Examination of Witnesses (Questions 1-19)
THE INSOLVENCY
SERVICE
27 JANUARY 2009
Q1 Chairman: Gentlemen, I am sorry to
have kept you waiting for a few minutes; we had some other business
today. I am also sorry we are slightly light on the Committee
today. We have got some colleagues on Bill committees which does
sometimes happen. Can I say how grateful I am to you for coming
and for the memorandum you provided the Committee with before
this evidence session, and ask you, as I always do, to introduce
yourselves?
Mr Speed: Certainly, Chairman.
I am Stephen Speed, Inspector General and Chief Executive of The
Insolvency Service.
Mr Horne: I am Graham Horne, Deputy
Chief Executive.
Chairman: As I think you understand,
this is a session about two things, our general scrutiny work
of the non-departmental public bodies which come under the Department
for Business, Enterprise and Regulatory Reform aegis, and we will
be asking you questions about that initially, but we also want
to ask you questions about insolvency practice and policy, particularly
in the light of the current recession, and pre-pack administrations
which we will be asking you questions about a little later on
in the evidence. We will begin if we may with some questions on
the routine scrutiny of your organisation.
Q2 Lembit Öpik: You have been
in the job now about six months; is that right?
Mr Speed: About 15 months.
Q3 Lembit Öpik: Sorry; I was
a year out. In that time presumably you have had a strategic look
at the Grant Thornton recommendations.
Mr Speed: Yes.
Q4 Lembit Öpik: To be quite
specific about those, they recommend improving vetting procedures,
increasing career development opportunities for the workforce
and also introducing a new regional or national management structure
for all investigative staff. How do you feel about those recommendations?
There would obviously be quite a bit of structural and strategic
change if you were to take on board those recommendations.
Mr Speed: I feel very positive
about those recommendations. You are right: as a newcomer coming
into the Service I felt the need to get a little bit of help to
look at the picture from the strategic level, particularly in
relation to the way we carry out our investigations and enforcement
work. We worked, as you say, with Grant Thornton to do that and
I felt that their recommendations were very positive. I would
just draw attention to the fact that, of course, Grant Thornton
were quite impressed with the quality of the work that we do,
but on top of that had a number of suggestions for how we might
improve it further, particularly in regard to our effectiveness
and efficiency. We have taken a number of steps already since
that report was delivered to us. I think the most obvious one
is that on 1 January this year we did indeed make the structural
change that they had recommended, so we have brought together
into a single organisation within The Insolvency Service three
rather major components of our investigation work. We have brought
together the Companies Investigations Branch, which looks into
the affairs of live companies, our disqualification investigations
teams, who are the people who investigate allegations brought
to our attention by insolvency practitioners, and also a team
we call the enforcement team. They carry out a range of functions
which in the legislation are secretary of state powers. There
is a separation of duties that we have had for some time. We have
brought all those together, and you were right to draw attention
to the fact that one of the things I am very interested in achieving
as a result of that is that our examiners, who are very highly
qualified and well-trained people, have a broader career prospect
ahead of them. There was a tendency, I think, in the past for
people to arrive in the Service and tend to stay in the stove
pipe in which they arrived and I would like to see that broken
down; I would like to see people starting to use their skills
in different parts of the organisation.
Q5 Lembit Öpik: So you feel
that you are achieving a better connection between the three silos
that you are describing?
Mr Speed: Absolutely. In a sense
one of the unintended but nevertheless extremely good by-products
of having Grant Thornton in was that it catalysed a whole range
of discussions within the Service which have really borne fruit
in the last 12 months. It has now become a matter of routine that
all the different enforcement and investigation parts of the Service
do not just talk to each other but do business together and think
carefully about how they can share their learning with each other,
so yes, it has been very positive.
Q6 Lembit Öpik: In essence do
you feel you are achieving the career development opportunity
target, which was a recommendation set for you, by bringing those
together?
Mr Speed: You do not achieve something
like that overnight, but I am very confident that we will. There
are structural issues to overcome and also cultural issues. In
organisations as big as the Service you tend to find that there
are cultures in different places. I do not think it is going to
be a particularly difficult job but it will take a little bit
of time. Certainly in the discussions I have had with our professional
investigators in all the different parts of the Service they have
been very positive about this and are quite looking forward to
seeing them come to fruition.
Q7 Lembit Öpik: Moving on from
though still slightly connected to that, is it your intention
to handle more insolvency cases through official receivers rather
than contracting them out, if you like, to private practitioners?
Mr Speed: That is quite a complicated
question and I know it is a matter of some controversy with some
of our stakeholders, so let me explain the underlying philosophy.
