To be published as HC 675-i

House of COMMONS



Business, Innovation and Skills Committee

The Insolvency Service

Tuesday 23 October 2012

Dr Richard Judge and Graham Horne

Evidence heard in Public Questions 1 - 69



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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 23 October 2012

Members present:

Mr Adrian Bailey (Chair)

Mr Brian Binley

Paul Blomfield

Katy Clark

Mike Crockart

Rebecca Harris

Ann McKechin


Examination of Witnesses

Witnesses: Dr Richard Judge, Inspector General and Chief Executive, and Graham Horne, Deputy Inspector General and Deputy Chief Executive, the Insolvency Service, gave evidence.

Chair: Good morning and welcome. Thank you for agreeing to assist us with our inquiry. Would you like to introduce yourselves for voice transcription purposes?

Dr Judge: I am Richard Judge, Chief Executive and Inspector General of the Insolvency Service.

Graham Horne: Graham Horne, Deputy Chief Executive.

Q1 Chair: Thank you very much. Can I convey the Committee’s congratulations on becoming the new Chief Executive? I think we are just about on time, so I will start with a couple of pretty general questions. What are your main priorities for the future of the service?

Dr Judge: We can take priorities at two levels. First, the long-term priorities are where I have been focusing, and there are probably three things there. One is to make sure that the service continues to do the really good job that it is doing already and that we absolutely sustain a high degree of service. Perhaps in a later question I will get the opportunity to explain and give examples of some of the fine work that is going on with our people. The second one is bringing the service together in a more integrated way. My predecessor described the service as almost a collection of federated businesses. There is greater power for the service to be working together, and therefore integration is an important part of the future. The third leg is retaining a very strong external focus. We play an important part in the sector, and I am keen we should play that role to the full.

Q2 Chair: Looking at your professional history, what elements of it do you think are particularly relevant to your new role?

Dr Judge: That is an interesting question-almost the same question as I had at interview for the role. By way of background, I have been a chief executive for the past 12 years; I have been running professional service organisations of one form or another for that time and beyond. Professionally I am chartered as an engineer; I am also a chartered director; and I have worked in both the private and the public sector.

The common characteristic in all of that is going into organisations where a degree of change is needed or there are some particular challenges, and helping the organisations get to grips with those challenges and take them forward. That is the specific experience. The other point I would remark on in passing is a degree of versatility that comes from having worked in quite different sectors: I started life in nuclear; I have been in rail; I have been in environment; I have been in marine science recently; and now I am in insolvency. That brings a breadth of experience and maybe some fresh perspectives that can help.

Q3 Katy Clark: According to the latest Annual Report, user satisfaction levels and stakeholder confidence in the insolvency regime were two targets that were missed. How do you account for this and what is being done to improve on this performance?

Dr Judge: Is that the 90% customer satisfaction, which was down to 87%-just to make sure I have got the same number-and the stakeholder one? There are two things going on, and it is probably worthwhile putting it into the context of where the service has been for the last three years. It had gone through a massive expansion in its role: if you take the cases going through the service, from 30,000 or thereabouts a decade ago it went up to 78,000 new cases every year four years ago, and then there was a sharp downturn, and it had to deal with that. That has made it very difficult for the service, and we are seeing some legacy issues on the back of that. At the heart of it, though, despite almost 1,000 people having left the organisation over an 18-month period, we still see a strong commitment to delivery and investigations, and people doing a fantastic job.

I will come on to the specific question of what we are doing about it, but I will just give you a quotation that came in from one of our customers: "I have never dealt with anyone quite so remarkably and reassuringly efficient. It made me feel as though I was her only customer. She is a wonderful asset to the service." That is not an unusual comment. We are seeing our staff working incredibly hard with people who are going through very distressing circumstances. We should all be very proud of that and the work they do.

Regarding the 90% figure, this year we are seeing higher figures than that; we are a touch above that, in fact, so I am confident we should be up there, or thereabouts. If you take the other figure you were asking me about, which was the stakeholder confidence in the investigation and enforcement regime, again, that has been bouncing around for four or five years at about 64% to 65% or thereabouts. Anybody who has tried to deal with changing perceptions knows what a hard job it is to change perceptions over a period of time. Again, I would expect that to be bouncing around at that sort of level.

As for the specifics, what we are doing, building on the feedback of the previous surveys, is in part trying to take action around communications-making sure that people are more aware of the good work we are doing. There are some great cases. We are dealing with scams such as people targeting OAPs; we are dealing with scams on solar energy companies-somebody was effectively turning over £50 million fraudulently. We are dealing with those things. We did a great publicity campaign in June or July raising awareness of some of the scams affecting OAPs. There is good work going on, and in part our role is to make sure that is more visible-there is a visibility issue on both of those-which will help us to increase it. But the underlying work and the contribution being made by our people, in what have been very difficult circumstances, is excellent.

Q4 Chair: On the general level of approval and confidence in the regime, the confidence in the service’s enforcement regime seems considerably lower than other elements of the regime. Your target is 68%, and 65% was achieved. Why do you think that is?

Dr Judge: In part it is the difficulty of shifting perceptions over time. That is a notoriously difficult thing to do, so there is an element of that. There are very specific concerns that were flagged during the year around resourcing; we might come back to that later on. If a perception of the service, a perception of the activity we are doing, is that there are resourcing issues, you almost get a selffulfilling prophecy. If someone says, rightly or wrongly, "There is a resourcing issue in the service, therefore we are not that confident in it," and that is articulated repeatedly, almost inevitably you are going to find it quite hard to up the levels of confidence. That is something that clearly we have got to work on.

Q5 Ann McKechin: Moving on to the delivery strategy, you appointed Atkins consultants in February this year to assist you with introducing a new strategy. Could you update the Committee as to whether they have concluded their investigations and whether or not they have come to any conclusions about what changes are required?

Dr Judge: Yes, Atkins have concluded their work-they did so in June or thereabouts. They were looking at three things. One was the funding regime and the sustainability or otherwise thereof. The second was our Official Receiver work, and particularly some of the responses that could be made in an area where we are expecting less demand for our services. The third one was our corporate centre-whether we had resized the corporate centre, the back office-type services, in the light of reducing demand elsewhere-and the proportionality and balance of the organisation.

What they did not look at, which is quite important, is the service in the whole. They did not look at the investigation and enforcement part of the organisation; they did not look at redundancy payments. One of the early bits of work that I was keen to do was to take the Atkins results, which were very helpful input, but also take a step back from that and say, "What is it as a service we want to be achieving? Where do we think we are going over the next three to five year horizon?" then go into some of the helpful evidence and support that came out from Atkins in specific areas, and build on the back of it. That is the stage we are at currently. We have outlined to our people a high-level direction of travel: this is what we are setting out to achieve; these are the areas and things you might expect to change. We will now be able to go back to the detail and pick up on the advice of Atkins.

Q6 Ann McKechin: In terms of timeline, when do you anticipate that you will have a new, more detailed delivery strategy?

Dr Judge: I hesitate to say it is almost a rolling strategy. The approach we are taking is one of being very clear on the high-level direction, so we are very clear what we are working towards over the three to five year horizon. There are clear things we have got to be tackling; again, I can expand on those if people are interested. Then, within each of those areas, we will develop the detail. For example, one of the comments from Atkins was that there was scope to improve some of our internal processes. That is not an unusual thing to see when you bring in people who are experienced in looking at operations.

If you follow that through, what does that mean? It means that on the face of it there is a prize, which is 10-15% or thereabouts, for doing things such as looking carefully at where the handoffs are and how we standardise processes. That work was done with 14 workshops, using a range of people from within the service to look at a level of detail. Now, taking that forward, clearly there is something we need to look at in more detail to articulate and understand. Where that would go is: if you revise your processes, then to implement it you would probably be seeing some downstream changes you would want to do around some of our IT systems; you would be looking at how we arrange ourselves at a level of detail.

When I say the detail will follow, what I am saying is we are pretty clear that we think there is a prize for getting better at processes. We think that prize is in the region of 1015%, but the detail of it, exactly how we do it, is best achieved by working with our people who are at the front line, who understand the day-to-day pressures and processes, and getting a degree of consistency across all services. We are operating on 35 sites currently, and trying to get those to work as one is important as well.

When I say we have a high-level picture now, and detail to follow, that is what I mean. Obviously, the bits we pick up will vary, and there are things we will do first and things we do later, because there is a natural sequencing of events.

