JOINT INSOLVENCY COMMITTEE – winter 2013 Newsletter

JOINT INSOLVENCY COMMITTEE
Newsletter – winter 2013
Table of contents
Introduction ........................................................................................................................................................ 1
Commissions and insolvency ............................................................................................................................ 2
Common sanctions guidance ............................................................................................................................ 5
Review of the Statements of Insolvency Practice project .................................................................................. 6
Statement of Insolvency Practice 9 - clarification .............................................................................................. 6
Changes in the pipeline ..................................................................................................................................... 6
About the Joint Insolvency Committee .............................................................................................................. 8
Members of the JIC .................................................................................................................................... 9
Observers of JIC......................................................................................................................................... 9
The bodies which regulate insolvency licence holders in Great Britain and/or in Northern Ireland ......... 10
Welcome to the winter 2013 issue of the Joint Insolvency Committee’s newsletter. This newsletter
describes the work of the Joint Insolvency Committee (JIC) during 2013 and also contains
guidance on commissions in insolvency. The newsletter has a technical focus and is aimed
primarily at members of the insolvency profession, but please feel free to share it with colleagues
who have an interest in insolvency.
Introduction
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of
foolishness, it was the epoch of belief, it was the epoch of incredulity Perhaps not a Tale of Two
Cities, but certainly a reflection on events since 2008 through to the current day. The demands on
Insolvency Practitioners, against a constantly changing background have been unpredictable. The
only element of predictability is that the professional standards that are expected of Insolvency
Practitioners have continued to rise. The general public, and parties impacted by insolvency have
greater expectations than have existed in previous periods. However, the legislative machinery is
undoubtedly an unwieldy tool, and whilst there has often been pressure for change, it is not always
easy to agree consensus and the form of that change. For that reason we continue with Acts and
Rules which have been amended, but have not been subject to wholesale change. That lack of
change is perceived by many to be a positive sign, one of stability and understanding allowing the
capital markets, alternative investors, banks and insolvency practitioners to act with certainty and
direction, ensuring that value is preserved within the economy. That having been said it is very
important that we recognise that expectations and demands do fluctuate, and that there must be
mechanisms for change.
The Joint Insolvency Committee has worked hard to reinvigorate itself following the comments
from the Office of Fair Trading review in 2009. The prime steps taken have been to seek direction
from the addition of Lay Members to the Committee, to broaden dialogue with parties interested in
insolvency and be responsive. New SIPs have been written, old SIPs have been, or are in the
process of being reviewed and updated to reflect the current demands of the market place. There
can be no room for complacency and just as there is a constant evolution in the financial market
there is evolution in the mandatory requirements and best practice guidelines for insolvency
practitioners. Everyone recognises the balance between considered change and kneejerk reaction.
The output from the qualitative reviews of Professor Kempson and the proposed report by Teresa
Graham into the pre-pack process, yet to be issued, will be influential upon the future work of the
JIC.
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The challenge of the JIC is to remain relevant and responsive and to ensure that insolvency
practitioners continue to develop against the backdrop of a changing world.
John Milsom
Joint Insolvency Committee chair
Commissions and insolvency
The insolvency code of ethics has been in place since 1 January 2009. At a time when formal
insolvency appointments are declining, case acquisition practices are coming under the spotlight
and the Recognised Professional Bodies’ (RPB) reviewers are seeing cases where the IP has
failed to comply with the code of ethics particularly in respect of commission payments. The JIC
has been requested by the RPBs to issue a reminder to the profession about case acquisition
practices and the payment and receipt of commissions in the context of the code of ethics. To
assist insolvency practitioners this article also includes examples of cases where the RPBs have
taken regulatory or disciplinary action relating to commissions and case acquisition.
Commission is one of those emotive words for the public. It conjures up images of sales
representatives recommending a product or a course of action for their own financial benefit rather
than in the client’s interests. The recent financial services retail distribution review banned payment
of commission to financial advisers to prevent advisor bias in the recommendations made to
clients.
Many professions, including solicitors and accountants recognise that paying or receiving
commissions can give rise to conflicts of interests and offer guidance to their members on
commissions in their codes of ethics and suggest mechanisms to mitigate the threats that arise
from the payment and receipt of commissions.
The insolvency code of ethics and the previous ethical guide is deliberately more prescriptive than
other ethical guidance on commissions. This is because an IP could be influenced (or could be
perceived to be influenced) in their approach to a case by their need to recoup the acquisition
costs. And also, as there isn’t a traditional client relationship, the client’s permission can’t be sought
for commissions received by the insolvency practitioner to be retained. IPs should also be mindful
that the regulatory regime refers to both them and their associates, and that payment of a
commission to an associate must be considered in the light of this guidance.
The insolvency code of ethics addresses the issue of such payments made by the insolvency
practitioner or received by the insolvency practitioner both pre and post appointment:
Pre – appointment - making payments
Code of Ethics - obtaining insolvency appointments
The special nature of insolvency appointments makes the payment or offer of any commission
for or the furnishing of any valuable consideration towards the introduction of insolvency
appointments inappropriate.
This provision of the code is a blanket prohibition on giving or offering any valuable consideration
to obtain an insolvency appointment. IPs should be mindful that valuable consideration comes in
many forms including the provision of work for free which an IP would normally receive payment or
reimbursement.
