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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1770-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Business, Innovation and Skills Committee

The Insolvency Service

Tuesday 7 February 2012

Stephen Speed and Graham Horne

Evidence heard in Public Questions 83 - 180

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 7 February 2012

Members present:

Mr Adrian Bailey (Chair)

Paul Blomfield

Katy Clark

Julie Elliott

Rebecca Harris

Margot James

Simon Kirby

Ann McKechin

Mr David Ward

Nadhim Zahawi

________________

Examination of Witnesses

Witnesses: Stephen Speed, Inspector General and Chief Executive, and Graham Horne, Deputy Inspector General and Deputy Chief Executive, The Insolvency Service, gave evidence.

Q83 Chair: Good morning, and thank you for agreeing to come before the Committee. Could you just introduce yourselves for voice transcription purposes, to make sure we have the right levels and everything?

Stephen Speed: Good morning. My name is Stephen Speed; I am the Chief Executive of The Insolvency Service.

Graham Horne: I am Graham Horne, Deputy Inspector General in charge of the Official Receivers business.

Q84 Chair: We have a lot of questions; obviously, you do not both have to speak on every question but equally, if there is something you want to add to or disagree with-I am sure you will not-then feel free to do so. It seems odd on the surface: the economy shrank in the last quarter of last year, but there actually seems to be a drop in insolvencies. Can you explain why?

Stephen Speed: I am not an economist, so it is very difficult to explain. There was a drop in personal insolvency; there was an increase in corporate insolvency. I can speculate. It seems to me that there was a huge increase, as you know, in bankruptcies and other sorts of personal insolvency throughout the last decade, which was probably a product of easy credit, easy lending and easy borrowing. My own view is that we are seeing that unwinding. What the recession did on top of that was change behaviours. It has restricted people’s appetite for borrowing and it has restricted lenders’ appetite for lending. So it is not entirely surprising that we have seen levels of personal insolvency level off, and in the case of bankruptcy fall rather dramatically, because the whole cycle of lending and borrowing has changed quite dramatically since 2008-09.

Q85 Chair: Could you say that people are behaving themselves a bit better?

Stephen Speed: That is not really for me to say. One of the indexes that we track when we look at what is happening in bankruptcy, as well as GDP, is the average level of household debt. I cannot tell you exactly when, but that peaked a little while ago and, if anything, I think it is declining slightly. Something has changed quite fundamentally, in that people’s appetite for credit is not the same as it was a few years ago, and clearly nor is lenders’ appetite for lending.

Q86 Chair: You make the point that corporate insolvencies are on the increase.

Stephen Speed: Corporate insolvencies rose across the board by about 5% last year compared with the year before. The only major type of corporate insolvency that broke that trend was administration, which was ever so slightly down on the year before.

Q87 Chair: Frances Coulson, the President of R3, said, "We are seeing a large number of what we have termed ‘zombie businesses’-businesses that are limping along and not going into formal insolvency," presumably because it is not worth their creditors actually taking action to put them into insolvency. Do you think that, as the economy improves, it may perversely lead to an increase in corporate insolvencies?

Stephen Speed: I would not want to speculate on what may happen in the future. Frances and her colleagues in the profession are probably closer to the dynamics of that than we would be. We do not deal with a great deal of corporate insolvency ourselves in the Insolvency Service. On the basis of the experience of previous recessions, it would be fair to say that there does tend to be a significant lag, beyond the end of a recession and into recovery, of businesses having difficulties and becoming insolvent.

Chair: You have developed a future service delivery strategy, and I want to bring in Nadhim Zahawi to ask some questions on that.

Q88 Nadhim Zahawi: How challenging has it been to reduce the Service’s annual costs by 30%?

Stephen Speed: It has been extremely challenging. We have reduced costs by about 30% in around 18 months. Unfortunately, the biggest part of that cost reduction has had to be saying goodbye to a lot of really valuable people in the Service. That is both people who have been working for us on a temporary basis-we had hired quite a number of temporary staff as case numbers rose during the last few years-but regrettably in April we had to release about 18% to 19% of our permanent work force in one go. That was incredibly difficult and has had some operational consequences for us during the course of the last financial year.

Q89 Nadhim Zahawi: Would you say that 19% reduction in staff has been disproportionately amongst high-quality investigative staff? Where has that come from?

Stephen Speed: We are very lucky in the Insolvency Service in that we have a very high quality of really professional staff at all levels right across the country. The changes we needed to make last April were really targeted across most of the grades we have. We are very lucky in the sense that we have a wonderful group of people still working for us, and we have been able to recover from the shock of losing those people reasonably quickly.

Q90 Nadhim Zahawi: How many cases do you deal with a month at the moment?

Stephen Speed: Insolvency cases? We are going to have about 43,000 cases this year. So if you divide that by 12, it is about 3,500 a month. Is that right, Graham?

Graham Horne: Yes, it is on a slightly downward trend, so at the start of the year it may have been nearer 4,000, but it is now about 3,200 a month.

Q91 Nadhim Zahawi: Do you think that is partly because of the reduction of the resource-i.e. the staff are stretched and are therefore investigating less?

Graham Horne: No, it is purely a function of the fact that fewer people are making themselves bankrupt. Of all the various types of insolvencies that we deal with, the one that is falling is what is called a debtor’s petition bankruptcy, where someone makes themselves bankrupt. Those are the types of cases that are falling, and because we have fewer cases to administer, we need fewer people to do that. That is why we ran the two voluntary exit schemes: to match our staffing resource with the number of cases we have to administer. It is not related to the amount of investigation work that we have to do.

Q92 Nadhim Zahawi: We have had some anonymous evidence-and I must caveat that-saying that the fall in complaints has been due to staff redundancies and, therefore, not having sufficiently experienced staff to register those complaints. It suggested that the figures are adjusted by you, Mr Speed, using an unknown formula. Can you share with us what formula you use?

Stephen Speed: There are a number of issues built into that. We started the conversation talking about the work the Official Receivers do. I think that allegation is actually aimed at the investigative enforcement work that we do in the Service as a whole, so that is a slightly different part of our work programme. I am very happy to refute that completely: there is no formula and there is no changing of the figures.

Q93 Nadhim Zahawi: So the figures are the figures?

Stephen Speed: The amount of people who work in our investigation enforcement area, which we may be talking about later, is actually slightly more now than it was this time last year. The Insolvency Service is a federation of five separately funded businesses. Graham’s business is by far the largest, but it is not the only one.

The area your question was about is actually a taxpayer-funded part of the organisation, which does investigation and enforcement. That is not the part of the funding problem we have had to fix in the last 12 months. The funding for that has been relatively stable, certainly in this financial year. So in that area, the consequences have been more to do with staff turnover than with the loss of staff. That is because we had a significant number of temporary staff working in that area, and we were able to release those staff and take across staff from the Official Receiver’s office who had become surplus in that area. So in that way we have managed to save some jobs, but we have also moved people across from one type of investigation work to another, where the skill sets are really very similar. There is no formula.

Q94 Nadhim Zahawi: You touched upon it just now, but can you just articulate what the current priorities are for the Insolvency Service and whether you have enough resources to fulfil those priorities?

Stephen Speed: We have some big challenges ahead of us, so let me try to articulate what those are. First of all, we need to work with the Department to resolve some of the short-term funding problems that we now have as a result of losing not far short of about half of our debtor’s petition bankruptcy cases. As you may have seen, our case numbers in total have fallen from about 78,000 to about 43,000 this year. So that would be the first one.

The second one would be that we have articulated a future vision for the Service and a delivery strategy aligned to that. It is very important now that we press on and turn that into an implementation plan. Again that is something we will need to do in partnership with the Department, because it will probably need some financial support.

The third priority for us as managers in the Insolvency Service is really to do what we can to reengage with our work force. Our work force has had a very difficult 12 months: a lot of them have had to leave; others have been given news, because of the shrinkage of the Service, that is not welcome to them, and they are understandably unhappy about that. So we need to work with the whole issue of staff engagement. One of the keys to that is about giving people certainty about what is going to happen to them at an individual level, which we have not yet really been able to do to the level they would want. So even if it is difficult news for individuals, they would like to know what it is.

The fourth point-and these are not in order of priority-is that we have to maintain the levels of service we have had in the past; this is fundamental. We have been able to maintain this fairly well through the difficult period we have had over the last 12 months, so being able to maintain that going forward has to be a priority for us.

Q95 Nadhim Zahawi: And you think you can do that?

Stephen Speed: Yes I do.