The vast majority of the cases that our official receivers deal
with are bankruptcies in which there is no real value, and our
view is that even if we wanted to invite other people to take
those cases on we probably would not be able to because there
is no value in them. In a sense the official receiver has a position
of appointee of last resort. There is, I think, a degree of questioning
in the public mind about some cases we do where there are considerable
assets, and what I would like to say about that is that we will
only do cases with assets in them where the realisation of the
assets is entirely straightforward and we can do it quickly and
cheaply, and we will do those because the underlying objective
of what we are trying to do is to return as much money as we can
to creditors. Where we come across cases where the realisations
are going to be too complicated and our staff are not sufficiently
trained, and we do come across 1,000 or so cases a year where
we have been the initial appointee, we will usually seek a secretary
of state appointment of a private sector insolvency practitioner.
Q8 Lembit Öpik: Do you have
any strategic intention to develop that in-house capacity to handle
more complicated cases or are you saying that you do not think
that is good use of the Service's time?
Mr Speed: We are satisfied with
the policy that we have at the moment. We recognise that some
of our stakeholders have some reservations about it and on that
basis I am very pleased to be able to say that we have agreed
with the trade association for insolvency practitioners, R3, that
later in the year we will do some joint research with them about
the costs of doing this sort of work in different scenarios. We
always like to keep an open mind but it seems to me that the underlying
public policy objective which we must focus on is trying to return
as much money as we can to creditors.
Q9 Lembit Öpik: Obviously, how
much you do has an impact on the profession as a whole. Have you
given any consideration to the potential impact on the quality
and viability of the profession as a whole, it being dependent
on how much you do yourselves?
Mr Speed: It is perhaps helpful
to remember that the profession does a great deal of the work
itself already. Certainly on the corporate side our estimate is
that insolvency practitioners will be doing about three-quarters
of corporate cases, plus, as I mentioned a moment ago, we seek
secretary of state appointments in more complicated company winding-up
cases. The most recent figures I have got are around 1,000 in
the year. On the personal side, of course, insolvency practitioners
do individual voluntary arrangements (IVAs). In addition, we would
seek secretary of state appointments where bankruptcy cases are
complicated, and I think in the last year we have done about 5,500
of those, so even in that area where we do seem predominant we
reckon that something like 44% of the work is being done by the
profession.
Q10 Lembit Öpik: Finally, I
want to ask you the degree to which you might be hampered by a
lack of understanding by businesses and also by the general public
in terms of the insolvency services which are available. Obviously,
very few people go through it at all, and no business wants to,
so is there a barrier to the effectiveness of applying the Service's,
and indeed the sector's, skills effectively?
Mr Speed: I think you have to
start from the proposition, do you not, that, like it or not,
insolvency is a pretty complicated subject? That is what I have
found, certainly in the last 15 months, and for an individual
who has managed to get themselves into some form of financial
distress there is quite a lot of choice out there, and, of course,
if you are in distress choice can mean difficult decisions. We
would certainly support any measures across government or the
voluntary sector, or indeed anywhere else, to make sure that people
get the best advice they can. The contribution we make to that
is not so much in providing individual advice, which we really
believe we cannot do, but nevertheless in making sure that the
channels people use have access to the best and most authoritative
guidance that we can give them. We have a very proactive approach
to providing information. If I can give you some examples, we
hold the national statutory database for bankruptcies and IVAs
and we get about seven hits a minute on that database, about 3.5
million a year, so a lot of people are interested in that sort
of thing. We have about 40 information leaflets available as hard
copy, download, even MP3 format for some of them, and you will
find most of those in any citizen's advice bureau you go to and
lots of other help offices that you might need to use. Indeed,
one of our leaflets that is very popular is entitled Alternatives
to Bankruptcy and that is designed to first of all make people
recognise that there are alternatives and try to give them some
information about what those alternatives may be. I think I am
trying to give you the message that we take very seriously the
responsibility we have as custodians of the system to try to give
people the best information we can about it.
Q11 Lembit Öpik: If a business
is about to go insolvent is there any guaranteed methodology for
advice from, say, their own accountants which makes sure that
that business knows the procedures?
Mr Speed: Certainly an accountant
would be expected to be extremely familiar with the corporate
insolvency provisions. Indeed, most of the insolvency practitioners
we deal with are accountants or lawyers, so I would expect that
to be the case. I think I will use the opportunity of your question
to stress that the most important thing that a company or an individual
can do is to take advice and act early. A lot of the most difficult
cases that we see, and I am sure that insolvency practitioners
see, are where people have not recognised their problems early
enough and have allowed them to become overwhelming.
Q12 Mr Wright: Is the request by
the department to reduce your case administration fees by 15%
over the next couple of years going to affect the service quality
that you can provide?
