatively narrow areas of concern – volume IVA providers and multi-disciplinary firm conflicts. In a profession with hundreds of firms, it would not be appropriate to increase the burden on everyone, just to address a regulatory issue with around 30 of them. It should therefore be possible to target any regulation of firms at those who meet certain levels of turnover, staffing, and case numbers, with transitional arrangements for firms that move into or out of the set criteria between periods. This would avoid increasing regulation of firms that do not meet the definition of a volume IVA provider or that do not offer the multiple services that are most likely to result in perceived conflicts. It would also reflect the fact that the majority of the firms that do not meet those definitions are also owner-managed or controlled by the IP, such that firm regulation would just add a layer of cost and complexity without bringing any additional benefit.


13. The Government believes that all firms offering insolvency services should be authorised and meet certain minimum regulatory requirements, but that additional regulatory requirements should mainly be targeted at firms which have the potential to cause most damage to the insolvency market. What is your view? Please explain your answer.

We don’t think that it is necessary to authorise and regulate firms in the vast majority of cases, given that most insolvency firms are owner managed or controlled by the IP. In firms where the IP does not have a majority controlling interest, it would be appropriate to regulate the firm as well as the IP. Any additional measures should be targeted at firms operating in the areas that are most potentially damaging, whether they are owned by IPs or not.


14. In your view should certain firms be subject to an additional requirements regime before they can offer insolvency services? If so, what sort of firms do you think should be subject to an additional requirements regime? Please explain your answer.

We think that additional requirements may be appropriate where the regulator(s) discern a need, with the regulator(s) left free to adjust the parameters as appropriate. While current concerns relate to volume consumer debt firms and larger multi-disciplinary firms, those concerns have developed over years as regulation has failed to keep pace with change in working practices. If the regulator(s) can decide when firms should be subject to any additional requirements, they could target any such measures at only the areas of concern, reducing the requirements once the perceived area of harm has been addressed, while adding new requirements if another area causes concern. With the likelihood that technological changes will allow firms to complete a lot more work remotely, it might, for example, be necessary to introduce additional requirements that extend to overseas entities or staff carrying out work that has traditionally been completed in the IP’s own offices by their own staff. There is an argument that if swift action had been possible earlier in the development of the volume IVA sector, many of the current concerns could have been managed. Similarly, if there had been scope for the regulators to impose additional requirements on multi-disciplinary firms, some of the current perceived conflicts could have been managed or disallowed before they became ingrained and potentially harmful.


15. Do you think that regulation of firms should require a firm subject to an additional requirements regime to nominate a senior responsible person for ensuring that the firm meets the required standards for firm regulation? Please explain your answer

No. We are not convinced that making an individual nominally responsible makes any difference. The IP is already directly responsible and that has not prevented the perceived concerns. If regulating the IP’s firm may help enforce standards in certain circumstances, the whole firm and its management team should be collectively responsible. If the IP and their firm between them cannot prevent misconduct or harm, the regulator should be able to intervene, which would be more effective than holding any individual responsible.


16. If so, would you envisage that the senior responsible person would be an Insolvency Practitioner? If not, please specify what requirements there should be for that role?

The IP is already responsible for their appointments. In a firm where the IP is also the controlling owner/manager, there is no need for firm regulation or the nomination of a responsible person. In a firm where the IP is “just” an employee, the IP is still directly responsible for their cases and any responsibility that falls on the wider firm should be collectively controlled by the firm and its management, not artificially placed on one individual. If an individual has to be nominated, it should not be the IP because they are already responsible, but should be the firm’s ultimate owner/controller. However, we think that any requirements should apply to the firm’s management as a team, not restricted to one individual. They should be “fit and proper” as defined in current regulatory membership criteria, i.e. not subject to criminal or disciplinary sanctions, and generally of sound financial standing and mental health. Any insolvency experience and qualification requirements should only need to apply to the IP and their staff.


17. Do you think that a single public register for Insolvency Practitioners and firms that offer insolvency services will provide greater transparency and confidence in the regulatory regime? Please explain your answer.

No. There is already a searchable database of IPs held by the Insolvency Service. Re-naming it as a public register and adding firms is just cosmetic tinkering that will make no difference to transparency or confidence in the regime. IPs are already required to declare their licence and regulatory details in correspondence, while their firm’s details have to be disclosed in correspondence, websites, etc. under the Provision of Services Regulations.