Q96 Nadhim Zahawi: You mentioned the future investment. Can you just say a little bit more about where you are in terms of your consultations with the Department and the trade unions on that?

Stephen Speed: Yes, I can. I would like to say that we have had an excellent working relationship with both the Department and our trade unions-I understand that one of the trade unions provided you with evidence during your session two weeks ago-and we have been working very closely with the trade unions. We did a full consultation with our staff over the course of last summer about how we would like the future of the Insolvency Service to look. We set some options out in that, but we were clear that we thought there was a preferred option for the future. That was built primarily around the idea that we need to start to separate out the front-office and back-office processes to bring greater efficiency and flexibility.

Through the late autumn and into the current period, we have been talking to the Department about getting confidence around the strategy. We are now about to go into a process with the Department that I hope will lead to a fully costed set of plans for how we will implement all of this. I would like to see that in place by the summer so that we can crack on with that. It is quite a big job; we are talking about a fairly major restructuring of the way we work.

Q97 Nadhim Zahawi: That begs the obvious question: if morale is low because of the uncertainty, how certain are you that you are going to be able to deliver on this big job? It is hard enough doing it when morale is stable.

Stephen Speed: Do you want to talk about the last year?

Graham Horne: One thing we do is try to make sure the changes we introduce are not "big bang". So they do not happen all at once, which would be very disruptive. We would try to set out a programme of events, so that people realise there will be a period of time and so that the agency could react to that. At the moment, we are trying to introduce the delivery strategy in what we call a virtual way, without moving people around, so we can get used to the structures we want to put in place. This is a way of derisking the eventual delivery strategy, so we can get used to new ways of working and can see what the problems are with those new ways of working before we go to a physical implementation.

It is really just about talking to staff on a regular basis, talking to the trade unions, explaining why we have to do things and seeking their input. They are the people at the front line, they know what they are doing, they know the job and we need to get their input into what we do so we can design it in the best possible way. It is not going to be easy; that is certainly true.

Stephen Speed: I would just add that, as a Board, we have a huge amount of experience in insolvency. What we may be lacking is specific expertise in big change management, both the hardnosed programme side of it and also the softer skills as well. Over the next couple of months, providing we can agree a way forward with the Department, we will be looking to strengthen the Board a little bit in that area.

Q98 Nadhim Zahawi: That is crucial.

Stephen Speed: Yes, that is probably one capacity we do not have enough of at the moment.

Q99 Nadhim Zahawi: My last question is about the current case prediction model. Models have proved fallible in the past, particularly in predicting changes of direction. Are they really sufficiently reliable tools for you to base a delivery strategy on?

Stephen Speed: The answer to that is that they are a guide. They have predictive value at some points in the business cycle and less predictive value when the gradient of the curve is steep, as it is at the moment. It is probably best if I say a few words about how we do this. I do not know anybody-either in the profession, in the City or in the banks-who actually has a strongly predictive model for bankruptcies in particular; remember, we are trying to isolate bankruptcies from the rest of personal insolvency remedies that exist. We have our own statistical model, which, as I said earlier, is based on GDP, average debt per household and so on, and we run that model. I ask Graham’s Official Receivers around the country to use their local knowledge and intelligence about what is going on in their parts of the country as well, and we get some data from that side.

Then, about two or three times a year, we gather together a group of people to talk this through. That group of people includes economists from big banks in the City, insolvency practitioners-we usually invite Frances Coulson or whoever is in her position-debt advisers-people who work in the debt advice sector and who see that sort of thing first hand-some of our own nonexecutive directors, economists from the Department and statisticians. We sit together in a room, look at all the data we have and come to a view. There is not a science but we take the best view that we can.

Q100 Nadhim Zahawi: So, basically you have some quantitative data and then there is a bit of qualitative data and a bit of thumbing to come up with what the view is.

Stephen Speed: Yes, and I would say openly that it is never going to be a perfect science. It has been difficult in the past and I do not think it is going to get any easier. One thing that is interesting is that the rate of decline of bankruptcy at the moment is unprecedented. The gradient of the curve is very steep. It has taken us by surprise, I have to say; it is not the way bankruptcy usually behaves after a recession. But because it is so steep, it is going to have to level off at some point, and that point is going to be sooner than it might otherwise have been. So although we are going through a period of terribly difficult instability at the moment, we can foresee a point in maybe a couple of years’ time where we will have started to level out again.

Q101 Ann McKechin: I wonder if we can look in particular at the issue of funding and the Official Receivers, Mr Horne. When we interviewed the trade union representative, he said, "We are going to deal with a lot of cases where there are no assets or only minimal assets, which will not contribute to paying the administration fee that we are supposed to charge and recover." Does relying solely on a feegenerated income make it difficult to predict what level of service you can provide?

Could you also comment on one other question we asked the trade union side? There is an increasing use of debt management companies by many private individuals these days, and they sell their services exceptionally hard. Some people might say they are actually creaming off the more profitable side in terms of recovery, and that you are left, more and more, with the cases where there are absolutely no assets to recover. Would that be true?

Graham Horne: We have always said that bankruptcy is a very serious last step for people; it is something they should not enter into lightly. So it is not something that we would want to go out and market, saying, "Why don’t you go bankrupt and get some debt relief?" It is a very serious step for people to take.

We have to take all the cases; we cannot choose not to take cases, so we have to take all the cases where the court makes orders. Approximately half of them do not have any assets, but we do get the deposit the debtor has to pay to make themselves bankrupt, so we do get a contribution to our costs.

The whole system is designed around crosssubsidy, where cases with assets pay for those without assets. That model is fine in times when case numbers are fairly static and when asset values are static. What has happened recently is case numbers have fallen far more quickly than we expected and asset values have also come under strain as the recession has bitten. That has put that funding model under some strain, and that is why we had the deficit we had last year. It is a model that can work in good times and is proving difficult in these particular times.

In 2010 we made some changes to the funding model to try to improve our cash flow. Essentially, someone has to pay for debt relief; if you want to give people debt relief, someone has to pay for it. That can only be the taxpayer, the creditors or the person themselves. Striking the balance between those three is what Ministers have to do to decide who should pay.

Q102 Ann McKechin: If we have a situation where there are more and more cases where there are in fact no assets, and if these people are trading anyway and are not made insolvent, it presents a danger in the commercial world that these people are allowed to continue and accrue debts. It is a danger to people who are doing business with them potentially. So I would say there is an issue of public good and also the balance of to what extent you think it is fair for the creditors to take on the entire onus of the fees in crosssubsidisation in the model you currently have to implement.

Graham Horne: The cases that cause difficulties are not the trading cases. Trading cases tend to have some assets in them. The trading cases where people have been in business, such as a small grocer’s shop or whatever, are not the ones that cause us difficulties. The ones that are causing us difficulties are what we call consumer bankrupts, where they have credit card debt and make themselves bankrupt but do not have any other assets. What we would want to do is look at our funding regime to see whether that balance needs to be altered. It could involve saying to the bankrupt themselves that perhaps they should pay more for the cost of administrating their bankruptcy, bearing in mind they get debt relief. If you are getting debt relief of over £30,000, maybe it is not unreasonable for you to pay slightly more than £500.

Q103 Ann McKechin: Am I right in thinking that in your Service they have to pay an upfront fee?

Graham Horne: You have to pay a deposit at the moment. To be bankrupt you have to pay an upfront fee of £550 already.

Q104 Ann McKechin: If you go to a debt management company, they take the fee over a certain period of time, so they have an advantage.

Graham Horne: The advantage that debt management companies have is that you can pay that by instalments, whereas ours you have to pay up front. That is one thing we would want to look at.

Q105 Ann McKechin: So that is one of the things you might be examining?

Graham Horne: Absolutely: whether the fact people have to pay it all in one go is a barrier to bankruptcy.

Q106 Ann McKechin: Obviously there is a pretty long timeline between the date when someone actually declares themselves bankrupt and goes into liquidation and the time when you recover assets and, presumably, your fees. As you have pointed out, you have this very steep downward curve, which means-if you look at the figures from last year-it potentially could be another two years before the full impact falls on to your Service. Some people suggested that you are trying to keep too many of the complex cases inhouse and that you might do better to try to outsource some of those complex cases, because you are never going to make real money out of them. Would you like to comment on that?

Graham Horne: It does not really matter to our finances whether we do the case or an outside practitioner does the case, because our fee has to be paid whoever does the case. We are not resourced to do complex realisations and asset recoveries, and we do not tend to keep those cases. If it is more than a simple, straightforward asset recovery case, we will seek to get an insolvency practitioner involved, because we are not resourced to do it and we are not skilled to do it. The only cases we keep are cases with low asset values and comparatively simple realisations where we think the creditors will possibly get a better return than if we also had an IP’s remuneration on top.

