The Insolvency Service

IS 03

Written evidence submitted by the Association of British Insurers

1 Introduction

1.1 The ABI is the voice of insurance, representing the general insurance, protection, investment and long-term savings industry.  It was formed in 1985 to represent the whole of the industry and today has over 300 members, accounting for some 90% of premiums in the UK.

2 Overview

2.1 We support developments in UK law that enhance the market power of unsecured creditors to play a role in the insolvency process and improves the way our existing regulatory system handles complaints. This must include measures to reduce the complexity of the current system to make it more accessible for unsecured creditors, rationalise the number of Recognised Professional Bodies and improve consistency in decision making across the regulatory framework.

3 Pre-pack administrations

3.1 The ABI has long expressed concern about the increased use of pre-package d ("pre-pack") administrations. The ABI is not opposed to pre-packs in principle, but they are not always a fair solution, and are open to abuse. While a pre-pack deal means that a company is bought out and can continue with business as usual, in most cases its unsecured creditors are left exposed. These are often SMEs who, in most cases, will never be repaid the money owed to them and are themselves therefore at serious risk of collapse. Only around 20% of SMEs have trade credit insurance, so those who do not are left to cover the losses on their own. In many cases, these unsecured creditors will have been trading with the company, unaware that it is about to enter a pre-pack, right up to the time the deal is done. The current system risks preserving large companies at the expense of their smaller suppliers, potentially leading to more jobs lost than saved.

3.2 The lack of transparency and notification of unsecured creditors in pre-pack situations is a serious problem both for SMEs and for insurers. We are disappointed that there has been no progress on this matter considering there was a consultation on proposals for a restructuring moratorium last year – which we responded to.

3.3 Statement of Insolvency Practice (SIP) 16 was intended to reduce the incidence of abuse of pre-pack sales, by compelling Insolvency Practitioners to disclose - albeit after the event - certain information concerning each transaction. It has failed to achieve its aim. It is being ignored by many Insolvency Practitioners, apparently with little consequence. Tighter regulation is required.

3.4 Pre-packs are being actively marketed by restructuring advisers as a convenient way in which to "dump debt" and start afresh free of troublesome creditors. The potential abuse of pre-packs is in danger of becoming institutionalised. We think that the heart of the problem lies in the serious conflict of interest inherent in an Insolvency Practitioner devising a pre-pack sale in secret in conjunction with the directors and secured lenders of a failing company, and then immediately implementing that transaction as administrator with a duty to act in the best interests of all creditors. Despite the professional and legal rules designed to prevent abuse, it is inevitable that a large proportion of pre-pack transactions will be structured so as to favour the owners of the business and their secured finance providers, who initially engage the Insolvency Practitioner and are privy to the design of the scheme, at the expense of unsecured creditors who have no opportunity to comment or intervene. We therefore favour greater transparency for unsecured creditors and support the Insolvency Service’s proposal for legislation requiring a 3-day notice period.

4. Regulation and sanction of licensed insolvency practitioners

4.1 We support any development in the UK regulatory system that restores trust among unsecured creditors. The current structure does not protect their interests sufficiently and a lack of transparency and accessibility has undermined confidence in the process. This has contributed to a perception that RPBs are not consistent when handling after-the-event complaints and the oversight regulator has insufficient powers to correct market failure.

4.2 We support the creation of an independent complaints body alongside measures to rationalise the number of regulators, introduce a single and coherent regulatory framework and a single complaints portal to reduce complexity for creditors. Such a body must incorporate lay membership as a feature to improve confidence in the handling of complaints. If such a body is given the powers to review fees and remuneration charged by IPs these responsibilities should reflect their duty to act for the body of creditors as a whole.

5. Creation of an Insolvency Ombudsman

5.1 We believe that creation of an Insolvency Ombudsmen should be a matter of last resort if self-regulation through RPBs fails to correct market failure consistently.

6 Strengthening control of IP’s remuneration

6.1 We would welcome greater transparency in the remuneration of IP’s. We would support a strengthening of the control of IP’s remuneration, such an agreed hourly rate or maximum amount, as it would improve transparency. It should include an obligation to inform creditors from the outset that any changes or meetings to renegotiate fees would still result in a cost to the estate.

21 December 2011