18 What is your view on the regulator having a statutory power to direct an Insolvency Practitioner or firm, to pay compensation or otherwise make good loss or damage due to their acts or omissions? Please explain your answer.

There should be a compensation scheme, but whether that should be administered by a regulator or an independent ombudsman is less clear. Given that most IPs already voluntarily reimburse estates for errors, there should be no impact from putting it on a formal footing, as long as it is restricted to compensating estates and individuals for identifiable losses and not used as a punitive scheme, or even as a sop for a complainant because of a perception that they are the aggrieved party even if the complaint against the IP is not proved. If a regulator is used to determine any compensation, those who are already critical of the regulatory system may not consider it fair or independent. If an independent ombudsman makes the decision, it is likely to be seen as more transparent and less subject to influence from within the insolvency profession.


19. What is your view on the amount of compensation that the regulator could direct an Insolvency Practitioner or firm to pay for financial loss? Please explain your answer.

We think that the focus should be on compensating the estate or individual for financial loss. For example, if an IP inadvertently fails to pay a creditor £1,000, they should compensate that creditor £1,000 plus interest at the rates applicable in the banking system at the time. If any penalty is due for the error, that should be referred to a disciplinary committee for determination, depending on the level of intent or negligence behind the omission and the perceived damage. If the IP has pre-empted any compensation decision that might carry more weight than if they complied only once ordered to do so. The ultimate penalty should be applied where an IP is ordered to reimburse a loss and refuses to do so. The IP should only be responsible for direct loss and the time value of money, not for any consequential damages. Therefore, if an IP delays in selling a property without justification and the price falls as a result, the IP should make up the original sale value with interest at current bank rates. The IP should not have to compensate creditors for investments that they might otherwise have been able to make with the money, had the property been sold and the dividend paid to creditors earlier. Any separate penalty for the conduct that caused the delay will depend on the degree of culpability shown by the IP and should be mitigated if the IP has already compensated creditors before being ordered to do so.


20. Which option or options do you consider would be most suitable to fund a compensation scheme for the insolvency profession? Alternatively, do you have a suggestion on how a compensation scheme for the insolvency profession might be funded? Please explain your answer.

We think that any compensation should be paid by the firm on their own account. Any attempt to use insurance or a contributory fund would just increase administrative costs and, potentially, either diminish the return to the person that suffered the loss or distort the cost of the scheme. The vast majority of the errors we have seen involved relatively small sums that would be below any insurance excess, with the firm simply paying them. In that situation, the ombudsman would simply need to see evidence of the amount paid. If the profession needs to set up a fund to reimburse individuals or estates where a defaulting IP cannot, or will not pay compensation, that would be a different consultation for another day.


21. Are there any further impacts (including social impacts) that you think need inclusion or further consideration in the Impact Assessment?

Yes. Any increased regulation of the volume consumer debt market risks harming vulnerable individuals. While there is, quite rightly, significant concern about debtors being “sold” an inappropriate solution, if any measures significantly reduce capacity to administer debt solutions, there is little room in the wider market to pick up any slack, which risks those in unmanageable debt being unable to find a solution. No matter what problems there may be with the current system, they would be outweighed by a single suicide caused by a depressed and indebted individual being unable to access a solution that they consider is appropriate. Unless the Insolvency Service and Government policy allows a similar level of marketing around bankruptcy and debt relief orders, the current capacity for alternative debt solutions must be maintained. That might require direct intervention to allow underperforming firms to continue under regulatory management, rather than punitive action to prevent them operating or withdraw licences from their IPs.


22. What are your views on the above proposals for funding of insolvency regulation? Do you have any other suggestions for self-funding of regulation?

Any system other than the continued use of the existing regulators will cost more. IPs will not stop being members of their current regulatory body if a new one is formed. The current regulatory body will simply change emphasis and become more of a membership or support organisation. As a result, the new regulator will have to be paid in addition to any current fees and will face greater opposition than the current regulators do in any disputed cases. In addition, external quasi-regulators will continue to have influence and increase costs, so bodies like the Pension Protection Fund (PPF), Officer for Professional Body Anti-money laundering Supervision (OPBAS), and influential creditors like HMRC and the RPS will still add requirements, and therefore cost, to the process.