Q107 Ann McKechin: Would it be fair to say the Service may require further restructuring if the figures are going to change?

Stephen Speed: My view is that the Service does require restructuring. We were talking about that earlier. It is for that reason that we went through the process during 2011, and indeed a little earlier, in 2010, of starting to look at what that restructuring needs to look like.

Q108 Ann McKechin: Would that potentially involve reducing your staffing numbers in the Service further?

Stephen Speed: The restructuring itself is not linked to staff numbers. We want to make the Service operate differently from the way it does at the moment. The thing that is driving staff members is going to be the volume of cases. Clearly the volume of cases is falling rapidly. We are running a second voluntary exit scheme for staff at the moment, and unfortunately I cannot rule out the possibility we might have to do that again in the future.

Q109 Ann McKechin: The danger is if there is a sudden upturn in cases. For example, if the interest rate increases, so will mortgage repossessions, which very often ends up in bankruptcy cases, or if there is a recovery in the economy, as insolvency practitioners have suggested, you will see an increase in cases. To what extent do you believe you will have sufficient staff, resources and capacity to deal with any increase in cases as and when that arises?

Stephen Speed: That is a very good question. We dealt with rising case numbers very successfully throughout the last decade. From about 2003 right up to 2009, cases were rising quite steeply. The way we did that was to use temporary staff. Temporary staff have become a bit more expensive because of the Agency Workers Directive but that possibility still exists. It is also the case that, as we make the business smaller, we are doing it slightly behind the curve. You have to do that, because you still have a stock of cases to run. So we can probably afford for cases to go up a modest amount without having to worry too much. After that we would probably need to think about in-sourcing some of the flexibility we would need, as we have done in the past.

Q110 Mr Ward: I have a question at this point because it does not fit in anywhere else. I am just interested in getting your feel about this. We are obviously spending a lot of time looking at the support the banks are giving in terms of lending to businesses. How have the banks been behaving? Is it the Mark Twain idea of taking the umbrella back when it starts to rain? What has the general support been from the banking sector towards businesses in distress?

Stephen Speed: I regret to say that I do not feel very well equipped to answer that question. We focus mostly on personal insolvency in the Service.

Q111 Mr Ward: Personal insolvencies have gone down but corporates have gone up.

Stephen Speed: Yes, corporates have gone up. In particular compulsory winding-ups have gone up by about 15% year on year. That is due to the actions of creditors. They may be banks or it may be the Crown.

Mr Ward: The unsecured ones are probably the banks themselves.

Stephen Speed: The banks and the Crown would probably be the two largest groups, yes.

Q112 Chair: On this issue of staffing, I was looking at the graph provided concerning the number of insolvency cases. Going back to 2001-02 there appeared to be about 28,000. That obviously peaked in 2008, 2009 and 2010. Now we are running at around 50,000, which is a substantial reduction. What are your relative levels of staffing now as opposed to in 2001-02?

Stephen Speed: Graham, it is probably best if you answer that for the Official Receivers.

Graham Horne: Since 2001-02 we have undoubtedly become more efficient, so I suspect we are probably back at the same staffing levels now, with 40,000 to 50,000 cases, as we had in 2001-02 with 26,000 cases. Over that period of time various changes to processes and various improvements within IT have made us more efficient. So on the Official Receivers side, we are about 1,200 or 1,300 people, which I suspect is about the level we were when dealing with fewer cases in 2001-02.

Q113 Chair: So you are doing probably 80% more with the same level of staff now.

Graham Horne: I do not think it is quite at that level. This is from memory-I do not have the figures in front of me-but we probably had 1,400 people, something like that. We are more efficient, but not 80% more efficient.

Q114 Paul Blomfield: I wanted to explore a similar thing about the impact of reductions you have had to make in relation to the investigations unit. Only one in four cases of "adverse" director conduct ends in disqualification, and there is a lag of 18 months for investigations. Do you think that is a result of the 11% cuts and has that been a cut too far?

Stephen Speed: We took an 11% cut along with most of the BIS family in June 2010. That cut has certainly had some impact, but my own feeling is that the organisational change we have been going through this year, which I described earlier, and will continue to go through a little bit next year, has probably had an effect as well. Overall the number of directors we were disqualifying had actually increased year on year until last year, when we did about 1,437. So I do not think there is any direct evidence that you can point to yet.

The problem with this, as you said yourself, is that the cases take quite a long time. That is because the insolvency practitioner or the Official Receiver is doing their job in asset realisation, and then reports are submitted to the Secretary of State after six months or so. These investigations require a decent quality of evidence before we can start proceedings against directors or against bankrupts. In the case of bankrupts, we have to do them within a year, and in the case of company directors, we have to have issued proceedings within two years. We try to issue proceedings within 19 months, so there is a five-month window where we can operate beyond that. It has been difficult in the last couple of years, but we have managed to keep the show on the road reasonably well.

Q115 Paul Blomfield: I just want to pursue the point you are making about the timeliness of progressing investigations. Is it fair to say that you have been falling significantly below your own targets for progressing cases within a 19-month timeline?

Stephen Speed: No, I do not think it is. We met that target last year. We published it in our annual report and accounts, and I am pretty sure we met that target. The current position this year is that we think we are going to meet the 19-month target, as far as I know.

Graham Horne: You may be referring to some of the evidence from the trade union side, where they are referring to internal targets we set ourselves for stages of the process. We do set challenging targets to try to encourage our staff to move things on as quickly as they can, but the overarching target is to launch proceedings within 19 months. That is the one we are achieving. It is very important that, if you are going to disqualify someone, you do it at the earliest possible opportunity.

Q116 Paul Blomfield: Within 19 months?

Graham Horne: The target is to launch disqualification proceedings within 19 months of the insolvency.

Q117 Paul Blomfield: But on your own internal targets, as of an internal performance report in November 2011, on Official Receiver cases you were at 83% and your target was 100%.

Stephen Speed: By the end of this year, which is only about six or seven weeks away, the indications are that we will meet the 19-month target across the totality of cases that go through that route-director disqualification cases.

Q118 Paul Blomfield: But if those figures are right, as of November, you were substantially behind.

Stephen Speed: Yes, we were behind that target earlier in the year.

Q119 Paul Blomfield: The target for 19 months?

Stephen Speed: We were behind the 19-month target earlier in the year, but we have recovered, and that was due to some of the disruption I have talked about. It might be worth me saying-and I may be repeating this, for which I apologise-that that part of the Insolvency Service has had a 30% staff turnover as a result of the disruption we had when staff left in April. So one in three of our investigators working on that type of work is new. We were certainly not meeting the target earlier in the year but, as I said to you, the indications are that by the end of the year we will have met the target for the year as a whole. That emphasises the point I was trying to make earlier, which is that I absolutely accept that we suffered a bit of a setback earlier in the year but we have done quite well to recover the position overall. I pay tribute to our staff, who have been the principal reason why that has been able to happen.

Q120 Paul Blomfield: I would like to probe on another area: live company investigations. In your annual report for 2010-11, you stated that there has been a 39% decrease. Now, is that because of changing patterns of work or is that as a consequence of the savings and the impact on the Service?

Stephen Speed: Can you pick that one up, Graham?

Graham Horne: These numbers change from time to time. These are comparatively small numbers; it depends on how many complaints you have had and whether you are dealing with groups of companies or individual companies. We have a prioritisation model, and what we try to do is put all our insolvent cases we need to investigate and all our live cases through a model and try to work out which is the best set of cases to use our resources on.

With complaints about live cases, you often have very little information about the company apart from someone saying, "We do not think this is quite right; we do not think we are being treated properly." Whereas, in an insolvency, you have a failure; creditors have lost money, and you really should have some investigation as to why creditors have lost money. So in allocating the resource, we try to make sure we allocate it in the way that best addresses the interest of the public and the people who have lost money. So there is often a mixing between live company investigations and insolvent investigations, and it may be that we shifted some resource into the insolvent side rather than the live company side, which is why the numbers varied slightly last year from previous years.

Stephen Speed: I would just add to that to say the live company area was one of the areas where we did lose a significant number of staff in April.

Paul Blomfield: That is precisely the area I am trying to probe.

Stephen Speed: Those are staff who had been working on that area for some time. We have replaced them all with internal people who were doing similar work but on a different type of case. It has taken a while for them to be trained up, but my understanding is that is going pretty well.