Q7 Ann McKechin: Do you think that that message has been clearly communicated to staff in the Insolvency Service? Are they aware of what kinds of changes are likely to happen?

Dr Judge: The best test of that is to go out and ask staff, and that is something I try to do. In terms of the overall direction of travel, that is something we have only recently settled. As you are probably aware, I have been at the service for 10 or 11 weeks. It was important for me to take a step back. It has been going through a huge amount of change recently, and rather than rush headlong to the next initiative, it was much better to take stock and say, "Okay, let’s see what we are doing overall. Let’s take the inputs from Atkins. Let’s also get an understanding of what we are seeing elsewhere in the organisation, and be clear what we are trying to achieve". That is what I have been doing over the last few weeks. In doing that, I have been out to the offices-I have visited half our sites so far; I have got half still to do. I will pick up through engagement, through the conversations, on the level of detail. Would I expect everybody to be aware now, in detail, if you went out there and did a test tomorrow? No, I would not. It is early days, and there is a lot of work to do to bring it to life, to make the examples real. That is clearly one of the challenges for us.

Q8 Paul Blomfield: I wonder if I can ask a question about a strand of Atkins’ work that you just touched on, which is the sustainability of your income. We raised concerns with your predecessor that your current model was not sustainable, given the reduction in asset-rich casework. Where are you now with that? What has come out of Atkins and where are you going?

Dr Judge: I might get Graham to come and help me on this one in a minute, but I will try and summarise where we are. That was absolutely one of the concerns; it is a valid concern. Look at the history over recent years of the types of cases we have had coming in: the spike I described earlier on, going from 30,000 cases to 80,000 and dropping again. Much of that spike was linked to debtors’ petition cases; many of those debtors’ petition cases had no assets, which then left fairly significant financial issues for us. That was recognised some years ago, with my predecessor and the team, which is why I say I may turn to Graham in a minute, but, in terms of the team, they understood this was happening. In 2010, the balance of the deposits and the Secretary of State fee, which we also charge in the assets, were modified. Those changes seem to be bearing fruit in terms of beginning to stabilise the position for us. In effect, the action we took two years ago, as we look at things now, seems to be helping.

If you go forward, which I guess is the question, Atkins almost confirmed the position as we knew it: that it is a very tricky challenge. How do you balance what are three clearly competing interests? On the one hand you want to make the bankruptcy regime as accessible as possible; you want to try and maximise returns for creditors; and you want to do it at best value to the taxpayer. Those three things do not always sit comfortably together, and there is a balance between those three.

The bit of work that we are doing and looking at next is saying, "Okay, there is no silver bullet we can spot; we have to do some more work around this area". That is a bit of work we will kick off early as part of the enforcement regime. I do not think the position has changed radically from when you were discussing it in January or whenever.

Graham Horne: As Richard has already said, it is that balance between the taxpayer, the person seeking debt relief paying, and the creditors. Because we are now down at a lower level of cases, the funding model is more sustainable than when we had 78,000 cases, many of whom did not have assets. Management information is key to this, but if we know the types of cases we are getting, if we have a richer level of knowledge about those cases, then we can try and match the resources we apply to a case to the income that that case is giving us. What we do not have yet, but we are going to be working on, is better quality management information to be able to take decisions on how we handle cases.

Q9 Mr Binley: You mentioned the three legs of those interested bodies in the Insolvency Service, and I am particularly concerned about many small businesses that should be in receipt of some return for a sizeable build-up in debt. That buildup occurs because they dare not be too heavy, because business has been fragile for five years or so, and yet insolvency agents sell off at 10% irrespective. They feel very badly let down. Have you looked at that area of the activity of insolvency agents in selling off assets that many people think will be sizeably undervalued by the agents handling the case?

Graham Horne: It is an age-old problem; you would not want to sell anything out of an insolvency-

Q10 Mr Binley: Forgive me, that is why it should be solved: because it is an age-old problem. I wonder what you are going to do about it.

Graham Horne: The issue is, when you know that something is insolvent, you know that there is a forced sale: the person who is selling the asset cannot not sell it, because the company is in liquidation, and it has to be sold. There is an element of someone saying, "I am going to hold out here, because I know that the liquidator at some stage will have to sell that asset, because his duty is to realise the assets and pay the creditors." It is a forced sale; it is a fire sale. They are obliged by law to get the best possible price for assets, and they use qualified valuers and agents in selling it.

It is very difficult, when you have a forced fire sale, to do something that increases the value. Ironically-we may come on to this later on-pre-packs are a way in which value is maintained, because it is done prior-

Mr Binley: We are coming there.

Graham Horne: That is one answer to the question.

Q11 Mr Binley: Having been in business for a very long time, and considering myself a reasonable businessman and not a very good politician, I know a little bit about the receiving end of this particular problem. I do know how angry it makes people, particularly people running small businesses, when they know the value is sizeably higher, but where, because of the fire sale that you talk about, there is a culture of, "Get rid of it; 10% will do".

Graham Horne: Insolvency practitioners are often incentivised to get the best possible price, because their fees are often based on a percentage of the asset realisations. That is a way in which one does incentivise a good value: if you have a fee regime that says the amount of remuneration an insolvency practitioner can get will be a percentage of the realisations.

Q12 Mr Binley: Not if they work on a 10% basis; they think they have achieved their objective. Can I ask you seriously to look into this matter, and can I ask you to come back to me? I am not satisfied with your answers; I think they have been sizeably complacent. A consideration of SMEs, where hopefully the growth is going to come from, needs to be higher up your list of priorities than it appears to be.

Q13 Paul Blomfield: That was a very helpful intervention Brian, but I will continue on the theme I was pursuing. What you seemed to describe to me was the predicament you face with your funding model, and that things were not as bad as they might be because, through external circumstances, your business base had changed at the current time. You did not seem to say anything that indicated how you were addressing the fundamental unsustainability of the funding model, which I think we agreed with your predecessor, and certainly we have had a lot of comments on. I am interested to know what Atkins said specifically on that and in what direction you might be going.

Dr Judge: Graham can correct me if I am wrong. My recollection is that a feebased system for the short term seems to be the option for the way forward. I recall there were comments in there about being clearer in our views about what the options were and what the impacts would be. An important element of that was clearly around better management information, as Graham mentioned, because if we have a better understanding of exactly where our costs lie and how they materialise, it would help to do that.

They also mentioned in passing the wider benefit and that, if we can get efficiencies elsewhere, we do not need to recover as much fee to balance our books. Again, that comes through. In essence, the recommendation from Atkins was, "Look at this area in greater depth"-a policy project, for want of a better description-"review it further," which is what we intend to do. Graham, is there anything specific I have missed in there?

Graham Horne: The unsustainable point of it was its ability to cope with very large fluctuations of cases and the fact that income comes in over a number of years, because asset realisations take a number of years to realise. The unsustainability bit is probably about rapid fluctuations and what model would be able to cope with case numbers going from 35,000 to 78,000 and coming back down again.

Currently the model is working reasonably well, but we have to look at that balance between what the debtor pays, what the creditor pays and what the taxpayer pays. The sustainability point comes to cash flow and how you can protect the income that you need at the start of a case, rather than waiting for the income to come in. Clearly in any business, if you are waiting for up to six years to get paid, that impacts upon the stability of your funding level. Equally, if you want more cash up front, you would not want to make the debtor pay more money to seek debt relief, because that would be driving away their access to debt relief.

That is the balance you need to strike. Lowering the costs and efficiencies are certainly a part of that, because if the cost is lower then you can get more of what you need on day one.

Q14 Paul Blomfield: In terms of the further work you described you are doing on that, what is the timeline for completion?

Dr Judge: We have yet to start the exact project, though the early actions we are taking are part of the direction of travel. The hope is to look at all our income streams, not just this one; we are talking specifically around the Official Receiver work, which is where the most material change has been. For that, the sooner we do it, the better; but beyond that we have not got a fixed plan with a fixed programme that I could show you to be definitive, but I am keen to get clear as to what could be done. I recognise that ultimately, when we are talking about fees, it is a matter for Ministers, Treasury and others to get involved in as well, so we have got wider views to take.

Q15 Paul Blomfield: Moving on to a related issue, clearly your current models for case prediction have proved flawed in the past. Can you tell us more about what you are doing on case forecasting and the role of the Consensus Group, which you mentioned in your Annual Report?

