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Single enforcement body to shake-up insolvency regulation

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The creation of a single independent regulator could soon replace the current four recognised professional bodies under new proposals from the government to reform and simplify insolvency regulation.

21st Dec 2021
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The government announced today a shake-up of insolvency regulation, with the key change being a new independent regulator sitting within the insolvency service. 

The new watchdog would pick up the regulatory responsibilities that have until now sat with recognised professional bodies ICAEW, ICAS, ICAI and the IPA. 

However, the ICAEW has called the plans “unnecessary and potentially damaging”.

The government proposals to strengthen insolvency regulation comes after decades of self-regulation in the sector has seen the industry operate more akin to the “the Wild West”, according to the recent damning verdict from the co-chair of the APPG. 

In addition to establishing a single independent regulator, the government has also proposed other measures to beef up the sector, including: 

  • Extending regulation to firms that offer insolvency services rather than just individuals
  • Creating a public register of all individuals and firms that offer insolvency services,
  • Introducing a compensation scheme. 

The single regulator would come with disciplinary powers to reprimand, fine and withdraw individual or firm authorisation. Included in these powers would be the ability to order insolvency practitioners or firms to pay compensation for errors or mistakes or for a service failure that has caused undue anxiety or distress.

Insolvency practitioners (IPs) would have to contribute to a fund that would dish out the compensation where required.

Business Minister Lord Callanan said the regulatory regime must “keep pace with the times” and the independent regulator will “strengthen the regime and deliver greater transparency, accountability and protection for creditors, investors and consumers”. 

Unnecessary and damaging

As one of the professional bodies set to be supplanted if the proposals are rubber-stamped, ICAEW called the creation of a single regulator “both unnecessary and potentially damaging to the UK’s insolvency and restructuring profession”.  

“As the largest insolvency regulator in the UK we agree that reform is long overdue and while we welcome most of the Government’s proposals to reform the insolvency regulatory framework, we are disappointed at the recommendation to transfer regulatory responsibilities from the professional bodies to a new single regulator,” said Duncan Wiggetts, ICAEW’s chief officer of professional standards.  

“The biggest problem with the current framework is not the identity of the enforcing body but the regulatory framework itself, which is focused on the regulation of individual IPs and so prevents complaints - and substantial penalties in cases of misconduct – to be brought against firms.” 

The insolvency trade body R3 has also pushed back against the plans for a single regulator and argues that it “raises a major conflict of interest issue”.

“We’ve always been clear that we don’t oppose a single regulator in principle, but under these proposals, the government would set insolvency legislation, regulate insolvency practitioners and then effectively compete with those same insolvency practitioners for work — while not being subject to the same regulation itself,” said Colin Haig, the president of R3.

Firm-level regulation

If the proposals get greenlighted, firms would also face regulatory scrutiny, not just practitioners as individuals - which would replicate what is seen in other professions like audit and law. 

Lord Callanan said that this gap in the regulatory framework causes problems, such as the conflicts of interest where “there is a tension between the statutory duties of the practitioner and the commercial interests of the firm that employs them”.

A recent example of this was KPMG’s £13m fine for fixing the pre-pack sale of mattress retailer Silentnight to a private equity business it was also advising.

Concerns have also been raised about the operation of “volume provider” firms that provide large numbers of such arrangements. 

Regulation has not kept pace

In the forward to the future of insolvency regulation consultation, Lord Callanan justified the changes due to the existing framework, which dates back to 1986, not keeping pace with developments in the insolvency market. 

“The regulatory structure is based on the individual responsibility of Insolvency Practitioners and does not consider the firms they work for."

He added that the current system is “top-heavy for the limited size of the profession, with four recognised professional bodies responsible for regulating a profession of fewer than 1,600 people, as well as the Insolvency Service, acting on behalf of the Secretary of State, as oversight regulator.” 

“Despite close collaboration between regulators and the Insolvency Service, the current model has not achieved the levels of consistency, independence and transparency which were envisioned following the introduction of statutory objectives for regulators in the Small Business, Enterprise and Employment Act 2015."

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