Q121 Paul Blomfield: I just want to probe Mr Horne’s point a little more. You were talking about these numbers coming and going. Is a 39% decrease within the normal cyclical pattern or is that more substantial?

Graham Horne: In 2007-08 we only did 193. In 2008-09 we did 240. So it varies a bit. 205 is probably fewer than we would have liked to have done, but it is not totally out of kilter with the level of activity you have in this area. As I said, we did lose some experienced members of staff. We did take decisions to prioritise the insolvent cases, as creditors had actually lost money. So there may have been a few more cases we would have liked to have done had we been in a different position.

Stephen Speed: Whatever actually happens, I can absolutely give the Committee assurance that the most serious, important cases-with a public interest, harm or whatever-get done. It is not a question of really difficult cases not being done. We have a very sophisticated, useful and accurate way of prioritising cases, which has got us through this period of disruption and will settle us down again quite soon I am sure.

Q122 Paul Blomfield: On the question of enforcement and the importance it plays, do you think you can still deal adequately with your enforcement work with the staff you have, or do you think you are going to need to hire in staff from outside?

Stephen Speed: We have no current plans to hire in staff from outside. We have about 12 or 13 more headcount or FTE than we had this time last year. That workforce is now stable because, as I mentioned earlier, previously quite a few of those people had been employed by us on a temporary basis. We do not really have very many temporary staff in that area now. We have a good, stable workforce, which is settling down, I think it’s fair to say; a lot of them are new. So I do not think that is an issue, no.

When we come across cases that are a little bit beyond our own capability-really seriously difficult, big cases-we have some capacity to outsource those to solicitors’ firms. We have calloff contracts with some solicitors’ firms. So we also have the scope to flex at the margin as well.

Q123 Paul Blomfield: I have one final question on a slightly different strand. Do you think the rebranding of the Companies Investigation Branch in April 2006 caused confusion among the general public about where to make a complaint about a fraudulent company?

Stephen Speed: We did not rebrand it in 2006; it was moved from the Department into the Insolvency Service in 2006. We brought it into company investigations more widely about a year ago.

I hope not. I saw the evidence from a former colleague of ours who thought that was the case. I do not think there is any direct evidence of that in terms of the number of complaints we see. If anything, we have streamlined our complaints process. We now have a single hotline number; we used to have a panoply of different numbers that people could phone. We have the number much more clearly and prominently advertised on our webpage; in the past you had to click a couple of times to find it. I really hope that is not the case, and I do not see any evidence that it is.

Graham Horne: What we have done is put a lot of effort into intelligence and networking with other agencies to make sure that those people who might want to make use of our powers are aware of our existence and can come to us if they think we can help them. So we put a lot of effort into intelligence and surveillance to make sure that people who have some decent information that we can use to start doing some investigations know about us and know about our existence.

Stephen Speed: I am glad you raised that; that is a very important point. We used to be fairly reactive and we decided about a year and a half or two years ago that we needed to turn that around. So we now do a lot of intelligence sharing with other enforcement agencies. We are looking for ways in which they can use our evidence and we can use theirs. We do not just sit and wait for people to come and lay complaints at our door.

Q124 Margot James: We have received evidence that some investigator posts have been replaced by lower grade admin staff who have not had sufficient training. To a certain extent you have covered this in your previous answers, but could you just recap?

Stephen Speed: I do not think that is the case. There is an allegation that decisions are being taken at too junior a level in some cases. We train people, from the most junior right up to the most senior level in their job, very carefully. What the witness or the person submitting evidence was talking about was the very early stage vetting of disqualification cases. The people who do that work know exactly what they are doing. They are trained very carefully in doing it. In order to give ourselves assurance that it is being done well, we have a fairly robust audit process, which checks that is being done properly. I do not have a concern, and I think the allegation is a little bit unfair on the people who are doing the job.

Q125 Margot James: As well as cutting staff you have also had to take on less experienced staff-or rather, let more experienced staff go-to save money, and perhaps train up the less experienced staff. Is that how you have handled it?

Stephen Speed: We had a voluntary scheme last year that released 470 staff. As you have to with these schemes, we had a very clear and objective set of criteria for scoring people for release. Clearly, what we tried to do was make sure that priority was given to retaining the best people where possible, but you cannot retain all the best people where possible when you are letting one-fifth of your workforce leave. So we did lose some valuable experience.

Q126 Margot James: Among the 470, of course you are going to lose some experienced people, but you cannot make serious cost reductions by letting go of the junior people. So there is a strong temptation, which we are seeing in other areas, of letting go of the more expensive people-because that is where you can save the money-but of course they are the more experienced people as well. Is that not a fair criticism?

Stephen Speed: The point I would like to make-and I think Graham would like to make a point as well-is that we did not do this randomly; we actually set up a target number for each of the grades we have. So it was not just "we need 470 people"; it was "we need so many at this level, so many at this level" and so on.

Q127 Margot James: What I am probing is: to make the financial reductions, it is easier to trim off the top, because that is where you make the main savings and still have some decent headcount left.

Graham Horne: The grade we actually let fewest go of, or protected the most, is the investigator grade, the L3 grade. That is not a grade where we have surpluses; it is not a grade where we wanted to let people go. We have let managers go. Because staff numbers were reducing, we had too many managers, and they can be quite expensive. So we have tried to readdress our management headcount span so that managers are not managing only two or three people. So it is managers we have tried to reduce, but skilled investigators is the one grade we have tried to retain; in fact I am just about to do a recruitment exercise to promote some more people into that grade. We have preserved, as far as possible, that investigator grade.

Stephen Speed: There is a nice little point buried in what Graham just said. The Service has been in a degree of stasis for members of staff for a few years, because there have not been promotion opportunities. One of the things this scheme has allowed us to do, and maybe the new scheme will allow us to do as well, is to offer a limited number of promotional opportunities to staff, which would not have been possible otherwise.

Q128 Margot James: My last question is about the consequences of these staff cuts on the level of disqualifications and the level of investigations. Is it not the case that one reason for the alarming drop in the number of investigations, as pointed out by my colleague, is that, because of the amount of change you have had and the loss of some experienced people, potentially a decision might have been made by those people remaining to put difficult cases on the back burner, and that might have resulted in such a dramatic loss of disqualifications.

Stephen Speed: I genuinely do not think so. First of all, Graham talked about our prioritisation model earlier on. There is an allegation out there in the press that we try to take the low-hanging fruit because it is easy and we can do lots of them. We do not do that; I want to be very clear about that. We do the cases that most need doing. On any given day, when we are looking at what we have in front of us, we will do the cases that most need doing.

I accept that we went through some disruption earlier in the year, but we are recovering from it reasonably quickly. If you examine the figures we put in our corporate plan for this year, you will see that in a sense we admitted at the beginning of the year that we would not be able to do quite as well this year as in previous years. What I am saying to you now is that is the case, but we are on the road to recovering our general performance a little faster than I expected. I do not want to sound complacent, but I am very pleased with that.

Chair: You have rather anticipated Rebecca Harris’s next question. Do you want to add anything to that?

Q129 Rebecca Harris: Perhaps I may go into it in a bit more detail. Can you give the Committee some understanding about how you prioritise cases? We heard about case targeting in a previous evidence session, and that you may have a public interest grid or parameter for working out which cases to deal with. In relation to the allegation that you pick low-hanging fruit, can you give us an idea what you do?

Graham Horne: We have quite a lot of experience of this; we have been doing it for a long time. We can spot things when they come through from the Official Receiver or insolvency practitioner side of the business. We look at the case on the insolvent side and see who has lost money. Are they institutional creditors? Are they members of the public? What is the nature of the losses? Have members of the public lost money because of an investment fraud, or something like that? We try to categorise the nature of the losers and how many complaints we have received.

Is there a risk of continuing activity? Is the business continuing, or are the directors continuing with another business? Have they had previous failures? Is it something we have seen before from these people? All of those factors are put into our prioritisation model, along with such issues as whether it kept proper accounting records. Is there any evidence of assets being misappropriated? Is it possibly being run by someone who has been disqualified? Are there indications of misconduct or criminal activity?

All of these are put into a grid and people use their experience and knowledge to assign values to them. That gives a score for the public interest. In deciding the allocation of resources for the investigation, obviously those cases with the biggest score will be taken out first. Those with the lowest score might be the ones that do not get done, because they just do not have the factors that indicate the public interest means we should spend resources on them.

Q130 Rebecca Harris: Presumably, there is not necessarily a relationship between a high public interest and it being an expensive case.

