The Insolvency Service - Business and Enterprise Committee Contents


4  Funding arrangements

30. The Insolvency Service's operations are funded from various sources, including charges that are levied against the services that it provides, programme budgets funded by BERR, and the recovery of fees in the course of legal proceedings. Further information is provided in the Appendix, below. Before 2004 almost all of the funding was set in advance and paid by BERR each year.[40] The current arrangements are intended to take away some of the financial risk that BERR would have to pay more if case loads unexpectedly increased. It is vitally important to ensure that the arrangements adequately support the work of the Insolvency Service both in the turbulence of the present economic climate and beyond.

31. More than two thirds of the Service's expenditure relates to the administration of insolvent estates, including companies that have been wound up by the court and individuals who have been made bankrupt. A private insolvency practitioner may be appointed in relation to those cases that raise complex issues or involve substantial assets, but the majority are handled by Official Receivers and other staff employed by the Service.[41]

32. Case administration is funded by fees that are set on the basis of key planning assumptions about the expected number of cases for each year. The Service's Corporate Plan states: "To the extent that our planning assumptions prove inaccurate, The Service has to manage the consequences in-year and, where appropriate, adjust fee levels and resource allocation in future years."[42] The Service is subject to an efficiency savings target to reduce case administration fees by 15% before 31 March 2011. It is confident that this can be achieved without sacrificing quality. The savings will primarily depend on IT-led investment which is due to achieve net savings of £67 million up to the year 2012-13.[43] Mr Horne allayed our concerns, based on the track record of many IT projects, by confirming that the project is due to conclude this summer both to time and budget.[44]

33. More generally, Mr Speed confirmed that it is "incredibly difficult" to predict the number of cases that will fall to be administered by the Service in any one year. For instance, the Service recently increased its estimate for this year by just over 5%.[45] Mr Speed played down the risk of needing to make further large increases, but stated the Service could cope even if levels rose by up to 35% to 40%.[46] In particular, the Service has stated that each extra case is broadly self-funding:

when case numbers increase, fee income increases… through the deposit we receive in all cases and then from assets realised in cases. Cases with few or no assets are cross subsidised by cases with assets.[47]

34. There is an inevitable time lag between the onset of new cases and the income that is derived from realising assets in those cases, which the Service manages by receiving working cash from BERR.[48] While extra cases will call for extra staff, Mr Speed stated that the service is able to recruit qualified lawyers and accountants on short term contracts: "there is a pretty active market in these people…so we are able to draw on that market to act as a buffer for our work".[49]

35. A quirk of this system is that as fees go up so do bad debts; this is because the Service estimates that 12% of fees will never be recovered.[50] This led to BERR's Supplementary Estimate for 2008-09 increasing its bad debt provision by a further £14 million based on its upward revision of the expected number of insolvency cases this year. We accept the Service's assurance that there is "no practical implication" associated with this revision and that it will not lead to more money being required from BERR.[51]

36. The Insolvency Service's Chief Executive, Mr Speed, assured us that arrangements for funding its case administration work are sufficiently robust to handle a dramatic increase in insolvencies if this were to happen. While we hope that this assurance is not tested, at this stage we can only hope that he is correct. Both he and his staff will understand the serious consequences if he is not.

Redundancy payments

37. Aside from case administration, a redundancy payments scheme is operated by the Service. This involves processing claims made by employees who have been unable to recover redundancy (among other) payments from their employers. The payments, and the costs of administering them, are paid out of the National Insurance Fund.[52] Each year Her Majesty's Revenue and Customs agree to provide a set amount of funding to the Service to meet its costs of administering the scheme. The funding for this year has been cut due to expected efficiency gains arising from a new IT based procedure. However, the number of claims is set to more than double from less than 80,000 last year to more than 160,000 this year.[53] The Citizens Advice Bureau has warned:

If the Insolvency Service is not able to cope, and processing of claims becomes delayed, then individuals will be left without money that might for example prevent them losing their home. There is no evidence of this happening yet, but it is still early days.[54]

Fortunately, the Service is managing to meet its targets for processing claims within the prescribed period of time, but doing so will cost it more than was budgeted.[55] HMRC is content to increase its funding in view of the extra demand, but it need not have done so. The Service's Annual Report highlighted: "Unless additional funding can be secured from HMRC, deficits not covered by surpluses must be met by BERR."[56] The Insolvency Service must consider changing its agreement to operate a redundancy payments scheme on behalf of Her Majesty's Revenue and Customs by ensuring that in future years there is an entitlement to recover extra funding based on a higher workload. We welcome the fact that this year any interdepartmental wrangling over funding has been set aside to give priority to ensuring victims of the recession get the payments to which they are legally entitled. This should become permanent.

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


 
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