Any increase in costs will be passed on to the insolvency estates and therefore harm the creditors. The focus should therefore be on minimising any change and financial impact. Our view is that if it cannot be funded within the existing levy structure, it should not be introduced, given the marginal benefit it would create, if any.


Proposals for reform of bonding arrangements

23. Should the current minimum statutory requirements of a bond be extended as proposed to include the following (if you disagree, please explain your answer including any alternative proposal or any additional factors to be included):

a. An allowance for reasonable associated costs of a bond claim:

Yes

b. A period of run off cover that allows for claims to be submitted for a period after the Insolvency Practitioner has left office;

Yes

c. Interest to be claimable against a bond to be calculated on the amount of the loss from the date it was incurred (if so, which interest rate benchmark should the rate be tied to?);

Yes, commercial bank rate applicable at the time, not statutory interest, because it is unrealistic and inflexible.

d. GPS cover to be available for all of an office-holder’s appointments, including those where no SPS cover has been obtained.

Yes


24. Would extending the statutory minimum requirements of bonds remove the need for Secretary of State approval of bond wording? What would be the possible impacts of this change?

We welcome the extension of the statutory minimum requirements, but we still think that SoS oversight is required to maintain standards. In the absence of SoS approval, the system could be open to abuse and any deficiency in bond cover might only be discovered once a claim is made and it fails, causing irreparable harm.


25. Should a minimum period of run-off cover be provided for in statute and should the period be 2 years? If not 2 years, what should it be? Do you see any disadvantages to applying a minimum period for run-off cover?

There should be a statutory minimum run-off period. 2 years may be short and it might be better to match the 6 years normally used for Professional Indemnity runoff cover.


26. Where a maximum indemnity period is applied by a bond provider:

a. should the maximum period an insolvency estate is covered be at least 6 years from the date of appointment?

b. should the Insolvency Practitioner be able to extend cover past the maximum period if they are still appointed on the case, with agreements from the bond provider?

The maximum period should relate to the date that the last asset is realised and the fund either used to meet costs or distributed. This would still be indefinite in some cases, but would allow earlier termination in cases where assets are realised quickly and either used or distributed without challenge. We don’t think that it is appropriate for bond cover to lapse automatically after a set time period, but it would be appropriate for a further premium to be charged, potentially connected to a reduced level of cover, after, say 3 years. That would allow a bond provider to quantify their exposure for the first 3 years and re-evaluate the risks and charge an appropriate premium for extending the cover. For example, if a case has £100,000 in assets and £90,000 is realised and used for costs or distributed without challenge in 6 months, then when the bond is reviewed after 3 years, the renewed bond would only need to be run-off cover for £90,000 and full cover for £10,000. That should result in a lower renewal premium, with the £90,000 less likely to be challenged and the reduced amount of assets under full cover.


27. Should cancellation of cover due to non-payment of premium only be allowed where application for payment has been made and reasonable notice has been given to the Insolvency Practitioner and their regulator? If yes, what would be considered reasonable notice?

Yes. 6 months should be enough, but a regulator should take action long before that if they do not receive an adequate explanation and evidence of the premium being paid, together with any late payment penalty.


28. Where a regulator has been notified that cover may be revoked due to non-payment of a premium, should the regulator be responsible for ensuring creditors of affected insolvency estates remain protected?

No. Based on the current wording of section 390 of the Insolvency Act 1986, in the absence of a specific penalty bond for a case the individual would not be able to act as an IP in respect of that case and hence would be committing an offence if they did so. In that situation the regulator would need to intervene to deal with the case and protect the creditors in any event.


29. The Government proposes to increase GPS cover to £750,000. Is this sufficient? If not please explain why.

We don’t have any view about the level, but we think that it should be easier to change, both to reflect changes in insolvency practice and inflation.


30. The minimum insolvency estate specific cover is currently £5,000. Government proposes this should be increased to £20,000. Would this level provide sufficient cover for small insolvency cases?

