The Insolvency Service

IS 10

Written evidence submitted by the Legal Ombudsman

Introduction

The Legal Ombudsman was set up following the Legal Services Act 2007 to deal with service complaints in the legal sector. We have now been in existence for more than a year. Our remit is to resolve disputes in a cost effective, fair and transparent manner, providing a straightforward path to redress for consumers of legal services. Our secondary purpose is to feed back information to consumers and the legal profession to help drive up standards and improve consumer confidence in this sector.

We use technology to ensure complaints are dealt with quickly and at less cost than the previous arrangements; operating within a budget of £19.9m compared to the old system which cost £32.5m, according to independent analysis commissioned by the Ministry of Justice. The other key change from the previous arrangements is that we are an independent body, a crucial element to resolving complaints in any sector. The creation of the Legal Ombudsman was a deliberate move away from self-regulation by the legal profession, designed to improve consumer confidence in the system.

We have had a positive response from our first customer satisfaction survey, with 67% of respondents saying that they were satisfied with the professional service provided by the Legal Ombudsman. This is comparable to satisfaction with other more established bodies such as the Financial Ombudsman Services, an encouraging result for our first period of operation.

Our early learning from legal complaints is that the legal and consumer landscape is constantly changing and that our service needs to adapt to developments and provide access to redress for all consumers using legal services. As such we wished to share our experiences and expertise to assist the Insolvency Service in reforming their complaints handling structure.

We welcome the BIS Select Committee’s inquiry into the Insolvency Service. The terms of reference of the inquiry can be split into three sections: the first looks at the effectiveness of pre-pack administrations and proposed changes to pre-packs announced in March 2011; the second looks at the effects of the reductions in the Service’s staff and budget; and the third section looks at the possible creation of an independent complaints body. In our submission we will comment on the first and third sections.

Pre-pack administrations (issues of transparency, their link to ‘phoenix’ companies);

We welcome proposals to increase transparency within pre-pack administrations. To date, we have investigated and closed 209 cases where the company has been a successor firm. This is around 3% of our cases.

The Legal Services Act 2007 (the Act), ensures that when we order a law firm to pay compensation to a complainant; successor firms, including ‘phoenix’ firms, are liable to provide the redress, if appropriate. The Act states that:

" (1) The ability of a person to make a complaint about an act or omission of a partnership or other unincorporated body is not affected by any change in the membership of the partnership or body.

(2) Scheme rules must make provision determining the circumstances in which, for the purposes of the ombudsman scheme, an act or omission of a person ("A") is, where A ceases to exist and another person ("B") succeeds to the whole or substantially the whole of the business of A, to be treated as an act or omission of B.

(3) Rules under subsection (2) must, in relation to cases where an act or omission of A is treated as an act or omission of B, make provision about the treatment of complaints under the ombudsman scheme which are outstanding against A at the time A ceases to exist."

Due to the provisions made in the Act, ordinarily, pursuing redress for complainants from successor firms is relatively straight forward. However, it can become more complicated if the firm disagrees about their status as a successor firm or if the firm has reopened under a new regulator. Take this case study:

Firm A operated for less than a year in 2009/10. In 2010, the firm was replaced by another company with the same solicitors and partners, the same premises and many of the same customers. We considered this firm to be a successor firm of Firm A and we ordered redress for the complainants who had received poor service. The case was, however, complicated by the firm’s denial that they were a successor firm and the fact that they had reopened under a new regulator. Neither of the regulators involved could tell us whether they were prepared to treat the firm as a successor of firm A. It was clear that the complainants were not going to be successful in claiming their compensation on their own, so we worked with them to access it. Once the legal proceedings had been triggered, the firm unexpectedly accepted responsibility for the complaints under its previous name. So, the members of the public who have been seeking redress will now receive the compensation they are entitled to.

We are keen that any changes to the Insolvency Service should consider the needs of consumers as well as creditors. This not only creates positive outcomes for members of the public, but can also improve consumer confidence in the profession. Part of the role of an independent Ombudsman is to feed back to the legal profession to improve the standard of legal services.

Any new arrangements should also take into account regulatory conflicts and conflicts between Ombudsman schemes. For example, if a new independent complaints handler were to be established for insolvency practitioners, there could be a situation where a successor firm reopens not just under a new regulator, but under a new Ombudsman, as many insolvency practitioners are also solicitors.

As well as making sure that any changes to the regulation of insolvency practitioners fit in with other current mechanisms of consumer redress, it is also important to make sure that they are sympathetic to likely changes in the wider regulatory landscape. We feel that it is particularly important to consider the direction of developments within the European community. The European Commission recently published their proposed directive on alternative dispute resolution (ADR) and their proposed regulation on online dispute resolution (ODR). If the proposals are adopted, this would mean that ADR mechanisms, such as Ombudsman schemes, will cover all sectors, where contractual transactions take place, including the insolvency sector.

Reforms to the regulation of insolvency practitioners

In May 2011, we responded to the Insolvency Service’s consultation on the regulation of insolvency practitioners, we commented on the proposals from our perspective as an independent complaints body. We stated that we saw no reason why an Ombudsman scheme would not be successful in the insolvency sector. This view has been strengthened in light of the European Commission’s ADR and ODR proposals. Indeed, there are many similarities between regulation and complaints handling in the legal sector before 2010, when the Legal Ombudsman was created, and the current arrangements in the insolvency sector. Currently, there are more than 10 overlapping organisations regulating 1,800 insolvency practitioners. The Legal Ombudsman also oversees many of the agencies who regulate insolvency practitioners.

One solution which has been touted is the possibility of creating an Ombudsman scheme to cover Insolvency Practitioners. The Office of Fair Trading (OFT) report, ‘The market for corporate insolvency practitioners’ June 2010, suggested:

"Establishing an independent complaints body to increase the efficacy and consistency of after-the-event complaint and review, restore creditor trust in the regulatory regime, and allow a cost-effective route of fee assessment

"Setting clear objectives for the regulatory regime, and changing some of the regulatory processes and responsibilities, to increase its ability to meet those objectives, and

"Amending some of the detailed regulations to better align the interests of the IP with the interests of the wider creditor group."

The OFT report also pointed out that many insolvency practitioners come from a legal or a financial background. So, if it was decided that an Ombudsman scheme or independent complaints handler would be most appropriate, it would be worth considering the possibility of extending an existing scheme’s purview to cover the insolvency sector. We would be happy to explore this model further with partners at the Insolvency Service and the Department for Business Innovation and Skills, if it was decided that an extension of the Legal Ombudsman’s jurisdiction may be appropriate.

The Government recently announced that, although they understood that there was a lot of support for a single insolvency regulator, they are currently looking at improving the existing arrangements and making them work better. We would be very happy to share our experiences and knowledge, gained from our own set up, with interested parties to assist in the development of any new arrangements, whether they are in the form of an Ombudsman scheme, or if the decision is made to make the existing arrangements work more effectively.

3 January 2012