Memorandum submitted by The Institute
of Chartered Accountants in England and Wales (ICAEW)
EXECUTIVE SUMMARY
1. The main points in this submission are
that:
(i) the Insolvency Service should take steps
to enable regulators of voluntary arrangement practitioners to
be recognised as soon as is reasonably possible, ideally by non-legislative
means;
(ii) the Insolvency Service should reconsider
its decision not to proceed with proposals for simplified voluntary
arrangements as a matter of urgency;
(iii) the Insolvency Service should improve the
means by which it engages with key stakeholders, particularly
when communicating difficult or unpopular messages; and
(iv) consideration should be given to the removal
of the Secretary of State's ability to authorise insolvency practitioners.
INTRODUCTION
2. The Institute of Chartered Accountants
in England and Wales (ICAEW) operates under a Royal Charter, working
in the public interest. Regulation of its members, in particular
its responsibilities in respect of auditors, is overseen by the
Financial Reporting Council. As a world-leading professional accountancy
body, the Institute provides leadership and practical support
to over 132,000 members in more than 140 countries, working with
governments, regulators and industry in order to ensure the highest
standards are maintained. The Institute is a founding member of
the Global Accounting Alliance which has over 700,000 members
worldwide.
3. Our members provide financial knowledge
and guidance based on the highest technical and ethical standards.
They are trained to challenge people and organisations to think
and act differently, to provide clarity and rigour, and so help
create and sustain prosperity. The ICAEW ensures these skills
are constantly developed, recognised and valued.
4. The Institute is a Recognised Professional
Body under section 391 of the Insolvency Act 1986 and can license
suitable individuals as insolvency practitioners. The Institute
licenses a larger number of insolvency practitioners than any
other licensing body. At 31 December 2007, the Institute licensed
719 insolvency practitioners out of a UK total of around 1,700.
In order to comply with the requirements of the Act and to maintain
professional standards, the Institute monitors insolvency practitioners
and operates disciplinary and regulatory systems. These ensure
that insolvency practitioners licensed by the Institute meet acceptable
standards in education, practical training and experience, and
are "fit and proper".
5. The Institute's approach to insolvency
regulation reflects its determination to ensure that the public
interest is taken fully into account. Key features of the Institute's
systems and processes include:
— complying with the "Principles
for Monitoring" agreed with the Insolvency Service;
— participating in arrangements for
independent input into the ethical and professional standards
of the insolvency profession via the IPC;
— including members who are neither
insolvency practitioners nor chartered accountants on the committees
that license, monitor and, if necessary, discipline insolvency
practitioners;
— cooperating with the other authorising
bodies through the JIC;
— cooperating—through regular
meetings of those involved in monitoring—to ensure common
monitoring standards;
— monitoring the work of insolvency
practitioners, using individuals who are independent of the practitioners
and who have an appropriate level of training and experience to
assess the work undertaken by insolvency practitioners;
— requiring insolvency practitioners
to comply with Statements of Insolvency Practice that are adopted
as common standards across all the licensing bodies;
— requiring insolvency practitioners
to follow the Code of Ethics, which is the common insolvency ethical
guidance applied by all the authorising bodies;
— communicating with insolvency practitioners
and providing information via the Institute's website and in Insolvency
News;
— making public our annual report to
the Insolvency Service (and the DETI in Northern Ireland); and
— requiring insolvency practitioners
to monitor their own compliance with the Insolvency Regulations.
Together, these measures are designed to ensure
accountability, transparency, consistency and independence.
INFORMATION
6. Generally, we believe that the Insolvency
Service carries out its functions efficiently and with expertise
and professionalism. The evaluation of the Enterprise Act is a
prime example of evidence based policy making—it has produced
extensive and useful data on many aspects of both corporate and
personal insolvency. Their initiative which brought together creditors
and the insolvency profession to discuss the IVA market is to
be applauded. They worked hard to find common ground between the
parties which lead to the creation of the IVA protocol. The matters
detailed below are the only concerns we would wish to draw to
the committee's attention.
