The government has published 'The future of insolvency' in which it proposes an independent insolvency business watchdog. The industry was labelled as the 'wild west' by a cross-section of MPs earlier this year, and the document outlines wide-ranging changes to the sector.

The consultation draws on responses to several earlier reports including a 2019 Call for Evidence. Business minister Lord Callanan said the government accepted that a good insolvency system was critical for keeping the business sector healthy, especially so in a post-COVID world, but that the current structure was not fit for purpose.

He says that the current framework dates to 1986 and has not kept pace with developments in the insolvency market. The regulatory structure is top-heavy for the limited size of the profession and 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.

The primary changes proposed for the UK's insolvency system include: 

  • Part A. Modernising the existing regulatory framework by creating a single independent government regulator to sit within the Insolvency Service and introducing the regulation of firms that provide insolvency services.
  • Part B. It is also proposing a formal mechanism for compensation where a party has been adversely impacted because of poor service or an error by an Insolvency Practitioner or a firm.
  • Part C. It is looking at amending the current requirements for practitioners to hold security to cover losses to creditors as a result of dishonesty or fraud pending any further substantive change to the regulatory regime.

The current framework dates to the Insolvency Act 1986 and prior to 2016 there were eight Recognised Professional Bodies (RPBs) that oversaw the individual insolvency practitioners. Today there are only four:

  • Chartered Accountants Ireland (CAI).
  • Institute of Chartered Accountants in England and Wales (ICAEW).
  • Institute of Charted Accountants of Scotland (ICAS).
  • Insolvency Practitioners Association (IPA).

Part A

Concerns highlighted in the report mean that the role of the RPB would be handed to an independent regulator overseen by the Insolvency Service and Secretary of State. The RPBs were unsuitable for overseeing the recent proliferation of 'volume provider' firms offering Individual Voluntary Arrangements and Protected Trust Deeds. They also produced inconsistencies in regulatory oversight.

"It also means that there is a risk that RPBs compete to retain membership, particularly given the relatively limited pool of Insolvency Practitioners (currently around 1,570 of which around 1,290 are appointment takers) [and] there is a perception of a lack of impartiality by RPBs in carrying out their functions, which undermines confidence in the regulatory regime," the report said.

There were also concerns that there is scope for tensions between firm culture and the regulatory duties of an Insolvency Practitioner within the corporate insolvency sector. It may (and has) led to insolvency appointments where there is the potential for professional conflicts of interest with other work undertaken by the firm.

Part B: Compensation

Under the Government’s proposal for a single regulator, the regulator would have a range of disciplinary sanctions to reprimand, fine, direct or withdraw individual or firm authorisation. The power to direct could include the ability for the regulator to require an Insolvency Practitioner/firm to pay compensation where there has been an error or mistake or for a service failure causing undue anxiety or distress.

The compensation scheme should be self-funding and this Section B explores different options for funding.

Part C

This sets out proposals for reforms of bonding arrangements to improve existing safeguards for creditors against the fraudulent or dishonest behaviour of Insolvency Practitioners. 

  • Protection for creditors and how the current bonding regime works.
  • Improving the existing requirements of a bond. This proposes extending the statutory minimum requirements of surety bonds and a revision of the monetary limits (which have not been changed since they were introduced in 1986).
  • Managing risks and transparency. The consultation proposes requiring current RPBs to take responsibility for ensuring the correct cover is in place. It suggests that Insolvency Practitioners should declare to creditors the level of bonding cover obtained at the start of each case. 
  • Claiming against a bond. A best practice protocol to provide clarity and guidance has been developed with key stakeholders.
  • Special managers. Following high-profile compulsory liquidations in which the Official Receiver sought the appointment of Insolvency Practitioners as special managers, this section discusses the security required.
  • The consultation also seeks views on whether, if the proposal for a single regulator is adopted, there should be more fundamental changes to bonding arrangements, alongside the new regime. This part also asks whether any future scheme for compensation might be extended to losses caused by dishonesty or fraud, thereby replacing the bonding arrangements.

The government is seeking views on its proposals set out over 60 pages and will accept responses until 25 March 2022. It accepted that one approach would be to do nothing but allow the Insolvency Service to develop rules through guidance and non-statutory means. It pointed out, "Given that a non-legislative, advisory approach has been tested over the last six years and has not had the desired effect, it seems unlikely that continuing with such an approach would result in any significant improvements."

Useful guides on this topic

Tax debts and insolvency
This guide looks at the treatment of tax debts to HMRC in insolvency cases.

Cease trading
This category contains guides and checklists to explain what to do when a company stops trading.

COVID-19: Insolvency & directors
As a result of the coronavirus crisis, the government has announced that it will temporarily suspend the wrongful trading on insolvency rules, backdated to 1 March 2020.

External links

Open consultation. The future of insolvency regulation

Review of the monitoring and regulation of insolvency practitioners, published 26 September 2018

The Insolvency Practitioners Association (IPA) – Monitoring Report 2020, published 15 October 2020

A report by the All-Party Parliamentary Group on Fair Business Banking, published on 14 September 2021

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