Dr Judge: I am not sure that historic forecasts have been flawed-

Paul Blomfield: Well, fallible.

Dr Judge: -just as an opening comment on that. Had we formed a view of the future? In running any business, that is one of the hardest and most important things to do: to look ahead, to forecast. In terms of the case numbers, we look across the piece, but I am looking very specifically at new cases coming through our Official Receiver work. There are three different strands coming together. You begin with an element of the past-relatively straightforward econometric models that build on GDP, household debt, some of the main parameters we see across the sector, which might be seen as drivers of future demand. That is one element.

Overlaying that is the frontline experience. One of the advantages of having 35 offices in different parts of the country is we have official receivers who understand what is really happening on the ground, what they are seeing. They are talking to other people in the sector, and that gives us some frontline experience. Graham collates and brings that together, and says, "Okay, well, the model may be saying this, within this range". A typical answer from a model might say we are looking ahead to 30,000, plus or minus 5,000 cases, over a one to two year period-whatever the numbers are. Graham then comes in and says, "Is that consistent with what we are seeing on the front line?" to bring it all the way through.

We overlay that again with what I would describe as experts from the field: people from the credit agencies, the trade bodies, banks, HMRC, and others. We take what I suppose is beginning to give you an indication for a model, and then apply the qualitative test, and say, "Does this make sense? Is this consistent with what people are saying?" On the back of that, we form the view as to what we should be planning for.

We recognise the aim of the forecast is not to be absolute; it is to tell us roughly what we should be thinking about what we plan. That is the way forward; that is the way we have been working. So that is the Consensus Group and how it works in terms of getting the numbers through. The ranges we are looking at: we are looking at 34,000, 35,000 or thereabouts new cases to the end of this year; six months in, we are reasonably confident the numbers will be there, plus or minus 1,000 or 2,000. It is trying to bring those two elements together.

Q16 Paul Blomfield: To be clear, the Consensus Group is bringing together technical expertise and field experience?

Dr Judge: Yes.

Q17 Paul Blomfield: How regularly has that been meeting?

Dr Judge: Twice a year.

Q18 Paul Blomfield: It was in your report in July, so it has met a couple of times.

Dr Judge: It met a couple of weeks ago, because I was at it. One of the interesting things-if I make an observation from that committee as a newcomer coming in-is that people look at economic statistics and assume X will happen because this is happening to GDP, or because growth is happening, or whatever it is going to be. Ultimately, it has all the dynamics of a market: if you are in financial distress you have different options available to you, and you would go out and use whichever you felt was most appropriate to you at the time.

One of the really interesting bits is the behavioural insights, because the behaviours of individuals or companies in distress will vary, as will the behaviour of creditors in terms of their appetite for taking action at a given time, depending on broader circumstances, resources, likely returns, all of those things. The approach of using economic data as a basis for it, sensechecking against local experience and then taking the view from experts of some of the behaviours we are seeing out there, is probably as good as we are likely to get. Then recognise that when you are planning it is a number, and you are not going to plan on a number; you have got to view what is a likely range, and on the back of that start doing scenario models, or whatever you do, to make sure you have got enough flexibility.

Q19 Paul Blomfield: A final question from me is about staffing levels. You have had two voluntary exit schemes over the last couple of years. Are levels about right now, or are you planning further schemes?

Dr Judge: For the shortterm, by which I mean this financial year or next, I take you back to the delivery strategy that highlighted overcapacity in some of our grades. Lower examiner grades are a specific example; these are the grades that are specifically associated with the debtors’ petition cases that have fallen rapidly. We have overcapacity there. The expectation, if you like, rather than the formality announced and everything else, is that there would be some action taken in that area. We are talking probably this year. In talking to staff, I am asked the number, and I give a figure around 50, which reflects overcapacity rather than anything else.

If you look further ahead, which is the other part of the question, it depends on whether or not the efficiencies we think are there are genuinely there and can be realised, but also what our expectations are in case numbers. If case numbers continue to fall, there is less demand; if there is less demand, we have overcapacity.

The driver for staffing levels is starting with market demand; it is driven by what the need for our service is, and that is where we start. Looking ahead, would it get smaller? Yes, if you believe case numbers will reduce down to 30,000, you can imagine it would get smaller.

Q20 Mike Crockart: If I could come in on something that you said in the last answer, you talked about the interesting part being the difference in behaviour of companies, of creditors. One of the issues that has been brought up to me is in relation to the behaviour of creditors, and whether that is helping enhance the culture of trying to save businesses, particularly in continuation of supply. If a company goes into insolvency, its creditors can act to change the levels they are charging them, to look for quicker payment. Insolvency practitioners have estimated that, if that could be changed, it would potentially be saving over 2,000 companies from failing. Do you think that there is a need to change the regulations around continuation of supply to ensure that businesses that find themselves in difficult circumstances are given the breathing space to be able to sort out their problems?

Dr Judge: I am not familiar with the data.

Graham Horne: I am aware of the comments made. Currently there is a fair amount of forbearance around in the market; we see a lot of people not pushing people or companies into insolvency, so levels of insolvency are quite low or quite static. The point about continuation of supply is a topic that has been raised with us, and it is a serious one we need to look at. When you start looking at these contractual arrangements, there is a danger of unforeseen consequences, unless you get it right. When you interfere between two contracting parties, the price of credit could go up if you start to say to people, "You have to supply at a certain rate, regardless of the risk", because clearly risk is an element in price. If you are dealing with a company that is insolvent or is about to become insolvent, your risks might be increasing, and that might be reflected in your price.

That is not to say there is not a genuine point here. Where you are talking about regulated industries, we should do and are doing something about it. It is not right that a regulated industry should seek to profit because a company is going insolvent. Where there is a contracting party it is trickier; we are aware of the issues and we are discussing them with insolvency practitioners and others. It would require legislation, and it is a question of those unforeseen consequences: if you pull a lever over here, you are not totally sure what the consequences are over there at the moment. Certainly there is a fair amount of forbearance currently.

Q21 Mike Crockart: You talk about an increase in risk, but suppliers would be paid as a priority. Therefore, there may be an increase in risk, but it is surely a marginal one.

Graham Horne: It depends on the suppliers. We are aware of cases where there is effectively an attempt to blackmail a company that has gone into some form of insolvency; the supplier has a particular thing that they supply that the company desperately needs, and they seek then to try and increase the price. We do not think that is right, but it comes down to how you would legislate to prevent that sort of thing. Are there codes of practice that you can have with trade industries? Regulated industries are an easy way of doing it; we have taken some action on the regulated industries. It is a tricky area and one we are working on. You are absolutely right: if you are going to have a proper rescue culture you would want to make sure that no artificial barriers were put in the way to prevent rescue.

Q22 Rebecca Harris: Back to the staffing and the shape of the service, you are still working from 35 sites. I was wondering if you could update us on the proposed closures of Official Receiver’s offices in Stockton, Bournemouth and Medway.

Dr Judge: Linking back to what I have been doing over the last not quite three months, I was very keen to take a step back on everything that was going on and take the opportunity to consider what we are doing as an organisation, to be very clear what our longterm priorities are, and therefore what we need to be doing in the short term. Part of that is trying to form a view. There is one fundamental point we needed to be clear about in terms of how we deliver in the future, and that was a model which was described in the Delivery Strategy as centralisation.

What centralisation did-it is a term that I was less familiar with when I arrived, but have since learned about-was basically say there is logic in economies of scale, which you recognise. It makes sense, particularly in the context of a high level of debtors’ petition cases, which tend to be administrative-rich-our heaviest resource level is there-to bring those types of capabilities together. That allows you to split off some of the professional examination work from the case clerk administration-type activities, and consolidate those in centres.

Where we are going to, in reflection, and reflecting the different mix of cases that we have, is a slightly different model. That is consistent with some of the findings coming out from the Atkins review of our work, which says that there is a lot of value in bringing case teams together-a slightly different approach. Rather than separating the team with examiners in one place and administrators in another, its critical mass remains important, but can we achieve that by bringing people together with clearer accountability around the case, rather than separating it out?