SECTION 389A INSOLVENCY
ACT 1986
7. In 2005 the ICAEW commenced discussions
with the Insolvency Service to become a regulator for voluntary
arrangement practitioners (later described as approved persons)
under section 389A of the Insolvency Act 1986 (as inserted by
the Insolvency Act 2000). We communicated to the insolvency practitioners
we license our intention to apply to become a regulator of voluntary
arrangement practitioners; a similar announcement was made in
the Insolvency Service's own publication Dear IP. We also
produced draft changes to our internal insolvency regulations
to implement the proposed changes and took those amended regulations
through our own internal approval processes.
8. In 2007 the Insolvency Service received
legal advice that a change would have to be made to the law before
any body could be recognised because, in its current form, section
389A would enable all members of the body recognised to act as
voluntary arrangement practitioners. This difficulty with the
legislation had been identified earlier but the Insolvency Service
had believed that the internal rules of the applicant body could
be amended to restrict recognition to those members with relevant
insolvency experience which our draft rules would have achieved.
Further legal advice was that the only option now available would
be to await legislative change using a legislative reform order.
9. On 17 November 2008, we were invited
by the Insolvency Service to attend a meeting at which it was
announced that they would be postponing making the changes necessary
to section 389A of the Insolvency Act 1986 to enable the licensing
of voluntary arrangement practitioners. This was because they
were unable to use a legislative reform order to make the changes.
Instead they would bring forward these changes when a suitable
bill became available—although they could not say when that
would be.
10. It is extremely disappointing that our
application to become a regulator of voluntary arrangement practitioners
could not be progressed. The initial flawed drafting of section
389A has been compounded by the delays experienced during the
application process, culminating in the announcement by the Insolvency
Service that a change using primary legislation is now the only
option available, with no timescale being set for that change.
It is also disappointing that we were not given the opportunity
to provide evidence to the parliamentary committee to support
the need for change. Even if this had not affected the outcome,
we believe it would have been appropriate for us to have been
given that opportunity rather than simply being informed once
the decision had been made.
11. We feel that in a time of economic downturn,
every opportunity should be taken to facilitate an adequate supply
of suitably qualified professionals to offer a solution to over-indebted
individuals. In recent years, the population of insolvency practitioners
has remained relatively static at around 1,700. In our view, the
introduction of voluntary arrangement practitioners would have
contributed to that supply, and the opportunity to do so has now
been missed.
SIMPLIFIED VOLUNTARY
ARRANGEMENTS
12. In July 2005 the Insolvency Service
first published its proposals for the introduction of a simplified
voluntary arrangement. The consultation document also included
recommendations for the adoption of industry best practice to
streamline the voluntary arrangement process in areas where legislative
change was not appropriate. The proposals for legislative change
were refined during consultation and, in May 2007, a further consultation
document proposed the introduction of the simplified voluntary
arrangement using a legislative reform order. We were broadly
supportive of the introduction of simplified voluntary arrangements.
13. During this period, a series of meetings
were held with interested parties within the field of insolvency
which resulted in the creation of the IVA protocol. The aim of
the protocol was to establish a framework to be adopted by both
insolvency practitioners and creditors to facilitate the efficient
handling of straightforward consumer IVAs. We played a major role
in the development of the protocol and it was formally launched
at our offices in Moorgate on 1 February 2008. We are also represented
on the IVA standing committee which was set up to monitor the
effectiveness of the protocol. Nevertheless, we always saw the
protocol as the response to those initial proposals for industry
best practice that accompanied the recommendations for legislative
change to the IVA regime. We are sure that many insolvency practitioners
saw the introduction of the protocol as part of a package of measures
which included legislative change and accepted the protocol on
that basis.
14. At the meeting with the Insolvency Service
on 17 November 2008 (paragraph 8), we were informed that their
plans to introduce a simplified voluntary arrangement would not
now be taken forward due to the success of the IVA protocol. It
appears that these proposals have now been completely dropped.
15. It is again most disappointing that
we were not given the opportunity to inform the opinions of those
who decided that the success of the protocol had made simplified
voluntary arrangements unnecessary, particularly given our role
on the IVA standing committee. It is much too early to say whether
the protocol has been successful and it was never, in our view,
a substitute for legislative change. It is also disappointing
to note that, unlike the changes to section 389A, there appear
to be no plans to take these changes forward using another legislative
vehicle. In the current climate, a mechanism that would have offered
over-indebted individuals an alternative to bankruptcy and creditors
greater returns than would have been received in bankruptcy would
only have been a good thing. A simplified voluntary arrangement
would have offered such an alternative.