Graham Horne: Absolutely not. The score is based purely on whether the case should be investigated in the public interest, and the people taking those decisions do not think about whether they have the resources or how much it will cost. They look simply at the facts of the case and give it a score, and it goes in. Those cases with high scores are done first. If it is a case that involves a lot of resource, we might want to outsource it to a firm of solicitors or get specialist help, but those are the ones that are taken first.

Q131 Mr Ward: I cannot understand where the dividing line is. You said earlier that you do not deal with corporate failure.

Stephen Speed: In terms of case administration, in Graham’s business we deal with three types: personal bankruptcy where you have made yourself bankrupt; personal bankruptcy where a creditor has made you bankrupt; and cases where the courts have compulsorily wound up a company.

Q132 Mr Ward: Can that be a public or private limited company? Is it any form of company?

Stephen Speed: Any Companies Act company.

Graham Horne: They tend to be smaller companies.

Q133 Mr Ward: Generally family businesses?

Graham Horne: Yes. You will not necessarily find a big high street name going into compulsory liquidation. They tend to be smaller one-man-type companies.

Stephen Speed: In terms of the investigation work we do, essentially that covers all companies that go into insolvency, and the routes are through either the Official Receiver who does investigations or the profession that might be managing an administration or liquidation, which is required by law to report to the Secretary of State within six months on the conduct of the directors. Those are the main sources of allegations we would receive on which we would then take a view on whether or not to take proceedings.

Graham Horne: We are not dealing with the administration of Peacocks, but the administrator must report to us on the conduct of Peacocks. Those conduct reports are the ones we look at to see whether or not we should take investigatory action.

Q134 Mr Ward: Yet that does not pick up the role of the banks, because they, along with the Crown, will often be the ones who force the issue into administration?

Stephen Speed: The banks will be secured creditors in many cases; they will have a charge on the floating assets of the company. The banks will be taking a view about the extent to which they wish to stay involved in a company that might be in distress, but that does not necessarily go to the issue of whether or not the directors have been involved in any misconduct. That will often emerge afterwards, once either the Official Receiver or the insolvency practitioner is looking at the company.

Q135 Chair: Before we move on, in your annual report there is a rigorous vetting procedure to determine the priorities of investigation. What concerns me is the line: "If a case has not been allocated for investigation at month six, it is usually discontinued." What reassurance can you give us that, in the event of some very staff-intensive investigations, shall we say, precluding the examination of potential investigations lower on the priority list but still important, they will not just be abandoned after six months?

Stephen Speed: In our submission we were talking here about live cases. For the record, for some time we have felt able to do all the insolvency cases that have come our way that merit taking forward to investigation. I want to talk just about the live companies. Our procedure is that, if we are not able to allocate an investigation immediately, we will set it aside.

At the end of two months we will review all of the cases, and one of the things we will be looking for is whether further information has come to light from any source, whether it be a complainant, insolvency practitioner or whoever. That case is then reviewed at the end of each month up to the end of six months, and it is only after that fifth review that we would take a difficult view that probably we cannot, at the moment anyway, afford to give resource to that case. It is not simply abandoned at day one; it would be looked at five more times. One of the issues we would be looking for is whether further evidence has come to light since we took the initial decision not to proceed immediately. If you like, it is a six-month process rather than an immediate one.

Q136 Chair: I quite understand that. I am just wondering what safeguards there are that some potentially significant investigations will not be abandoned prematurely because no further evidence has turned up-by definition you tend not to get evidence unless you investigate it.

Stephen Speed: That is a difficult question, because in a sense we are getting thousands of complaints a year, most of which are not evidenced. That is the way it is.

Chair: I understand.

Stephen Speed: I see where you are coming from. This may go back to the point that we have tried very hard over the last year, I think with some success, to develop the intelligence and surveillance side of what we do. Certainly on the live companies side we are very well clued in to how we can use our powers to deal with particular types of scams going on in the economy.

We have had runs of cases on issues like land banking, boiler room scams, carousel fraud and charity publishing, which has been particularly predominant in the north-west of England for some reason. We are working with the police, the Serious Fraud Office, SOCA and other organisations in intelligence sharing. If we have a case in the stack that is going through its monthly review, it is perfectly possible that we will get further intelligence from one of those sources that will help us with it. If that is the case, it is perfectly possible that we will lift it out of the stack and allocate it to somebody to investigate.

Q137 Chair: Looking at your outputs, it is interesting that the number of disqualifications has risen despite your staffing issues. The number of live company investigations has dropped significantly, certainly from the 2008-09 and 2009-10 figures. How many of those disqualifications arise from live company investigations or other investigations?

Graham Horne: Very few of the disqualifications come from live company investigations. If we investigate a live trading company using our powers and we do not like what it is doing-we think it is trading against the public interest-we will put it into liquidation. If a fraud or scam is going on, the measure we take is to stop it by putting it into liquidation. The disqualifications flow from the insolvencies and liquidations we deal with, so that is our major power on live company investigations.

Stephen Speed: As a general comment, these figures are quite difficult even for us to interpret because of the 19-month point we talked about earlier. There is not a one-to-one correlation between the early and late-stage figures in a given year. A two-year time lag is built into these numbers.

Q138 Rebecca Harris: Mr Speed, in evidence to our predecessor Committee in 2009 you said you were proud of your very good and locally based service. Can you comment on that in view of the fact that you are moving to a much more regional call centre base under the current model?

Stephen Speed: I remain very proud of everybody in the Insolvency Service. They are a constant wonder to me. This takes us back to the earlier discussion about the delivery strategy on which we have been working. What we have said in the delivery strategy is that we need to separate out our customer-facing work in the front office from the back-office work, because we need to concentrate the back-office work in fewer locations than we have at the moment if we are to get further efficiencies and if we are to have the flexibility we need to cope with future ups and downs of the sort we have seen recently. At the moment we are stuck with the predicament of trying to shrink our complement in 35 different places. In the future we would like to design a Service where the ups and downs can be managed in a much smaller number of places. It will make the whole thing a lot easier to do.

But what we have said in the delivery strategy and remain absolutely committed to is that we need a local presence across the country. As we have said in the strategy document, in the long run we envisage a network of about 25 offices staffed by people whose job it will be to do all the facetoface work we currently do. We are not planning to cut back on the face-to-face work; we want to continue that; it is very important. The key part of that face-to-face work is the need-which in a sense is more our need than the customers’-to interview bankrupts or company directors where we have some concern about their behaviour in the run-up to the insolvency. For the purposes of that face-to-face work, we want to remain local.

At the moment, if you are made bankrupt on your own petition in the courts, we will interview only about 15% of those cases face to face, because that is our estimate of what we need to do. For some years the other 85% we have been interviewing over the telephone, so to that extent it is not necessary for that service to be localised.

Q139 Julie Elliott: To put a supplementary before I go to my question, you say that you are slimming down to 25 face-to-face offices. Will any of those be in the north-east of England?

Stephen Speed: There will be one in the north-east of England.

Q140 Julie Elliott: I am slightly concerned about a regional structure where the furthest north is Leeds, which has no link to my region.

Stephen Speed: We will absolutely need to have a presence in the north-east of England, and our plans certainly include that.

Q141 Julie Elliott: Good. As to the regional call centre system you have proposed, what analytical work has been done on the benefits and efficiency savings of the policy, and was the decision evidence based?

Stephen Speed: I think it was evidence based. If I may put the record straight, you have used the expression "call centres". We have not used that expression; they are not really call centres but offices where more of our staff will work than work in our average office at the moment. They will be Graham’s people to some extent who do the telephone interviewing, so these are people who are calling out, not taking calls that come in, which is not quite what the call centres are for.

Q142 Julie Elliott: Call centres can be outward- or inward-facing.

Stephen Speed: It is a job we already do around the country in all our offices, and we just want to bring it together. The work itself is not new, and we would not want to create something from scratch. The investigation work where we have not had to do a face-to-face interview would be in those offices as well. There are other aspects of the Insolvency Service’s work. We have looked also at redundancy payments work, where there is scope for separating out the job that is done in terms of actual claims processing, which is the important part of the job-it is how you get the money to the redundancy claimant as fast as possible-and dealing with people who have made claims on the telephone. It is not necessarily the best thing to have the same person try to do both.

Q143 Julie Elliott: What was the evidence base that you used for moving to this structure?

Graham Horne: We have loads and loads of spreadsheets, analyses and masses of data. As Stephen says, we are not changing the way we do things. We still want to interview face to face because you have to. If people have lost money, you need to be able to see the whites of their eyes and what they have done with the money. We are still going to telephone people, as we telephone them now.