With that approach, what we now have to do is to say, "Fine, what are the implications for the estate strategy as a whole?" That is for every site, not just the three being considered. On the back of what we view as the appropriate estate strategy for the service, we need to make very clear decisions for the three sites being considered for closure. In terms of where I am currently, we have got two sites in an area with a level of activity such that you would expect those sites to be managed together. That was the case; that is the case. How we achieve that is an open question, and what we benefit from is helpful feedback through the consultation process earlier in the summer.

The timeline for decisions, which is often a question, is: having now done the overall strategy and being very clear what we are doing at the high level, we are working on the estate strategy, so we are very clear about the principles we would apply, and we are seeking to take decisions on the three sites this calendar year.

Q23 Rebecca Harris: You were talking about your percentage satisfaction ratings in the investigatory and enforcement regime. You said that, to some extent, those figures can be skewed by people thinking that there are staff cuts, and just hearing things. Also, you are not selling cupcakes, so this is not a service that everyone is going to naturally enjoy being involved in, in terms of your stakeholders. Is your 68% target still a target for satisfaction and is that still achievable?

Dr Judge: I would be surprised if it was radically different from a year ago, which was 65%. It is once a year, so it is quite a hard metric to forecast; it depends on mood at the time. As I mentioned before, it has been bouncing around 64% or 65% for four or five years.

Q24 Rebecca Harris: It is not a very high percentage and it is not a terribly ambitious target, although I accept you are not selling a universally enjoyable product. I still do not think it is a very challenging target, though.

Dr Judge: It is a challenging target. The question is whether it is the right target. If it was not a challenging target we would be walking it; we are not. If you look at it from that perspective, it is clearly something that is demanding, despite a lot of good work by people across the organisation. What I am not clear about, and the point is a fair one, is: should it be 75%; should it be 85%? What is an appropriate target for a world where many of the people involved in being asked for opinions do not want to be where they are? What would we feel is an appropriate level? I have not got benchmarks for that yet; it is a question I am quite interested in, so if people have got benchmarks then clearly I am interested. However, I have not got a specific answer for that.

Q25 Rebecca Harris: Might there be some better way of judging how well you are doing, rather than satisfaction?

Dr Judge: There may well be a better way. The thing that I think brings value to it is that ultimately, if you are thinking about an effective enforcement regime, one of the elements of that is perception. Is it going to change behaviours? Is it going to persuade people not to abuse the system? That tends to be quite a soft driver, and therefore to pick up perceptions through some sort of survey is certainly part of the answer; I do not think it is the only answer. The question is what you put it alongside.

Q26 Rebecca Harris: It might be worth looking at some other measurements.

Dr Judge: That may be one of the things we could look at.

Chair: We are coming on to issues about director disqualification and company investigation.

Q27 Mike Crockart: Over the last few years, the number of reports coming in to you has been rising fairly regularly. The question is whether there is an issue about capacity in dealing with those, because broadly the number of disqualifications has stayed fairly flat, which has meant that of the 5,401 reports passed to the Insolvency Service in the year to March 2012, only 1,151, which is just 21%, resulted in director disqualification. That has gone down-it was 27% last year and 45% 10 years ago. I realise that that is because of the numbers that have been reported to you, but you say it is about perception; the perception is that you are dealing with director disqualifications in a less effective way, leaving directors who have been guilty of alleged misconduct able to start new companies, and putting people at risk. There is, then, a particular perception there.

Dr Judge: I accept the perception. I do not necessarily agree with the figures, but I accept the perception. It is a figure that has been reported in the media. The 45% figure quoted is not a figure that is familiar to me.

Mike Crockart: From 10 years ago?

Dr Judge: Yes, from 10 years ago. What is familiar to me is that we are disqualifying roughly 1,200 directors a year; that is roughly five every working day. That has been fairly consistent now for a number of years, over which the level of company insolvencies has also been broadly consistent. In terms of the relative amount of disqualifications-this does not quite answer your question-that has been fairly clear, and I do not think that is always recognised. In discussions and meetings that I have had with stakeholders there has been some element of surprise that we are doing 1,200 a year. The message that people are picking up, bringing us back to my point about perceptions, is that 1,200 feels like quite a big number, as opposed to a small number.

The other part of it is recognising we continue to target the proportion of more serious cases. We clearly prioritise things: 10% of those 1,200 are between 11 and 15 years of disqualification, which is a significant number, where we think cases are serious, and it is good to see that coming through. The broader issue that is coming back is twofold. If we went from 1,200 to a random number-3,000, just to take a big number-would we really be adding considerable public value? Would it really act as a deterrent?

If we look at the cases and the reports coming in from the insolvency practitioners, which is where the number of 5,000 or thereabouts is-the D1 Forms coming through-then it is right that IPs are doing their job. They see potential misconduct-it is an indication of misconduct, I emphasise that, as opposed to definitive, proved misconduct-and then there is a view to be formed about how that gets pursued.

There are a number of things that come through; one is if there are cases with very low monetary values, they might not get pursued. You have to take account of what the court judgments would be; is there evidence there to take it through? For a number of reasons, cases may not be taken forward. One of the things we probably have not done well enough is to communicate back to the insolvency practitioners why cases are not going forward. That is one of the bits of work we will look to do with the trade associations.

The other part of the question mark around 1,200 is whether or not there have been sufficient resources in the service. We have as many people investigating now as we did last year, or thereabouts; it is slightly up.

Q28 Mike Crockart: I will stop you there, because I am going to come on to that in my next question. You seem to be handing it back to insolvency practitioners and saying, "You are sending too many."

Dr Judge: No, I am not; not at all.

Q29 Mike Crockart: The proportion that you are dealing with is falling year on year. Insolvency practitioners see something there that they believe you should be dealing with, because the numbers are going up, but you seem to be quite satisfied with the number that you are dealing with year on year; you feel that that is a reasonable number and the right number. What discussions are you having with insolvency practitioners to say, "You are sending through stuff that we do not feel we should be acting upon"? That is ultimately the setup that you are describing: you are happy with the 1,200 you are doing. But there are 5,000 coming through. What are you saying about the 3,500 that you are not taking forward?

Dr Judge: I will get Graham to come in on some of the detail in a minute. Specifically, to be clear about what I said, there are 5,000 indications of misconduct. I say indications, because I think that is an important point; not every one is going to be severe. There are people who are innocent amongst that. Every case is looked at; every case is assessed on a public interest basis: is this a case where it is a good use of public money, there is sufficient evidence, and we believe we would secure a conviction? We form a view as to which we investigate in further depth, which ultimately may well end up in a disqualification.

That goes on, and the level at which that has been going on is broadly where it has always been. The question is: have we communicated well enough with the practitioners on our rationale? That is an area where we can probably do more work, so there is a common understanding. Every bit of potential misconduct is very valuable intelligence anyway, because if we see the same people again two years later that will help us.

There is value in understanding the indications of their concerns. We tackle it by assessing public interest and we prioritise, but we make sure we get the most significant cases. Hence, I have been pleased to see the 11 to 15 year disqualifications. We work our way through that, and at the moment those 1,200 feel an appropriate level to secure an effective enforcement regime, which ultimately is what we are trying to achieve. We believe at that level it is, but there is a discussion certainly ahead of us.

Graham Horne: Insolvency practitioners have got a statutory duty to report, so they are obliged to report. If I can use a speeding analogy, they are obliged to report someone doing 31 in a 30 mile zone; that is what they have to do. Clearly, we are not going to take a lot of those things forward, because it just is not in the public interest. As part of the Red Tape Challenge, we are looking at the way in which they report, and looking at that whole area of disqualification reporting, to see if there is a smarter, better way we can attack that particular problem. It is a burden upon them; they have to report, because there is a statutory obligation. They are reporting, and they are correct to report; it is useful intelligence. But is there a smarter way we can target those cases that deserve public resources being spent on them? That is part of the Red Tape Challenge and the projects we are setting up to look at that.

Q30 Mike Crockart: We will be returning to that later on. Coming back to the resources that you started talking about, the Committee were concerned that last year’s Annual Report had shown that BIS had reduced the budget for investigation and enforcement by £6.6 million since 2008-09. This year’s Annual Report shows an increase of nearly £5 million. Can you outline how that will assist in investigation and enforcement work at the service?

Dr Judge: Can we just make sure we are talking about the same numbers? What is the number you see for last year?

Q31 Mike Crockart: We have £33.5 million in 2010-11 and £38.3 million in 2011-12.