Mr Speed: I will ask Graham to
say a word about the detail of that in a moment, but our view
is that it is not. Our view is that, like any other part of government,
we should be subjected to pressures on our efficiency, pressures
to do the job we do better on a continuous basis, and that target
was agreed with our parent department a year and a half ago on
that basis. I would like Graham to explain, but we are fairly
confident that we are going to be able to deliver that without
difficulty.
Q13 Mr Wright: You said that was
with agreement with the department. Was that a figure that you
put forward that you could achieve or was it through negotiation
or compromise?
Mr Speed: We would not want to
put forward a figure we could not achieve. It was a figure we
put forward on the basis that it seemed to us to be reasonably
consistent with the pressure that the department generally was
under to reduce its costs across the piece. I think you will find
that most departments are facing the prospect of having to do
their work with 5% year-on-year administration cost reductions,
and we felt that we needed to be kept to the same discipline,
provided, as your question implies, that we can continue to offer
the level of service which we have offered in the past.
Mr Horne: The principal way in
which we are going to achieve it, which, as you said, is challenging
but we think achievable, is through an IT-led programme of change.
We are investing some £70 million in IT systems which we
think should bring about a net benefit of between £30 million
and £40 million and it is that which we think is going to
be the main way in which we will achieve those efficiency savings.
As well as achieving efficiency savings the IT will also help
us improve our service to customers through such things as increasing
the speed of processing, improving the quality of the output and
also making services accessible online.
Q14 Mr Wright: I am in a difficulty
when we start talking about IT and improved services. There is
always slippage in the cost. You mentioned, was it, £75 million?
Mr Horne: It is £72 million.
Q15 Mr Wright: Is that a realistic
figure? Are we going to see slippage in terms of the time for
implementation? Are there going to be difficulties and errors
within the system? That is where I find it is difficult when you
rely on savings in the Service of up to 15% and you can deliver
those, but—and there is always a "but"—it
is all to do with the fact that you need to modernise your IT
and that all the timescales generally slip.
Mr Horne: The programme is now
sufficiently developed for me to have a degree of confidence that
we will deliver it in the summer, so it is not as though this
is a way away. We have had some issues over the last few months,
like every IT programme does. I am pleased to say we have kept
within the £72 million budget and we are quite close to delivery.
I am confident the £72 million budget will still be sufficient
to deliver the changes. We are quite well advanced with the development
of the systems. We expect them, as I say, to go live in the summer
and then we will start reaping the benefits from those systems,
which will be productivity and efficiency savings which will then
feed through into case administration.
Q16 Mr Wright: Of course, the other
part of the equation is the fact that you rely quite heavily on
a number of incomes from various sources which are really outside
your control. There is funding from BERR and the recovery of legal
costs in court proceedings. Does that make it difficult to predict
what level of service you can provide and would it not perhaps
be far better for you to know exactly what your budget is going
to be rather than relying on an unknown quantity?
Mr Speed: That was the way that
the Service was run up until 2004. The problem with that is that
it puts a huge amount of risk on the department because the department,
having to fund in particular the case administration work, then
bears the risk of having to deal with significant changes in the
caseload, such as we have seen in some parts of our organisation
recently, without having the funds to back that up. The great
advantage to the Service of the net funded regime which came in
in 2004 is that where we are delivering public services we are
able to collect fees to cover the costs of what we do.
Q17 Mr Wright: So you do not find
that a difficulty, predicting the level of service that you can
provide, because you obviously assume that you are going to get
recovery of legal costs?
Mr Speed: Predicting the volume
of demand that is put upon, for example, the official receivers
or the redundancy payment service, is incredibly difficult so
I would not want to pretend that that is easy, but in the official
receivers' area the point is in a sense that every case we do
brings in the income that we need to cover the costs of doing
it.
Q18 Mr Wright: You have said that
you can deliver the service at the level that you have done before,
but you did approach the department for a supplementary estimate
in 2008-09 for £14 million in relation to case administration.
What was the reason for that?
Mr Horne: What happens is that
on our fee funded side we get fee income and the fee income equals
costs, so as part of the parliamentary approval process we have
to ask for a supplementary estimate when say our costs have increased,
but it is a net zero because our fee income has also increased.
The reason it has gone up by £14 million is that we have
more cases. On the case administration side, more cases equal
more fees and therefore it zeroes off, which is not true on those
parts of the business which are funded from a programme budget.
Q19 Mr Wright: I am sure somebody
with an accountancy degree will be able to understand but an engineer
would not be able to do that perhaps.
Mr Horne: I suppose the point
is that we were not asking for more money from Parliament. It
is the accounting side of the transaction which balanced off to
zero.
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