The case is based on having 35 increasingly small offices that can be quite inefficient to run because you need a manager in that office and yet there will be only six or seven people in it. We are trying to get efficiencies through the use of our accommodation and maximising the use of our managers, but for the people doing the key day job, the examiners, they are still doing the same job they were doing and still need the same skill sets. It is really about making better use of our management and accommodation, and we have pages and pages of spreadsheets with detailed analysis.

Q144 Julie Elliott: You have put forward a cost saving of £33.5 million for the closing and rationalising of offices and moving of staff. How realistic is that costing, given that there will be a period of double running at the offices?

Graham Horne: That is a business case based on the assumption-you have to do business cases on this basis-that on day one you move to this structure, and you calculate what the cost would be of moving to the structure in a big bang approach. In reality you would not do that, because you would want to do it over a period of time. You could not put the organisation through that degree of stress. So, the business case is based on reducing the amount of management you need, because you would have larger groups of people in fewer locations, and making better use of accommodation so you are not paying for accommodation you are not using. It is very hard to flex buildings up and down when you have 35 of them. On the plus side, you have efficiencies through fewer managers and better use of accommodation, but there are costs in moving to that system, and the business case model enables you to do various scenarios.

Q145 Julie Elliott: In coming to the decision to adopt this model, did you look at the possibility of using cheaper accommodation to keep a more locally based service?

Graham Horne: We will be locally based, so we will still need 25 local offices, and we will be looking for accommodation increasingly on the Government estate. It makes more sense for us to share with other Government Departments than to try to have our own particular building, so again some of the accommodation savings will come from our renting part of another Government Department’s building in the local presence. We will then have fewer but larger administration centres, and they are the ones that might flex up and down a bit, so we will be trying to find some flexible cheap accommodation that means we can grow and shrink as case numbers grow and shrink.

Stephen Speed: As Graham said, we have 35 locations at the moment, about half of which have a lease break or lease end that will come up in the next two or two-and-a-half years, so that is a significant opportunity for us to grasp. We have already taken the bull by the horns in deciding that in a couple of months’ time we will be moving ourselves in London from a quite big and expensive building that we can no longer populate properly into a smaller building on the Department’s estate and with the help of our Department. We are getting on with that now.

Q146 Julie Elliott: If you have these local units, or whatever they are to be called, the staff in them will still be managed, because you have made great play of the cost of management. Will they be managed at arm’s length?

Graham Horne: No. The delivery strategy envisages that the local offices where you have local examiners doing the local cases will have local management. It is in the regional centres where, if you like, there will be management as well. In the process of moving, there is an element of remote management, but that is an interim stage until we can go to the physical implementation of the delivery strategy.

Q147 Julie Elliott: Moving to the information systems that you use, more than £80 million has been spent on the Service’s Enabling the Future IT system over the past two years. This is more than one-third of the annual budget of the Service. Is this an efficient use of public money?

Stephen Speed: Let me give you a top-line answer and then pass it to Graham, who was the main instigator and did quite a lot of this work. That was a programme of work that took about four or five years. A big component of it was simply changing the contract we had with our desktop ICT supplier, which was originally Fujitsu and is now IBM. That has already paid back quite considerably. The second component in terms of the systems is our case administration system, which was introduced in October 2010. For both that and the claims handling system that we use in redundancy payments, the technology we were using up until then was such that it was becoming very risky to keep it going. The systems were quite elderly, and we increasingly found it difficult to find anybody in the market to support them, so replacing those systems was something we would have had to do, regardless of what the business case looked like, just to keep the business running. We took that opportunity to bring all of those things together.

As to the case management system, in particular in Graham’s business, we built it on the technology platform supplied by IBM, and it is now in such a state that we will be able to use it to drive forward the changes in the delivery strategy that we talked about earlier. Had we not done any of that work, we would be a bit stuck with the kind of estate and type of geographical spread that we have at the moment, so it has been very much an enabling piece of work for us, and it will pay back in about 2013-14.

Graham Horne: The cost is £82 million. However, the benefits on the other side of the equation are estimated to be £124 million by March 2014, so it is a net benefit of £42 million. We have already realised benefits of £68 million, so it is very nearly at break even, and will be by May of next year. Purely on the financial side, it is due to break even but, as Stephen said, it is a great enabler.

For example, another part of the programme of which we are very proud is the debt relief order system. It will enable us to do the debt relief order systems, which is a low-cost debt relief mechanism for those who cannot afford bankruptcy. That was part of the project that came in on time and on budget and is part of the £82 million. The benefits are not great for us, but the benefits for the people who make use of the debt relief order process are very important.

Q148 Julie Elliott: We have been told that the new case management system is slower and less productive than the former one. What would you say to that?

Graham Horne: This may be because what we have asked for is more data capture than previously. Like all businesses, I suppose we want management information and to be able to capture information so we can better run the business. The former system, which was very old, just did not contain certain bits of data, so when we introduced it we took the opportunity to capture more data. People probably have to do a little more inputting, but at the same time it enables us to get efficiencies further down the line with the way we manage the business, and managers will get more information. If you like, it helps with efficiency in terms of the number of managers we need, but overall we think it will improve productivity.

Stephen Speed: Perhaps I may link this to the question Mr Zahawi asked at the beginning. You made the point about the need for change capability. One of the groups of people who will be watching the proceedings today is our own staff. When that system was rolled out in October 2010, it did not go very well. The difficulties for our staff that that roll-out created persisted for some months. Having recognised that we did not do that particularly well-the system worked but not as well as it should have-we have made some very significant improvements and it is now working well, and we have learnt quite important lessons from that difficult episode that we need to take forward into the wider changes that we now need to make.

Q149 Julie Elliott: Do you plan any further major investments in IT systems?

Graham Horne: Not major ones. We will look constantly to improve the ones we have got and see how they can be made better for both customers and our staff. We have aspirations to create a portal for our customers to interact with us electronically. That will not be anything like on the same scale of investment we had with the Enabling the Future programme. We still need to work through the business case on that, but we are not planning investments on quite the same scale as the Enabling the Future programme.

Q150 Julie Elliott: We have heard that you are planning to introduce another new IT project called WISDOM, which will mean that manual bankruptcy case files across the Service will become purely electronic files. How much will the system cost, and what are the perceived benefits in efficiency and productivity?

Graham Horne: We already have that in place; we already have areas of the business where there are electronic files. All we are doing is turning on more scanning; in other words, paper that arrives in some parts of our business is already scanned in and turned into images, so it can be used without having paper. All we are doing is rolling that out, so there is no significant investment; it is merely extending something that happens in some areas across the whole of the business. Once that is done, people will be able to work remotely because they will not need a paper file in front of them; the paper file will be on the computer. That means people can work flexibly from home and we can move cases around the country without having physically to ship files around the country. It is nothing significantly new; it is something we already do and we are just extending its range.

Stephen Speed: It will also reduce the costs of storage over the next few years. All of our cases are in storage and we will not need to store new cases in our own offices. If you go into our offices, in most of them you will see a big rack of paper cases. We want to start to get rid of that so we can use our space more effectively.

Q151 Julie Elliott: You said that people would be able to work remotely from home. Is that common practice within the organisation?

Graham Horne: Yes. Currently, we have about 500 people who work partly from home. We like a pattern that means that maybe they work two days at home and three days in the office. There are some who work at home full time, although they can get a little bit isolated and some of our work does not necessarily lend itself to full-time home working, but we want to extend, as part of making better use of our accommodation, a working pattern where, if people want to, they can work at home two or three days a week and two or three days in the office. It is good for their work/life balance and good for us.

Stephen Speed: The context is that the Government have essentially made it mandatory over the last couple of years to have an eight to 10 hot-desking ratio. We are driven that way anyway, but that is the way we want to go. In terms of the delivery strategy, we shall be asking people to make difficult choices about where they will work in future, moving work from one office to another. What I have said to staff, which I fully intend to follow through, is that where we can give them flexible working to make that transition easier we will certainly try to do that if the business can afford it.

Q152 Mr Ward: There seemed to be an intent by the former Minister in a statement in March of last year to respond to the concerns of some people about pre-pack administrations, but, within the last couple of weeks-you are nodding your heads so you know what I am going to say-has there been a change of mind?

Stephen Speed: As to where the Government are coming from, first I make the point that pre-packs are an important part of the armoury available to insolvency practitioners, but they recognise the concerns that in particular creditor groups often have about the way they work. The Government have thought fairly extensively about this, but have reached the view that, in the light of higher level policy decisions that have been taken about the way the coalition want to do regulation-and effectively to step away from it particularly for micro-business until 2014-the benefits of the things we had been thinking about do not outweigh the wider benefits of the micro-business exemption.