Dr Judge: I am trying to think whether I recognise those numbers; there are a variety of numbers that are floating around, which always makes it complicated. I will do the generics and Graham can sort out the detail of the actual numbers. In terms of the level of resourcing we are getting around the investigation and enforcement area, broadly speaking there was a decline three years ago, in 2010, which was noted by the Committee in January.

In terms of the overall resourcing, there has been an impact in terms of the numbers of people we have got doing the work and everything else. The implied criticism that we have not done as much as we should have is fair, but it is less a resourcing issue in a sense of absolute budgets. For me, the observation coming in is one where the investigation and enforcement area has gone through massive change. We have swapped about 30% or 40% of the people investigating; those are people who have left and other people who have come in from elsewhere in the organisation. That turnover has a bigger impact than absolute resource levels.

In terms of performance and some of the question marks about whether we are at the levels we want to be, if you look back to last year and the early part of this year, we are not quite back at the full level. Looking ahead, we are confident we can be. The point is it is probably less an absolute resourcing issue, and much more an organisational change issue, where you are turning over 30% of the staff, and having to retrain and develop. People have got the innate skills and an understanding of the area, but need to work their way through that. That is what we are seeing, and have seen. We are comfortable and confident that we can deliver an effective regime within the resources and budgets we are allocated.

Q32 Chair: Earlier you mentioned pre-packs, and I want to come on to those now. There is widespread dissatisfaction with prepacks and proposals that had been mooted were shelved early on this year. How do you see the Government’s perspective on prepack administrations? Do you think there is scope for further reform?

Dr Judge: I will bring Graham in on some of the details of the policy side; he is more familiar with it, particularly on the history. I will make some general points on prepacks. As I understand it, about 25% of all administrations are now prepacks. They are a useful tool as part of a rescue culture; they have saved jobs, and we have not come across widespread evidence of abuse.

Having said that, we recognise that almost 80% of prepacks are to connected parties, and that would be an underlying factor in phoenixtype issues. This is not a new issue. One of the written witness statements to this Committee reflected that, over 100 years ago, phoenix companies were something of concern. Picking this up specifically, I recognise there are creditor concerns, one of which was around transparency, which the Statement of Insolvency Practice 16 tried to address. There was also some slight concern about distortion in the markets through changing competitive behaviours if someone goes through a prepack and deals with their debts in that way.

There are concerns out there. Clearly, they are also a useful tool, so it is quite a complicated world, and on that complicated world, I will pass over to Graham to answer.

Graham Horne: We did consult on some specific reforms, which try to address the issue of sales to connected parties. This is the real heart of people’s complaints: a company director fails a company, goes into administration, buys back the assets, and carries on as if nothing had changed the next day. What the reform has tried to say is, where there is a sale to a connected party, the creditors should be given three days’ notice of that sale so they can intervene. We were suggesting strengthening some of the regulatory obligations on insolvency practitioners.

In consultation, there was not universal support for the proposals; there were different views. There is a general Government view that legislation should not be passed on to small businesses, because that is not what we are trying to do. Insolvency practitioners and the companies involved are often small businesses. On balance, Ministers decided not to pursue legislation at this stage, although it has not, I do not think, been ruled out.

The previous Minister had a round table with various trade bodies to try to make them more aware of the position and to make them aware that there are avenues for them to complain and of how to formulate complaints. We have also put factsheets on our website so that people can complain. We get comparatively few complaints about pre-packs. We get about 20 a year, and those are actively looked at with the various powers available to us, and we will report IPs to their recognised professional body if we do not think that they have been following the best practice as far as transparency is concerned.

There are, then, mechanisms out there where people can complain if they think something has happened, and this is where the disqualification regime does come in. Last year, we disqualified 161 directors who entered into transactions which were to the detriment of creditors, 56 directors who misappropriated assets, and 102 directors whose conduct was quasi-criminal. Where we are coming across directors who are misappropriating assets, doing transactions which really just defraud creditors, we will report them to a prosecuting authority, and criminal sanctions might flow, but we will also take disqualification action against them.

Q33 Chair: Just arising from that, have you any idea how many directors were actually prosecuted?

Graham Horne: I do not have the figure in front of me. We do not prosecute; we refer them to a prosecuting authority and I think we probably report about 400 possible offences to prosecuting authorities a year. Some of those will be individual insolvencies; some will be corporate ones. Certainly, our parent Department gets a couple of hundred prosecutions a year from the reports.

Q34 Chair: Earlier, you mentioned that you had a round table. Can I just quote from the service’s Annual Report? The "Minister recently hosted a meeting of stakeholders, and ideas for improvement were suggested which are now being considered". Is that the meeting you referred to and, if not, what I am looking for is whether you could share with us any suggestions for improving the service, other than those you may have covered already?

Graham Horne: Ultimately, it comes back to the balance between trying to not fetter something which is a useful tool in preserving jobs and value, and giving greater confidence to creditors. There are various suggestions which are made from time to time, but, whatever suggestion is made, one party does not think it will work whereas the other party thinks it will work. Transparency is one thing we are continuing to work on, and we are not satisfied that insolvency practitioners are doing enough to persuade creditors that they have done a good job in the way they have handled the pre-packs. We do not see evidence that the pre-pack was not the right thing to do, or it was not the best option in the circumstances. What I do not think practitioners are doing enough of is explaining to people why they chose that option and giving the circumstances surrounding it.

Q35 Chair: Were there any specific suggestions at that meeting which are being looked at?

Graham Horne: Other than the ones I have mentioned, no, I do not think so.

Q36 Mr Binley: I cannot set your number of directors being delisted, as it were, into context. The figures were vague. I did not understand the size of the potential marketplace, to use a term I would use in my business. Could you come back to us with 200 out of how many, and what is the exact figure? We really do need to know that to be able to make a judgment as to the relevance of what you are telling us.

I have a question regarding SMEs in pre-packs-small businesses who often think the whole deal is done above their heads. They do not get any information whatsoever and they feel either the Inland Revenue or the banks or the big companies have wrapped it up, without any recognition of the relative size of the hit to a small business. To a bank, £50,000 is not a great deal of money; to a small business, it is very often the difference between survival and going under. In terms of pre-packs, it is often the SME-the very small business-that is totally left out of any consideration. Is that fair? If there is a hint of concern there, what are you doing about it to find out how great that concern is?

Graham Horne: There is obvious concern, and it is SMEs who suffer through any insolvency, because they are the ones who can least afford the debt that they lose. Insolvency is going to hit them. The real issue there is that the company they have been dealing with has become insolvent, and they are going to become a creditor, and that is clearly going to affect SMEs. I think this is where the forbearance that we are seeing at the moment on the part of banks and, to some extent, the HMRC, is helping, because there is, at the moment, a general belief that companies are not being pushed into insolvency precipitously. I know the HMRC are certainly looking at the way they approach their debt collection at the moment to see if they can do more to turn people to payment rather than push them into insolvency, so there is forbearance. SMEs will suffer in insolvency.

The added injury/insult, if you like, that they will get in a pre-pack is lack of knowledge of what is going on. They will be dealing with a company one day; the next day, it will be announced it has gone into administration, and the company has reformed. I think this is where we have not ruled out going back to that idea that people should give notice. As part of the practice, we do encourage IPs to market the company’s assets, because I think one answer here would be to say to people, "What is anyone prepared to pay for these assets?" This is what it is all about, going to your earlier point: a fair, open market to say, "What is anyone prepared to pay?" I think the issue on pre-packs is, often, that it is done behind closed doors. The SIP is supposed to be telling IPs to give information about what marketing they have done, and this is where we pull them up. Their compliance, I am afraid, is disappointing with the SIP. It is, then, the light of transparency that would go some way to helping SMEs, I believe.

Q37 Chair: One of the most vocal critics of this has been the British Property Federation and the Association of British Insurers, maintaining that the conditions of pre-packs are quite deliberately kept vague in order to favour potential buyers over the unsecured creditors. How would you respond to those criticisms?

Graham Horne: Again, what I would stress is administrators have a duty to try to rescue the company and rescue the business. They have a statutory obligation to try to do the best they can, so that business is preserved. If they cannot do that, their duty is to get the possible value for assets, so creditors get the best deal. That is their obligation; we look at their conduct to see if they are achieving those aims.