16. We would also question the way in which
the announcement was made. We were only informed in the sidelines
of the meeting about section 389A (as were the other applicants
for recognition), and other stakeholders were left to find out
via a small announcement on the Insolvency Service's website.
The members of the IVA standing committee were notified by email,
but at around the same time of the announcement on the website.
We feel that the whole matter was particularly badly handled and
that this was compounded by the way in which the announcement
was made and has caused a great deal of bad feeling in the insolvency
profession.
ROLE OF
THE INSOLVENCY
SERVICE AS
AN AUTHORISING
BODY
17. The Institute is a Recognised Professional
Body under section 391 of the Insolvency Act 1986 and can license
suitable individuals as insolvency practitioners. A body may be
recognised if:
"it regulates the practice of a profession
and maintains and enforces rules for securing that such of its
members as are permitted by or under the rules to act as insolvency
practitioners:
(a) are fit and proper persons so to act,
and
(b) meet acceptable requirements as to education
and practical training and experience".
18. Insolvency practitioners may also be
directly authorised by the Secretary of State acting through the
Insolvency Service.
19. In common with the other Recognised
Professional Bodies, we have a disciplinary process with a range
of sanctions that could be imposed on an insolvency practitioner.
These include ordering a targeted insolvency monitoring visit,
restricting or removing an individual's licence, fines and removal
from membership of the Institute. We are also able to impose obligations
on the insolvency practitioners we license using our own internal
regulations.
20. The Insolvency Service can take no formal
disciplinary action against the insolvency practitioners it authorises
except for withdrawal of their authorisation (which we are not
aware as ever happened). Neither does the Insolvency Service have
internal rules for its insolvency practitioners. Any obligations
the Insolvency Service wishes to impose (such as requirements
for continuing professional development) must be introduced using
secondary legislation or using a Statement of Insolvency Practice
and would affect all insolvency practitioners.
21. This has the potential to cause difficulties.
There is the potential for regulatory arbitrage between the bodies:
a body that can impose a limited range of sanctions could be seen
as a more "attractive" option than one that can apply
a range of penalties. It also appears inherently unfair that behaviour
that could lead to a financial and/or reputational penalty being
made against an insolvency practitioner authorised by one of the
recognised professional bodies would result in no action being
taken against the same practitioner were he/she authorised by
the Secretary of State.
22. Additionally, the Insolvency Service's
lack of any form of internal regulations (short of legislation)
can cause problems when considering making changes that affect
the regulation of the whole population of insolvency practitioners.
To give a practical example, a sub-group of the Joint Insolvency
Committee was considering requiring insolvency practitioners to
apply their body's clients' money rules when operating certain
types of bank account for estate funds. This was not considered
possible, as the Insolvency Service has no such rules.
23. There is also the matter of the Insolvency
Service's role as the regulator of regulators, acting on behalf
of the Secretary of State, to decide whether a body is suitable
to license insolvency practitioners. We are subject to inspection
by the Insolvency Service and are required by the Memorandum of
Understanding to submit a report on insolvency regulation annually.
Although we are not in any way opposed to such oversight, it seems
somewhat bizarre that the inspection is carried out by a body
that is essentially competing in the same market place. We would
also question how the Insolvency Service's own monitoring and
regulation of insolvency practitioners is inspected. It appears
that the Insolvency Service does not produce, or at least does
not make publicly available, information about the regulation
of its insolvency practitioners to the same level of detail as
the Recognised Professional Bodies are required to produce.
24. In many ways, the direct authorisation
of insolvency practitioners by the Secretary of State is an accident
of history. Nevertheless, there is now no reason for direct authorisation
to continue. Many of the Recognised Professional Bodies can issue
insolvency licences to individuals who are not members of their
body, and an accounting or legal qualification is not a requirement
for them to hold a licence. There is no longer a need for a regulator
"of last resort".
9 January 2009
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