Q153 Mr Ward: That is not a view shared by the Federation of Small Businesses.

Stephen Speed: I appreciate that. I know there are people who do not agree with it, but that is the position the Government have reached having thought about this quite carefully.

Q154 Mr Ward: In place of that, the argument is that there are a number of other measures that can be taken, in particular SIP 16. What is your interpretation of the success with which that particular SIP is being implemented?

Stephen Speed: SIP 16 was introduced on 1 January 2009, a couple of weeks before we came before this Committee three years ago. It was a pretty big step forward for the profession. It codifies the general principle that there must be high levels of disclosure very quickly by the insolvency practitioner to the body of creditors. It goes on to set out 17 different specific types of disclosure that are required, most importantly in our view about the extent to which valuations of the business have been made, or it has been marketed and so on. To that extent it has been a new and useful tool in the regulatory armoury.

We have had concerns over the last couple of years about whether, in specific individual cases, insolvency practitioners always meet the SIP and tick every single box. There is some evidence that that is not happening, but I think it would be wrong to draw a conclusion that linked that fact directly to an allegation that abuse in pre-packs themselves is widespread. I do not think those two things are necessarily related at all.

Q155 Mr Ward: Even with the recently increased level of compliance, your evidence suggests that 25% still do not comply fully with SIP 16.

Stephen Speed: Yes, when we find more serious cases, we refer them to the recognised professional bodies, the people who regulate insolvency practitioners themselves, and we expect them to take firm and appropriate action.

Q156 Mr Ward: The big issue is the suspicion of unsecured creditors, because the secured creditors will be part of the negotiations and the agreement. Is there protection there? Do you still have concerns about the unsecured creditors in these situations?

Stephen Speed: There are always concerns about the power of unsecured creditors in an insolvency. For example, in many cases quite a lot of unsecured creditors have a relatively low individual economic interest in the outcome. Unfortunately, unsecured creditors tend not to be as well organised as secured creditors, and often there are lots more of them. There are probably questions about the extent to which they understand the system into which they have found themselves pitched by the insolvency.

Probably the most important point to remind ourselves about is that, unfortunately, when a company goes insolvent, by and large unsecured creditors lose. What we have seen in the past is some evidence that they do not do much worse whether or not a pre-pack is done, so to the extent unsecured creditors lose in an insolvency, it does not seem to me that the presence or absence of the pre-pack itself is a determining factor. Clearly, what it does do is heighten the perception among those unsecured creditors that they have been unfairly treated.

Q157 Mr Ward: Just for my benefit, what is the difference between that and a CVA?

Stephen Speed: In a CVA the creditors sit round the table.

Q158 Mr Ward: It is a voluntary agreement?

Stephen Speed: Yes. Normally, in a pre-insolvency situation they negotiate; in other words, the company being advised will come to the table with a proposition to the creditors.

Q159 Mr Ward: One of the protections was the three days’ notice. Three days is not a long period of time, is it?

Stephen Speed: The three days’ notice protection was interesting because it produced some very polarised views among our stakeholders. Creditors took the view that it was a useful step forward but would have liked it to be longer; insolvency practitioners tended to take the view that it would make the whole process impracticable unless there were further refinements to that idea. One of the difficulties with pre-packs is that you get very polarised views. Insolvency practitioners are very keen, with good reason, that we should not lose the idea of a pre-pack, because in their view-I think there is evidence to support it-when used appropriately pre-packs are reasonably effective in safeguarding economic value and also jobs that would otherwise be lost.

Q160 Mr Ward: How many pre-packs would you support before you became suspicious if it involved one family firm?

Stephen Speed: I cannot give you a specific number but, in the context of our matrix that Graham talked about earlier, one of the behaviours we would be looking for as an indicator for taking on an investigation would be serial phoenixism; in other words, a repeat failure normally with similar reasons behind it.

Q161 Mr Ward: Is a time built into that? Obviously, many people have very long business lives.

Stephen Speed: No. We would look at our records as necessary. Obviously, if there had been a series of repeat phoenixes that happened quite quickly, it would be a very serious issue, but we would look back at our own records to see what intelligence we had about an individual going back into previous times.

Q162 Mr Ward: Would you then look at the separation of the business wealth from the personal wealth in those cases?

Graham Horne: That is one of the things we look at-the misappropriation of assets. We are looking to see whether or not there is any evidence that the company’s assets are no longer in the company and have somehow found their way to a company controlled by the director or the director personally. Everybody is entitled to fail. The economy is all about people seeing if they can make a go of business. What we are saying is, "Okay, but have you learnt from that failure?" For those people who do not learn and carry on with the same failed business model, we come in and say, "I’m sorry; this is not working, so you need to be disqualified." We look to see whether the second company is in some ways a mere repeat of the first, or shows some differences in the way it operated.

Mr Ward: All Bradford City supporters are experts in this field.

Q163 Chair: Probably an increasing number of football fans of other clubs have also become experts. You mentioned earlier that, in the context of the 25% of IPs who basically were not compliant with SIP 16, that fact was reported to their RPBs. What steps are the RPBs taking?

Stephen Speed: Just to clarify it, the 25% relates to the cases we see that we regard as sufficiently serious. We see some very minor breaches, and it would not be worth taking a lot of time to pursue those. The bodies have a range of powers available to them. At one extreme they can simply take away the licence and livelihood of the insolvency practitioner.

Q164 Chair: Has that happened?

Stephen Speed: Yes, that does happen. I do not know whether that has happened specifically in relation to a pre-pack, but as a general rule, looking across the whole of practitioner regulation, I think that in 2010 six individuals had their licences taken away, and we know of at least three who had their licences taken away last year. As oversight regulator once a year we publish a statement of the regulatory activity in which the bodies have been engaged over the last 12 months. We will probably be publishing that next month.

Q165 Chair: I want to move on to the issue of a single regulator. To the layperson it seems absurd that there are so many regulators on this. What is the idea behind the Government’s proposal to reduce the current nine to one? I can see broadly what the idea is; it is obvious, but how practicable do you think this is?

Stephen Speed: The previous Minister, who was in post until Friday, took the view, which he expressed publicly on a number of occasions, that if he was starting from scratch there would be a single regulator, but he accepted that there is not a single regulator but in fact eight. For historical reasons, one of them happens to be the Insolvency Service itself. I can say a bit about that in a moment.

He accepted that it would be better in the short term to try to find a solution to some of the problems faced by the regulatory system by working with the eight bodies as they are to try to increase the level of transparency, accessibility, independence, consistency and so on of the system rather than take up expensive legislative and regulatory time reforming the system root and branch. The Government have a pretty heavy legislative timetable going forward.

Q166 Chair: If I may intervene at this point, the issue has not been Government time, quite honestly. They have plenty of time. I realise that is not your Department, but I will not labour the point.

Stephen Speed: At the moment we are talking to the larger regulatory bodies, the creditor community and so on and looking at a process that will lead to a single complaints system that is far more accessible and easy to use by people who want to complain about the conduct of practitioners. We and Ministers have been very clear that we want that complaints system to be capable for the first time of looking at the quantum of insolvency practitioner fees, which at the moment is pretty much the sole remit of the courts. As a statement of Government policy, we want to remove the Secretary of State, though not literally. I will talk to Mr Cable later.

Chair: We will not go down that particular avenue today.

Stephen Speed: We wish to remove the Secretary of State from being an authoriser of individual practitioners. That is a hangover from the 1986 Act, which we now believe to be unnecessary and complicates the landscape. So, as well as being the oversight regulator, we are looking after at an individual level about 66 insolvency practitioners. We do not see the need to do that any more.

There is a question mark certainly in our minds about whether, as oversight regulator, we have the breadth of powers we need to bring to bear on the regulatory system as a whole. I mentioned a moment ago that the individual regulators have a wide range of powers that they could bring to bear. When we look at the regulatory system from above, essentially we have either a nuclear button, which means we can de-authorise one of the regulatory bodies, or we have to have a private conversation with them if we are not happy with what we find. There is nothing in between for us. It seemed to me at least, as someone charged with this, that it might make more sense to have a similar suite of powers and sanctions as they have themselves over insolvency practitioners. That is what we are trying to achieve. We have made it very clear that we want to achieve that with the profession and its regulated bodies with the interests of creditors and other interested parties at the table. That was not a big feature of the system in the past, and we want to get on with that quite quickly.

Q167 Chair: In that context, do you not think there is a conflict of interest between the role of your service as a regulator and competing as a licensing authority against the other licensing bodies it regulates? It is a bit like having a referee who is free to pick up the ball whenever he wants.