I think the issue here is, when you have a retail business, the preserving of the business may well be all about how many sites that company should be on, what its profitable sites and least profitable sites are. The judgment that the insolvency practitioner will have to make is how he would structure a deal so as many jobs and as much of the business can be preserved going forward. That, unfortunately, often means jettisoning unprofitable shops, or shops with onerous lease provisions.

We are looking at the relationship between what is payable as an expense to the administration as against what is a claim in the administration, because you do not want to do something that will drive behaviour in the wrong way. You do not want people to take decisions based upon trying to game the system, but what you have to try to do is give the insolvency practitioner enough tools to be able to rescue the business, because that, really, is what we are all about. We are trying to make sure that businesses that have some element of them which is worth preserving are preserved so they can carry on. That is a lot of what we are looking to try to do and work with the practitioners on.

Q38 Chair: You touched on this in terms of selling of shops, but why do you think the British Property Federation and the ABI are particularly critical? Is there anything in this process that you think particularly affects them over and above what you have said already?

Graham Horne: Clearly, at the moment, the high street is under real threat. The business models are changing. People are struggling to make profits trading out of the high street, which is leading to a high level of insolvencies in the retail sector. As I said, inevitably, when an administrator is looking to see what he can preserve out of a company, that will all be about, "Can I lower the cost of renting premises? Can I get rid of unprofitable shops?" I think a lot of the onus that we have seen through CVAs and administrators has been restructuring to reduce the burden arising out of rental properties, so I can understand the British Property Federation’s concerns in that area.

Q39 Chair: What about the ABI? Like you, I can see the British Property Federation having a particular concern; I am less clear about the ABI.

Graham Horne: They provide trade-indemnity insurance to suppliers, so they would be providing insurance for a supplier to a retail outlet. If the retail outlet goes into insolvency, they often have to pick up the debt. The creditor, in fact, will not lose out; it will be the insurance company that will lose out. They are clearly keen to see this transparency point and whether the debt that they are insuring has been ditched in an appropriate way and whether they have been left holding the baby. They are keen, again on this transparency point, to make sure that things do not go into insolvency as a device, but it is a proper recourse for the circumstances of that particular company.

Q40 Ann McKechin: Regarding the issue of SIP 16 compliance, in your Annual Report this year you stated that 32% of the cases reviewed were not fully compliant, and some 7% of the sample were substantially deficient. That is quite a high percentage, I would suggest to you, in terms of problems. Are you satisfied with the levels of compliance at the moment, and when do you expect to publish further guidance to ensure that we get a higher compliance rate?

Graham Horne: No, I am not at all satisfied with that. It is disappointing that the industry has been unable to get that level up to where I would expect it to be. They are professional people. It is a complicated SIP and it has quite a lot of elements to it, but one would expect them to be able to comply with that to a far higher level than 68%. I would say that non-compliance is slightly technical, so it is not as though, in those cases, the pre-pack was in any way wrong or was the wrong thing to do or there was abuse; it is simply the point that they are not giving enough information to creditors. That is why, again, as part of the reforms, we were looking at strengthening the rules and regulations relating to the supply of information, to really put it on a statutory footing rather than the footing it is on with the SIP. So it is disappointing, and we do complain where we think there is abuse.

Q41 Ann McKechin: The SIP, at the moment, is a sort of voluntary guidance provided by your Department, and you would prefer, personally, for that to be on a statutory footing of some kind?

Graham Horne: I am not sure my personal opinion carries much weight, but it is something that Ministers would want to look at. This was part of the consultation we went out on: in instilling confidence in people, is that something that we should be looking at to try to strengthen the obligations?

Q42 Ann McKechin: But Ministers have rejected this proposal at this point.

Graham Horne: On the balance that we do not want to legislate if we can do things via voluntary means, and we are legislating on small businesses-because a lot of these firms are, indeed, small businesses themselves. At the moment the balance has been decidedly against legislation.

Q43 Ann McKechin: Insolvency practitioners are not always small businesses.

Graham Horne: There is a range.

Q44 Ann McKechin: They are used to statutory regulation or, often, their professional regulations. Have any of the professional regulators involved adopted the SIP 16 guidance into their own regulatory environment, so that, in fact, there are penalties for those who do not comply?

Graham Horne: There are penalties for non-compliance, yes. When we complain, penalties are imposed, fines are imposed and undertakings are given, so there are some regulatory consequences of the failure to comply. My disappointment is that those penalties have not had the impact of improving compliance levels, and I think what we are trying to do with the RPBs is urge them to up the game to say, "You need to do more to make sure they do reach acceptable levels of compliance".

Q45 Ann McKechin: Is it the level of penalty that is faced? Do you think that is a reasonable one they face at the current time? Would it be better if they actually had a strengthening of the penalties?

Graham Horne: I think our view is that the penalties imposed so far have not really been of the level we would have liked to have seen in some cases. We think that perhaps the RPBs could have taken a little bit of a firmer line with some of the noncompliance cases.

Q46 Ann McKechin: Thank you very much. If I could turn to this issue about the complaints against IPs, the number of complaints against insolvency practitioners has decreased by 16% in the last few years. Is this due to the difference in the volume of cases that are currently going through the system or is it an indication of increasing confidence in the insolvency profession?

Graham Horne: Interesting. If you read the OFT report, you might think it was possibly because of a lack of awareness of how to complain, and maybe there is a little bit of an issue there about the mechanisms by which you complain, the way in which you complain. Levels of insolvency are fairly static at the moment, so I would not want to expect increasing levels of complaints. Insolvency practitioners, in fairness, do a difficult job and do it well in the main, and the level of complaints is comparatively small compared to the sorts of cases they deal with. What we are doing is trying to work with the recognised professional bodies on a measure to have a single gateway for compliance, and we are, hopefully, pretty close to announcing a basket of measures there, where we will host a gateway for complaints, so people will be able to see the way in which they can complain and will not need to work out which body is licensing which insolvency practitioner.

Q47 Ann McKechin: Is this the alternative to having a single complaints body, which had been originally considered as one option?

Graham Horne: Yes. It is a voluntary package of measures. We are working on them and, hopefully, close to getting ministerial agreement to launch shortly.

Q48 Ann McKechin: Is it one telephone number, one email, one web account which one can access?

Graham Horne: Yes, there will be one gateway for complaints, which we will host. We are also working on common sanctions, so it will not matter which body you are complaining to; there will be a consistent approach to the misconduct and a common appeal process as well. You get many of the advantages of a single regulator but by bringing it together with a single front end and a single approach to complaints.

Q49 Mr Binley: I am concerned about what seems to be a bit of an anarchic market with regard to regulation in this respect, and the impression is given that some practitioners fall between seven stools. Has the suggestion of a single complaints body for the insolvency profession now been taken off the agenda? It did appear that there was a merging of these seven regulatory bodies that has come to an end. What is your response to that concern?

Graham Horne: We consulted on the question of a single independent regulator, and I think there was quite a lot of strong support for that. Perhaps I am going to sound like a broken record here, but again Ministers have ruled out, at this stage, legislation-because that would require legislation. What the previous Minister said was that he would want to explore the question of trying to achieve the same aims through voluntary means, which is this package of measures that I have just been talking about. No one falls between two stools because, to be an insolvency practitioner, you have to be licensed by one of the bodies, so you have to choose and you get licensed by the ICAW for an accountant or whatever, so you have to be licensed. The issue is this lack of transparency about who to complain to. You can have joint administrators in a company: one would be licensed by one body and one by another body.

Mr Binley: That is clear.

Graham Horne: Neither we nor Ministers have ruled out a single independent regulator. It needs Parliamentary time and they need to think about that, but what we are trying to achieve for this voluntary set of measures is some of the advantages that would give us-a single gateway for complaints, common standards and a common appeal process-so that people do not need to work how it works. The public do not need to work their way through it. You want the public to be able to go to one place, and that is the idea of our gateway.

Q50 Mr Binley: There is quite a support and demand for it in the industry, isn’t there? Lee Manning, President of the trade body R3, who said, "The vast majority of our members would be happier with fewer regulators than the current seven bodies", suggests that there is a requirement. One of the great frustrations of business is that it feels that, in terms of how Government bodies move, a snail’s pace is quick, quite frankly. How quickly are you moving on this? Because you do have great influence.

Graham Horne: This is ultimately a matter for Ministers. We can propose, we can say there is support for this measure, and we can advise how easy or difficult it would be to bring that measure forward, but ultimately Ministers would have to decide where that fitted in the Parliamentary schedule and in the priorities for legislation. So far, Ministers have not pushed that far enough up the chain.

