Investigation and enforcement
38. The investigation and enforcement activities
of the Service are also coming under increasing pressure. The
Service's Corporate Plan for 2009-12 estimates that the overall
number of complaints and reports alleging misconduct will increase
from 9,250 in 2008-09 to somewhere between 10,150 and 10,850 in
2009-10.[57] This is
the equivalent of an increase of between 10% and 17%. While positive
steps have been taken over the previous 12 months to restructure
and unify this part of the Service's operations, it has been acknowledged
that: "as insolvencies increase and incidences of director
misconduct grow (as usually happens in an economic downturn),
the Service will need to maintain rigorous processes to ensure
that the instances of misconduct which most merit action in the
public interest continue to be targeted."[58]
39. We are concerned that this extra pressure comes
at a time when many insolvency practitioners already consider
that too few investigations are being carried out. For instance,
R3 stated its belief that:
given the limited resources within the Service, not
all of the reports submitted by IPs [i.e. insolvency practitioners]
are pursued (for reasons such as a lack of evidence to exact a
disqualification). A number of IPs assert that it is due to the
lack of resources that not all reports meriting action are investigated,
leading to fewer, justified disqualifications; and there is a
fear that 'easy cases' are taken on in order to meet targets.[59]
40. R3, among others, have therefore recommended
that the Service receives greater resources to fund this part
of its activities.[60]
At the moment, investigations are primarily funded by a programme
budget set by BERR. The Service's Corporate Plan for 2009-12 states
that funding was £42.4 million in 2008-09 and projects that
this will reduce to £40.5 million in 2009-10 and £40
million in 2010-11.
41. We struggle to understand how the Service will
respond to increasing demand whilst facing reducing levels of
funding. With this in mind, we note the decision by the Secretary
of State to scrap the Service's target of increasing the number
of successful enforcement outcomes by 7% each year. Instead, the
target for 2009-10 is to maintain enforcement outputs at the same
level that was achieved in 2008-09.[61]
The Service has stated that instead of targeting a higher number
of enforcement outputs it will take an extremely rigorous approach
to prioritising cases in the public interest.
42. This is insufficiently ambitious at a time when
the number of complaints is expected to increase. Targeting the
same number of enforcement outputs means that a lower proportion
of wrongdoers face sanctions for what they have done. The Service
has agreed this target on the grounds that "prioritisation
of cases will consume proportionately more resources than in the
past as the volumes of misconduct increase"[62]
and maintains
The Service will take care to ensure that proper
attention is paid to the full range of different types of cases
that we see, so that no area of corporate or personal misconduct
falls below the enforcement radar.[63]
43. It will be little comfort to insolvency practitioners
and creditors that their reports and complaints are rigorously
prioritised, if investigation does not follow. From their perspective,
it may appear that that the Service is lowering its sights at
the very time when more than ever must be done to combat misconduct.
Understandably, Mr Speed was keen to emphasise the Service's enforcement
achievements: "on an average working day in this country
round about five directors will be disqualified as a result of
the work that we do, round about six or seven bankrupts will have
bankruptcy restrictions placed upon them as a result of what we
do, and somewhere in the country, again on average, one person
per working day will be convicted of committing an offence on
the basis of evidence that we have brought to a prosecuting authority".[64]
He did not call on BERR to provide additional funding for investigation
and enforcement, but felt that what was missing was a small amount
of additional funding to highlight the number of successful cases
as a deterrent effect: "we do not do enough of this and we
do not do it well enough".[65]
This aligned with R3's belief that the industry as a whole suffered
from a low profile and while everyone concerned was in part responsible,
the Service insufficiently promoted its activities.[66]
R3 called for the Service to be awarded more money to enable it
to publicise its work.[67]
44. It is surprising
and disappointing that the Secretary of State has reduced the
funding for investigation and enforcement activities for 2009-10,
despite the expectation that there will be an increase in the
number of cases referred to the Insolvency Service. It is unacceptable
that the Service's new target requires it to achieve no more than
the same number of successful enforcement outcomes than was achieved
for 2008-09. This would mean that as the recession bites there
will be proportionately fewer wrongdoers facing sanctions for
their misconduct. This is unlikely to inspire confidence among
the insolvency practitioners and creditors who report wrongdoing
but see no sign of it being investigated or penalised. The Department
for Business, Enterprise and Regulatory Reform must provide the
Service with sufficient funding to meet an increase in demand
for its investigation and enforcement activities and it should
amend the target to ensure that the number of successful outcomes
the Service is expected to achieve in 2009-10 is increased to
ensure it is proportionately equivalent to the target in 2008-09.