Stephen Speed: I do not think that is right. The Official Receivers work in one part of the business and have nothing to do with the way we carry out the regulatory part of it. There is a very clear Chinese wall there. A couple of years ago one thing I did was to separate the individual licensing operation from the oversight regulator. They were being done in the same place, and I pushed those to separate parts of the organisation so that that perceived conflict of interest is also dealt with, I hope. I do not see that as an issue for us.

Q168 Chair: I do not expect you to answer on behalf of the former Minister, but one of the arguments was about the time and cost involved in setting up a new body. Have you researched it? As a layman it seems logical to have one body, and even if in the short term it would take a bit of time and money to sort it out, the long-term savings would be quite considerable. Have you done any cost benefit of this?

Stephen Speed: I think the honest answer is that I do not think we have, but it is quite important to remember that the Government have said that they support selfregulation by the profession. This sits alongside the self-regulation of other professions. One of the reasons we have a number of regulators other than the Secretary of State is that almost every insolvency practitioner I have ever come across before authorisation is sought is already an authorised accountant or lawyer, or in some cases both. In a sense, whether or not you think it is neat, the current situation has taken advantage of the fact that there is already a series of regulatory bodies looking after the legal and accountancy professions.

I suppose a counter argument to a single regulator would be that you are creating something outside that framework. Only one of the seven recognised professional bodies, the Insolvency Practitioners Association, does not do that; it is unique in that. All of the others regulate both insolvency practitioners and lawyers or accountants.

Q169 Ann McKechin: Mr Speed, you mentioned that you had a very limited range of powers with the regulators. You could either authorise them or remove authorisation.

Stephen Speed: We can either de-authorise them or have a private conversation behind closed doors.

Q170 Ann McKechin: Does that apply simply to the regulatory bodies in England or the regulatory bodies in Scotland and Northern Ireland?

Stephen Speed: We regulate in Great Britain but not Northern Ireland, so it is the same for England, Wales and Scotland.

Q171 Ann McKechin: In terms of the consultation, have you had any contact with the Scottish Government or the Scottish courts about the potential of moving to one regulator?

Stephen Speed: I talk to my opposite number in Scotland regularly; I was in her office about 10 days ago. But they do not have legislative locus in regulating insolvency practitioners at the moment. In Great Britain that is a reserved issue for Westminster; it is devolved in Northern Ireland.

Q172 Chair: To go back to the number of professional bodies, seven license 1,600-plus insolvency practitioners. It still seems an incredible number. It would seem to me that if you are licensed by one as opposed to others, you would be able to do certain things that others licensed by another body would not be able to. How do you get consistency?

Stephen Speed: The perception of inconsistency is one of the things that has driven the whole issue. The matter arose from a report by the Office of Fair Trading in 2010 and a feeling that there must be an issue if you have seven bodies exactly as you have stated. There is a body called the Joint Insolvency Committee, where we get together with the seven bodies and look at the way the system works, in particular regulatory standards. It was that committee that worked up SIP 16, which we talked about earlier. One of the things we are working on with them at the moment is whether we can institute a common tariff for sanctions across all the bodies so they are effectively working to the same system, which they do not do at the moment. It would be quite a big step forward if we can achieve it, and I am confident that we will.

Q173 Chair: Logically, if you have a joint committee working on that and it achieves it, what is the problem with having just one organisation?

Stephen Speed: I think the problem is simply the cost and upheaval. First, it would require primary legislation; second, there would be cost and upheaval in moving everybody from place A to place B. The view taken by Ministers is that would be something they would want to do as a later resort if we cannot come up between us in non-legislative mode with a better solution than the one we have at the moment. My feeling from the conversations we are having with the bodies is that we will be able to come up with something that is significantly better than the system we have at the moment in terms of the experience that the user will have of it.

Q174 Chair: I find it odd that should be a major obstacle, given the number of reorganisations that Government Departments and other bodies, including you, have had to go through. I would not have thought that parliamentary time was a problem, given the fact that for the last three or four months probably fewer Bills have gone through the Commons than I have known since I have been here. However, I recognise that you are not responsible for the Government’s legislative timetable. Do you feel you need any more powers to sanction IPs and RPBs?

Stephen Speed: The Secretary of State as the licenser of insolvency practitioners has the same problem as I alluded to earlier in relation to his power of oversight. Essentially, we have either a nuclear button or the hope that they will be compliant when we talk to them in firm tones. I think that in both cases it would be better for confidence in the system as a whole if we had a wider range of powers, very much akin to those that the recognised professional bodies themselves have in disciplining their members.

Q175 Mr Ward: Many of the IPs are dual-qualified or more in terms of other professions: taxation, accountancy or law.

Stephen Speed: As I think I said earlier, almost all IPs will be either accountants or lawyers before they qualify as insolvency practitioners. I think the average age of qualification for insolvency practitioners is the early 30s.

Q176 Mr Ward: So, it is a second one?

Stephen Speed: Yes.

Q177 Simon Kirby: What are your views on the proposal to establish an independent complaints body?

Stephen Speed: This goes back to the same line of questioning we have just been on. I think it is to do with the question of the ombudsman raised in some of the evidence. We have been looking at that. As I think the evidence from the Legal Services Ombudsman said, we have been talking to them about their experiences in doing this and looking round generally. We are trying to achieve a system that has the characteristics of an ombudsman but does not necessarily require us to set up something new. The Government have been involved in reforming the landscape of public bodies for the last year or so, and there is a high-level presumption against the creation of new bodies, particularly new regulatory ones. As part of the process I was talking about, we are trying to create appeals processes at later stages that will have the characteristics of an ombudsman without having to set up something new.

Q178 Simon Kirby: Is one of the arguments for not setting up something new the conflict over the power to adjudicate on fee complaints, and whether that should be left to courts or an independent complaints body? Is that an argument for not changing things?

Stephen Speed: Bringing in fees at all is a difficult and quite big step for the profession, whether it is in the appeals process or at the beginning. That is quite tricky, but we are determined to press on with it. I do not think that goes specifically to whether or not we set up an ombudsman. In very large cases, fees will probably end up being determined by the courts where there is a big dispute. It is not really that sort of case we are looking at but cases where in the past there has been a lower level of dissatisfaction that has not been taken to the courts. I do not think that issue is necessarily linked directly to whether or not we have an ombudsman. We want to bring consideration of excessive fees into the process from start to finish.

Q179 Simon Kirby: If you accept there is a fair amount of frustration felt by creditors about fee setting for insolvency practitioners, has the revised SIP 9 note gone some way to relieving and remedying that frustration?

Stephen Speed: I cannot answer for creditors and the way they feel. We did some work two or three years ago to look at compliance with SIP 9. We found that in general compliance levels were very high. From our systematic review of those cases-Graham was involved in this-we did not find a systemic problem.

It is also important to make a general point on IP fees themselves. Of course, if you are an insolvent person or creditor and you have lost a lot of money, you will start from a pretty sore place, and that is perfectly right and understandable. But what needs to be said is that insolvency practitioners are extremely highly qualified, able people. The barriers to entry to the profession are extremely high. They are very highly regulated, and they do incredibly difficult jobs in difficult circumstances. It therefore does not seem to me necessarily wrong that the premium they command in the market should be particularly different from the premium commanded by highly qualified accountants and lawyers, which is broadly what we are talking about.

Q180 Simon Kirby: Let us suppose for one moment that is correct and you have a reasonable argument. What more can you do than you are currently doing to educate creditors that the fees being charged are reasonable?

Stephen Speed: We need to educate creditors more generally about the process and the rights of action they have in corporate insolvencies, but it is not easy because, if you are in business and you are lucky, you go through life with this never happening to you, and if you are unlucky, it may happen once or twice. I think there are about 4.2 million registered companies in this country. The question is how you educate an extraordinarily large population of potential unsecured creditors about an event that they may experience if they are unlucky only once or twice in their working lives. But that is something we need to think harder about with the profession and also the creditor community. In preparation for today I re-read SIP 9, to which you referred a moment ago. Annex C has a very good, straightforward statement of creditors’ rights to action. Maybe that is something we need to push a bit harder to people who are in that sort of situation.

Chair: I think that concludes our questions. Thank you for your contribution. I state, as I always do, that if by any chance retrospectively you feel there is a question you would have liked to answer but it was not posed, feel free to submit your response in writing. Equally, if we feel there is a question we should have asked but did not, we may do the same and require an answer. On that, thank you very much.

Prepared 13th February 2012