Dr Judge: I will just add two things: one, just in terms of the numbers, I think I picked up some numbers, which I might subsequently be corrected on. Creditors and debtors had a strong feeling that a single regulatory body or a single place would be sensible and would give them greater confidence. Of the insolvency practitioners, I think the figure was about 39%, so just under half, but still a substantial proportion, so reinforcing your point.

In terms of where we are at the moment, what I am picking up coming in is that almost nobody would start from where we are, but we are where we are. The question then becomes one of: is it worth, if you like, the added value coming from the energies put in to try to bring fewer numbers of regulators; would that add value? The message I am picking up in a number of places is that, if we can achieve the same aims, so you can get consistency, you can get effective regulation and you can build confidence, then, ultimately, that is a goal. I think the message I am picking up is the first step is, "Let’s try to make that work". If we cannot make that work, then clearly the other options exist, such as legislation.

Coming back to your point about what else we could be doing, one of my senses is that our oversight function-and we do have an important part to play with oversight of regulators-is one we can probably reinforce. I think our predecessor to this Committee explained there are, basically, two buttons you can press: one fairly nuclear and the other one is a quiet word. I think, at the moment, we are limited in the actions we can take. However, that does not stop us being pretty clear about our views on particular bodies’ approaches and being a bit more overt, more explicit, on our oversight regulatory role. That is a role I will be looking at to see how we might explore.

Q51 Mr Binley: I am encouraged by your words. Let me be more robust: when did you last have the seven heads of these seven bodies-almost like the Seven Dwarves, aren’t they? "We’re off to work" or not to work, as the case may be-together to knock their heads together and see that you can get a more compliant and sensible situation?

Dr Judge: We had a complaints committee fairly recently. We are trying to do that. But I do not have-

Q52 Mr Binley: Can you let us know and can you keep us in touch with the progress you make?

Dr Judge: Specifically on complaints, yes.

Q53 Mr Binley: I am very grateful. I wanted to ask about the announcement that the IPA recently made that it had reached agreement with the Solicitors Regulation Authority to handle all complaints made against solicitor insolvency practitioners. That is a surprisingly good response from a body which tends to be rather autocratic and sees themselves as the masters of all they survey; I am talking, of course, of the Law Society. I wonder, again, what the current progress is on common sanctions guidance; there is no sense in answering, other than to include that too in your response to us, so we have the written evidence to allow us just to monitor the situation. Thank you.

Q54 Rebecca Harris: Similar questions, really: what progress has been made in enabling creditors to challenge and look at excessive fees?

Dr Judge: I will pass that one over to Graham again, in terms of the details.

Graham Horne: This is an area where we have made some progress but, I think, I have to say, not as much progress as we would have liked with our dealings with the recognised professional bodies. We talked about the common gateway and the question that people will be able to raise complaints. They will be able to raise complaints about fees, and RPBs will look at those where the circumstances surrounding the fees amount to misconduct, so where an IP does not have proper authorisation for fees, where an IP cannot support the calculation for the fees, or where the fee levels are very egregious. They will, then, look at those, and that will give creditors some avenues to complain.

The position is still that, in most cases, the recourse is to court if you are not happy with the way practitioners have handled fees. Most fees are approved by creditors, so, in most cases, the creditors will have approved the way in which the insolvency practitioner gets their fees. Again, we are looking at whether we can push this voluntary measure a little further, because the recourse, again, would come back to legislation, and we would want to look at looking at secondary legislation to give RPBs the right to examine the quantum of fees, and have not ruled that out. I think the natural concern is getting into a commercial discussion/debate about whether that was the appropriate fee in that particular case. We think it is right that there should be some mechanism where someone looks at that and decides whether, not down to last pence-

Q55 Rebecca Harris: That is the formal appeals process.

Graham Horne: Yes. We would want to see whether that is something that would be facilitated in some way, other than the way at the moment, which involves going to court. I think our common complaints process, which we will hopefully be launching shortly, will help, and it will enable people to complain. We are doing all we can in our role as a creditor, albeit we become a creditor after the event, to use our power as a creditor to look at IPs’ conduct and raise issues. HMRC do quite a lot as well, although they have to take it on a resource basis. They cannot do every case, because they are a creditor in every case.

Q56 Rebecca Harris: That was what I was coming on to, because it was made clear to us that about a quarter of all debts are due to the HMRC or even yourselves in terms of the Redundancy Payment Service. How much is actively being done to deal with that? You said there was a resource issue at HMRC. I would have thought that they would have an interest in that and they would get something back for their investment in working harder on that. You have the clout, which often these smaller creditors do not have, and the knowledge of dealing with it.

Graham Horne: They take a commercial view: if they think there is some merit in putting their resources into it, they will put resources into it and they will get involved in overseeing the liquidation and administration, and challenging what the IP is doing. They will take it on a case-by-case basis. In some cases, they just do not think it is worth their while, because they do not see any return for them in doing it. They are, then, making commercial decisions. Our position is that, since the Committee raised this last time around, we have put more resources into our role as a creditor. We are a creditor by default: once an insolvency practitioner has made an employee redundant, we have to pay the redundancy pay and then become a creditor. So we are a creditor after the event, not at the time of the insolvency. Nonetheless, we are a significant creditor and we have put some of our resources into a team that looks at the cases, looks to see what has happened, raises issues with the insolvency practitioner and raises points where we do not think that what has gone on is quite the way we would want to see things being handled. That is something that we have put more resources into and will continue to look at.

Q57 Rebecca Harris: It is interesting that you say that the HMRC look at it on a case-by-case basis. You would have thought, if they were throwing their weight around, they would be setting an example, at the end of the day. By looking at it on a case-by-case basis, it may not be worth their while, but by using their clout more generally it might drive down and drive out sharp practice or excessive fees in the long term. It would be worth putting more work into that, don’t you think?

Graham Horne: I would have to say these are matters for them, and you would have to ask them rather than me and doing it third-hand. From our discussions with them, however, they are fully aware of the position and they say they put their efforts in where they think there is some reward for the taxpayer in putting their efforts in. They clearly do not have unlimited resources, and they try to apply them in what they think is the appropriate way.

Q58 Rebecca Harris: Do you take my point, though, that, if they made a more general effort in that direction, it might be that the problem does not occur in the first place?

Graham Horne: I note the point.

Q59 Mike Crockart: I will start with a fairly general question: what do you hope to achieve from the Red Tape Challenge? In particular, have you been in contact with any stakeholders with any interesting or creative ideas in identifying any particular regulations which can be simplified, merged or, indeed, scrapped?

Dr Judge: I will give you the general position as to what we are doing and, then, if there is anything specific, maybe Graham can pick that up. The general position that the Red Tape Challenge is something which is running across a number of industries. I came across it whilst I was working in the marine area. It makes absolute sense if a regulation that is no longer needed, out of date or overly demanding, to get rid of it. Indeed, one of the points around IP fees is, if we can simplify some of the processes, then the costs which are being incurred on a time-and-materials basis also go down, and that has a wider benefit. Absolutely, then, there is huge value in that to try to strip out costs. There is also a huge value for us operationally, because, if we can lose bits of activity we have to do again, it will simplify some of the efficiencies we are aiming for.

In terms of the process and the timings, it was launched in early or mid September for a period of six weeks, and ideas came through. We are fortunate to have Philip King, Chief Executive of the Institute of Credit Management, chairing Red Tape Challenge, so it is being done by an independent party. He has held meetings with stakeholders and there have been ideas coming in. My understanding is that those meetings have been productive and a number of ideas have flown in, including some from us, where we see opportunities for doing things, but they are currently being assessed, as far as I understand it. As they are assessed, there is the test of whether it is credible, whether it is going to achieve what people are trying to achieve and whether it is a sensible thing to move forward. However, I think the overall ambition to try to simplify matters is clearly one which most people would subscribe to.

Linked to that is the tidying-up of some our Insolvency Rules, because, as you simplify some of the regulatory approaches, it also makes sense to take the opportunity to do some, I guess, slightly overdue tidying-up of the rules which are slightly complex and have not caught up with recent amendment, so there is also work in that area.

Q60 Mike Crockart: That was going to be my next question. If we do that first, then we can look at specifics. When do you hope to start the consultation on a set of draft Insolvency Rules?