45. While the
Service is securing sanctions against a considerable numbers of
individuals at present, there is a need for additional funding
to promote this more widely in order to create the best possible
deterrent effect. We recognise the heavy demands on public expenditure,
but maintaining confidence in the market is a central task of
the Department and, in the light of regulatory failures elsewhere,
we are surprised by the lack of commitment shown by the Department
in this crucial area. The sums involved are, after all, very modest.
Future funding
46. Recently the Service changed the way that it
projects the demand for its services by replacing a precise estimate
with figures based on a lower and upper range.[68]
For instance, bankruptcies
for 2009-10 are estimated to be 77,400 to 83,300 for 2009-10.[69]
This is in recognition of the unpredictability of demand
caused by the current economic climate.[70]
We can see the sense in this. However, the funding arrangements
and target for 2009-10 onwards are each based on figures at the
very bottom of the range.[71]
The Service has stated that
any shortfall in funding will be managed in-year and, where appropriate,
adjustments will be made to fee levels and resource allocation
in future years.[72]
47. The Department for Business,
Enterprise and Regulatory Reform must work with the Insolvency
Service to ensure that its funding arrangements are sufficiently
robust to handle the very high levels of insolvency that are almost
inevitable at a time of steep economic decline. We welcome the
Service's shift to projecting demand for its services based on
a lower and upper range, but we believe that its funding and targets
should be based on the expectation that activity will be at the
mid-range, rather than the bottom end, of the scale.
40 Q16 (Mr Speed) Back
41
Q9 (Mr Speed) Back
42
Corporate Plan 2008-11, p11 Back
43
Corporate Plan 2008-11, pp9, 12 and 41 Back
44
Q15 Back
45
Q31 Back
46
Q31; Q45 Back
47
Ev 23, para 3 (The Insolvency Service) Back
48
Ev 23, para 3 (The Insolvency Service) Back
49
Q39 Back
50
Ev 22, para 2 (The Insolvency Service) Back
51
Ev 22, para 2 (The Insolvency Service) Back
52
Ev 20, para 28 (The Insolvency Service) Back
53
Q41 (Mr Horne) Back
54
Background briefing to the Committee Back
55
Q41 (Mr Horne) Back
56
Annual Report for 2007-08, p24; Q42 (Mr Horne) Back
57
Page 8 Back
58
Ev 21, para 39 (The Insolvency Service); Qq 4 to 6 Back
59
Ev 31, para 3.2 (Association of Business Recovery Professionals) Back
60
Ev 31, paras 3.2 to 3.3 (The Association of British Recovery Professionals);
Ev 37, para 3.5 (Insolvency Practitioners Association) Back
61
Corporate Plan 2009-12, page 23 Back
62
Corporate Plan 2009-12, para 6.1.1 Back
63
ibid Back
64
Q50 Back
65
Q47; Q48 Back
66
Ev 29, para 1.11 (Association of Business Recovery Professionals) Back
67
Ev 29, para 1.13 (Association of Business Recovery Professionals) Back
68
Corporate Plan 2009-12, page 7 Back
69
Corporate Plan 2009-12, page 8 Back
70
Corporate Plan 2009-12, page 7 Back
71
Corporate Plan 2009-12, page 7 Back
72
Corporate Plan 2009-12, page 7 Back