We think that would make a lot of cases minimum bond cases, but in those cases it will only generally be the IP’s fees and expenses at risk. We are not sure what benefit there is in changing the minimum bond requirement, but if it has to be changed, it might be simpler to use £10,000 or £25,000 which we have seen as existing premium bands.


31. Should the GPS be reformed to cover interest, investigation, parallel and bond claim costs of the successor Insolvency Practitioner?

No. We think that the investigation and related costs of the successor IP should be paid by the IP’s professional indemnity insurance, or personally under an appropriate court order. The bond should just be used to reimburse the estate for any loss suffered.


32. Should the specific cover obtained per insolvency estate be set at a higher level than the asset value to factor in interest, parallel and investigation costs and fees of a successor practitioner in bringing a claim? If so what percentage above the asset value is an appropriate amount, and why?

No, as above. In our view the bond is protection for the estate and the assets in it. Recoveries for any misconduct by the IP that leads to the bond claim should be a separate claim under the IP’s professional indemnity insurance and, potentially, personally payable by court order. That might require an IP to obtain something similar to directors and officers insurance, or fidelity insurance, as an extension to their professional indemnity insurance, or as a separate policy.


33. Should the option of a Global Bond, where the distinction between GPS and insolvency estate specific cover (SPS) is removed, be provided for? If so, who would benefit from such a product and can you foresee any disadvantages?

We do not see any particular benefit from this and we are concerned that it could leave insufficient cover for the assets in some estates, with no way to allocate recoveries between those estates with a shortfall. We think that any SPS cover is better ring-fenced and based on the assets in each estate.


34. Would adding a requirement for Insolvency Practitioners to declare the level of cover specific to that estate as part of the initial report to creditors be helpful information for creditors? If so, should any changes to the level of cover also be reported?

We see no benefit in this suggestion and consider that it just adds to the already unnecessary burden of statutory and SIP requirements in reports and notices.


35. Where a regulator takes action which may foreseeably result in revocation of an Insolvency Practitioner’s authorisation, should the regulator have a duty to ensure that the Insolvency Practitioner’s bond cover is maintained at a sufficient level, until such point as the action has concluded and either the practitioner is deemed fit to continue practising, their authorisation revoked and/or a successor practitioner appointed to their cases?

Yes.


36. Where an Insolvency Practitioner is appointed as special manager, does a surety bond provide sufficient security? If not, please explain why.

We have no view on this point.


37. Are the current rules requiring security for special managers fit for purpose (taking into account that they apply to all persons appointed special manager, including those who are not Insolvency Practitioners)? If not, what changes should be made?

We have no view on this point.


38. Do you agree that the proposed changes to the current requirements for bonding should be made now pending more significant changes to the regulatory regime?

Yes. Change is long overdue. It might be appropriate to make some changes immediately and then conduct a further consultation once the impact of those changes is made. That would allow some monetary limits to be brought up to date and run-off cover limits to be set, with the wider aspects of, for example, investigation funding considered once more is known about the type of claims arising under the new limits.


39. Considering the changes proposed to the bonding regime above, would the introduction of a single regulator present opportunities for more fundamental reform of the bonding regime? If so, please give reasons for your answers including any suggestions you may have on a proposed reform.

We do not see any particular correlation between the bonding regime and the number or identity of the regulators. Bonding is specific to the estates and the office holder’s conduct and we do not think that any regulatory change should have an impact on that.


40. Is the current balance in the UK between protection of creditors’ interests and cost to the insolvency profession the right one? If not, how might this be addressed

There is currently too much paid in investigating the actions of the former officeholder without enough protection for the assets in the estate. Rather than changing values, we think that the bond money should be ring-fenced for the estates, with any investigation costs covered by separate insurance, personal recoveries, or as a funder of last resort, a new regulatory bond funded by a direct levy on insolvency practitioners, or as a separate bond for each estate.


41. Do you think that a levy funded scheme should replace the existing bonding regime, and cover not only acts of fraud or dishonesty by an Insolvency Practitioner but also a broader compensation regime? Please explain your answer.

We think that the investigative costs behind a bond claim could be covered by a levy funded scheme, because we would like to see the bond funding ring-fenced to compensate the estates. We think that any compensation scheme should be separate, with the IP directly reimbursing the estate for the loss arising from any error. Bonding should be retained only for fraudulent or dishonest conduct.