Understanding the recent insolvency regulation reform

Understanding the recent insolvency regulation reform

September 18, 2023

The government consulted in 2021 on its proposals to reform and modernise the regulation of insolvency practitioners (IPs) and the insolvency market more widely. It has now published its intentions, having taken into account the responses to its proposals. The reaction from the insolvency world has been a broad welcome, but with some concerns.

No single insolvency regulator

This was the most contentious issue in the consultation. Fortunately, the very considerable practical difficulties which would be triggered by replacing the current system of regulation through four recognised professional bodies (RPBs) with a single regulator within the Insolvency Service have been recognised and this will continue unchanged, at least for now. Nevertheless, the single regulator idea has not been kicked very far into the long grass, with the government planning to legislate to give itself the power to move to a single regulator in future should it be necessary.

Regulation of firms as well as individual IPs

One oddity is that formal insolvency appointments are personal to the IP(s) concerned, rather than the firms in which they are partners or for whom they work. As a result, individual IPs are authorised, regulated and subject to regulatory sanctions, but their firms have not been until now. This will change, with full authorisation and regulation procedures being extended to firms, as well as continuing for individuals.

In future, firms will be prohibited from offering insolvency services unless they are properly authorised. These changes were overwhelmingly supported in the consultation and should eliminate some abuses committed by a very small number of firms in the past.

A public register of Insolvency Practitioners

As soon as practical, a public register will be created to list all individual IPs and firms offering insolvency services, including details of previous regulatory sanctions against firms or individuals. This is a positive step towards improving transparency.

Reform of the bonding scheme

IPs are required to take out bonds on every case in which they are appointed, providing a source of redress for those who suffer losses as a result of fraud or dishonesty committed by IPs. There have been calls for reform of this system for some time. The government has announced some initial improvements, but will propose further reforms in due course. This system is at the heart of the regime for protecting the interests of stakeholders, so while the changes so far are seen as favourable, it is vital that the full details of the final scheme are known without delay.

A compensation scheme

The government has decided that a system of redress and compensation should be a vital part of creating public confidence in a modern insolvency framework. Further work will be carried out to establish how such a scheme could operate. Detailed proposals will be presented to stakeholders as part of a future consultation.

The rationale for the scheme is understandable, but most IPs will have significant fears of a wave of unsubstantiated claims, ill-informed media coverage and the emergence of a PPI-style claims management industry, placing a potentially unmanageable burden on smaller firms and limiting the profession’s ability to deliver the optimum outcomes for clients and creditors. It could also undermine the UK’s national and international reputation for having an effective insolvency framework.

Professional standards setting

At present, each RPB sets its own professional standards for the conduct of the IPs it regulates, although the standards are common across the RPBs. Under the government’s plans, responsibility for setting these standards will move to the Secretary of State, in practice through the Insolvency Service. This is much less welcome: in the current system, standards are set by the Joint Insolvency Committee, which has an effective majority of lay members representing a broad group of stakeholders right across the insolvency landscape. The new arrangements could be an unnecessary bureaucracy to replace a broad-based, inclusive framework aimed at improving real-life working practices.