Dr Judge: Have you got a date for that, Graham?

Graham Horne: They will not come into force until October 2014. We are hoping, some time next year, to have a set of rules which will be able to go to a focus group. We know this is quite a big thing. It is a big document and people will need time to respond. We do not have a specific time, but early in 2013, I think, we will be going to a focus group. We want to leave those rules in place for six months, so people can comment on them. We are, then, really taking quite a measured process all through the way until October 2014, because we appreciate that people have systems in place that they need to amend. Between now and October 2014, then, with at least a six-month period of time for people to look at those rules.

Q61 Mike Crockart: A focus group rather than a wider consultation?

Graham Horne: There will be a wider consultation but a lot of these are quite technical rules, so there will be a stakeholder focus group to get into the nitty-gritty of the detail. However, they will be on our website for six months and we will make them publicly available for people.

Q62 Mike Crockart: Can we go back to the Red Tape Challenge and try to get into any specifics that you are looking at?

Dr Judge: I have not seen specifics come through to me yet, because it is still being discussed.

Graham Horne: There is an interesting thing, because we have had some responses that say, "This is an industry where people handle other people’s money and we would quite like some regulation there," so we do not want to throw the baby out with the bathwater. I mentioned the disqualification area, which is a big area we are looking at in terms of reporting disqualifications and the whole D form issue. I think the rest really relate to the processes of insolvency and some of the issues relating to how meetings with creditors are held and whether we are facilitating modern means of communication. There are little rules in there about things having to be sent by first-class post. That alone would save £280,000 if we removed that requirement to send by first-class post. It is a lot of little things. I cannot really tell you that there is a big idea, because we have not received a big idea that would sweep away a load of it. It is, however, incremental things which, taken in the whole, will amount to a serious pruning of-how was it described?-the impenetrable thicket of insolvency legislation. We are taking the pruning shears to it.

Q63 Mike Crockart: I take your point about regulation being there for a reason, but there is process that can be dealt with as well, such as the D1 forms that you are talking about. There is a feeling amongst insolvency practitioners that that has been shelved; that there was a move towards an electronic form, but that is now not happening. It was caught up in the moratorium on new regulation. Is that the case? The moratorium was there to stop extra regulations being built on top and making it more difficult, but, ultimately, this is wanted by 80% of the people who are going to be affected.

Dr Judge: I will let Graham pick up on the moratorium aspect specifically. I think, more generally, one of the things we will be looking at as a service is how we make better use of digital channels generally. One of the early areas of focus-redundancy payments-is how we can transfer information very easily. We are slightly cautious in going with a big bang with IT projects-I think people have seen some of the challenges of big bang IT projects-so we are being quite focused in our ambitions. We are going to get a portal going and working. We will start with redundancy payments in one area, make sure that works, and then look to adopt the wider approaches of digital channels for all of our customers, because it adds a huge amount of value for them more generally as we go downstream. I am keen, where we can, to make use of that; it makes sense. I take your point that you can do these forms electronically. It helps everybody.

Graham Horne: We certainly have not shelved it. We have had some discussions, and we had a meeting with insolvency practitioners. We have hit certain barriers in terms of legislation, but we are kicking off another project to see, to the very point you make, whether we can make a good case out for reform. What I am keen to do is take it away from the narrow focus of, "Should we put the form onto the web? Why don’t we look at the way in which reporting is done in the first place? What is the point of the D2 form, which is a no return?" That is a classic Red Tape Challenge-type thing we can look at and ask, "Do we need a D2?" We can just have the D1. Should we have a reporting requirement that is different to merely filling in a form, which can involve an element of doing it by rote without necessarily thinking about the longer-term reasons why you are doing it? What we have just initiated is, hopefully, a short, sharp project to see how we get through this impasse we seem to have reached on the D form, and try to break out of it. It is an important area we should try to break out of, using the Red Tape Challenge maybe as the lever or the mechanism to get that time in before Parliament if needed.

Chair: We come to the last issue, and that is the perceived cosy relationship between insolvency practitioners and asset-based lenders.

Q64 Mr Binley: Many small businesses would know asset-based lending as factoring, as you know, and it is that particular area I wish to concentrate on. I understand you are to meet, with officials from the BIS Department and the Treasury, a group called Campaign for Regulation of Asset-Based Finance. I think that meeting is due to take place this week. They quote a case of a sizeable bakery in, I think, the north, called Tindale & Stanton, who had factoring with Bibby Financial Services. They were given two and a half working days around the Jubilee Bank Holiday to find new funding, when a deadline for an investment round was missed. They got other funders. Bibby wanted a £92,000 termination fee before they would allow the whole thing to go to other funders, and the business was put into administration. Fortunately, it was saved, and it was saved because, clearly, other people saw it as a very good business.

I wonder whether you think the power-and, seemingly, the unfair power-that some factorers have in this respect is right and proper. I want to link that with the fact that some factoring companies put companies into administration and appoint a friendly insolvency firm. Some go even further; they pass leads to lenders who are owned by the insolvency practice firm themselves. This is pretty much an unacceptable mess, isn’t it? Can I ask, this week, whether you are going to really pull the stops out to put this right when you meet with this group, and could you keep us in touch with the outcomes of that meeting, which seems to me to be very important in this area?

Dr Judge: I absolutely recognise the concern with the story you describe. I can understand why you raise that here and why it is important. It is a relatively recent concern. As you say, we are meeting with Treasury and with BIS.

Q65 Mr Binley: It is not a relatively recent concern. It is relatively recent in that it has been brought to your attention recently, but as a businessman, I can tell you it has been going on for a very long time.

Dr Judge: It is a concern we are relatively recently aware of.

Mr Binley: Thank you. That’s better.

Dr Judge: I think what is important is that, yes, we do speak with the relevant players-we understand that-to understand the issue. Clearly, our interest in that is largely around the behaviour of administrators or around the insolvency aspects of it, and other parts of Government will have other interests within that as a whole. What is important for us is to really get a feel for the size of the problem and the issues. Where there are specific issues and evidence, that is very helpful to have, and I would encourage people to provide that to us.

Graham Horne: I think the regulatory framework is there in place, and we do not need even more tools. If people have taken out charges late on prior to the insolvency, those charges can be rendered invalid. These sorts of things can be looked at in terms of the way the company’s behaviour was structured just before insolvency. This is stuff that we can do with our current powers, so what we need to do is to get complaints to us. We have powerful powers to investigate companies, using our statutory powers there, and we are more than happy to receive any instances where people think it does not look right. If people tell us, "This does not look right; this looks wrong", then we will look at those cases.

Q66 Mr Binley: How would you get those instances when you meet? I think it is this week that you are meeting, isn’t it?

Graham Horne: It is an ongoing dialogue. I think there has been a meeting already and we will be having more meetings.

Q67 Mr Binley: If you would keep us in touch with process, because it seems to me that some of the time limits being laid down are especially harsh, and I might say Barclays Bank did exactly the same sort of thing with overdrafts. If that helps small businesses by my stating that, I am delighted, and I am equally delighted if you can come back and tell us that you are looking into this and what progress you are making.

Graham Horne: One issue we are looking at is the way in which insolvency practitioners get introduced to business, because they have a code of ethics. They should look at where their business is coming from to make sure that they are approaching new business with clean hands, and that is, certainly, one focus of our investigations.

Q68 Mr Binley: You do recognise that the banks have an important role to play in this particular area.

Graham Horne: Yes.

Q69 Mr Binley: Because it is the banks that almost stipulate-and I use the word "almost"-that some of their small businesses use an associated factoring company. The whole loop has a smell about it which is not overly savoury.

Chair: Just picking up one previous issue, which was the SIP 16 compliance issues, it would be helpful to know the number and the level of fines that have been levied for non-compliance. I think, to help you and us, I will ask my officials to go through the transcript, single out those issues that we have asked you to come back with written evidence on, tabulate them and send them to you, which, hopefully, will help you as well as us. Equally, of course, I can say, if there is anything further that you would like to say, please put that in further evidence to us. It may well be that, in hindsight, you feel that there is a response either to a question that we did ask or one that we did not ask but you would have liked to have asked, that you would like to give us. That would be very helpful.

Could I just conclude by saying thank you very much? It was very helpful indeed. On receipt of your written evidence, we will be issuing a report and we will publish it in due course. Thanks very much.

Prepared 30th October 2012