Ethics and case acquisition
In both the corporate and personal insolvency sectors, payments to third party introducers by
practitioners are typically characterised as being for “work done”, whether by way of payments to
the referring accountant for assistance given to the directors in the preparation of a company’s
statement of affairs, or the provision of information by a lead introducer as the basis of compiling
an IVA proposal. The code of ethics makes it clear that any such payments need to reflect the
value of the work done:
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Code of ethics - obtaining specialist advice and services
When an Insolvency Practitioner intends to rely on the advice or work of another, the Insolvency
Practitioner should evaluate whether such reliance is warranted. The Insolvency Practitioner
should consider factors such as reputation, expertise, resources available and applicable
professional and ethical standards. Any payment to the third party should reflect the value of the
work undertaken.
When considering the acceptability of such payments under existing regulatory provisions, the
principal issues are how the payment is characterised, and the value of the work undertaken.
RPBs have continued to address the issue of IPs paying for the introduction of insolvency work
through their authorisation and complaints processes and, in many cases there is evidence to
suggest that such payments are commensurate to the work done by the introducer. But where this
is found not to be the case, practitioners can expect to be subject to censure by their RPB and
criticism as well as possible action from creditors.
IPs also need to be conscious of their duty to creditors to use estate funds appropriately, and to be
able to justify expenditure. If paying a third party for services, an IP should be able to justify why it
was cheaper or more effective for that third party to do the work than for the IP himself, and what
evidence there is to show that the third party was cheaper or more effective than others.
Marketing
The code of ethics also includes provisions dealing with marketing. There can be a very fine line
between an arrangement which purports to be a marketing agreement and paying commission to
obtain an appointment. So insolvency practitioners should review any such arrangements with
care. If you need guidance on specific arrangements you should contact your RPB for guidance.
The burden of proof in this area must lie with the IP who should be able to demonstrate that the
marketing arrangement is not a commission, a duty which can be discharged by seeking advice
from an IPs RPB or similar method.
It is also worth noting that the provisions on marketing in the code of ethics apply to any third party
advertising carried out on behalf of the insolvency practitioner and the insolvency practitioner will
be responsible if that advertising is considered to be inappropriate in any way.
Pre appointment – receiving payments
Code of ethics - Prior to accepting an insolvency appointment
Where an engagement may lead to an insolvency appointment, insolvency practitioners should not
accept referral fees or commissions unless they have established safeguards to reduce the threats
created by such fees or commissions to an acceptable level.
Safeguards may include disclosure in advance of any arrangements. If after receiving such
payments, an Insolvency Practitioner accepts an insolvency appointment, the amount and
source of any fees or commissions received should be disclosed to creditors.
This does not amount to a blanket prohibition on the receipt of pre-appointment referral fees or
commissions; rather the code prescribes the introduction of safeguards when accepting such fees
or commissions.
Post appointment – receiving payments
Code of ethics - After accepting an insolvency appointment
During an insolvency appointment, accepting referral fees or commissions represents a significant
threat to objectivity. Such fees or commissions should not therefore be accepted other than where
to do so is for the benefit of the insolvent estate.
If such fees or commissions are accepted they should only be accepted for the benefit of the
estate; not for the benefit of the Insolvency Practitioner or the practice.
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Further, where such fees or commissions are accepted an Insolvency Practitioner should
consider making disclosure to creditors.
Thus, receipt of such payments is prohibited post-appointment, unless they are to the benefit of
the insolvent estate. Where such commissions are received, there should be transparency. So
the code effectively prescribes the necessary safeguards rather than offering the insolvency
practitioner any discretion in the way such payments should be dealt with.
Examples of cases considered by the RPBs:
Case 1
In August 2009 an insolvency practitioner consented to a reprimand, a fine of £4,000, and an
undertaking to repay unauthorised Statement of Affairs fees to an estate pending authorisation by
the creditors in respect of the practitioner’s failure to obtain the required approval from creditors
for the payment of £15,000 from estate funds. It was noted that it was for the IP to ensure that
fees were reasonable and commensurate to the work done and in this instance the practitioner
had been unable to provide a satisfactory explanation of the overall fees charged.
Case 2
In December 2010, a practitioner was found to have been in breach of the Code of Ethics by
entering into a contract the purpose of which was the payment or offer of commission or valuable
consideration towards the introduction of insolvency appointments (IVA referrals, in this
instance). The practitioner consented to formal reprimand and award for costs against him.
Case 3
Following concerns raised on a routine visit in 2008, a practitioner was subject to a targeted visit
during 2009 for the dual purpose of reviewing their SIP3 compliance and the appropriateness of
the payments being made to referrers. The practitioner’s contracts with providers were reviewed
and it was noted that appropriate systems were in place to ensure that the work done was of
commensurate value and the agreements with providers were being disclosed to creditors. This
alleviated the concerns that the Committee originally had and no further action was considered
warranted.
Case 4
An insolvency practitioner admitted making payments to a third party for introductions, where the
payment made was not commensurate with the work done by the third party. The insolvency
practitioner also admitted that he had not reviewed the advertising material used by the third party,
contrary to the code of ethics. The insolvency practitioner was reprimanded and fined £2,000.
Case 5
An insolvency practitioner had entered into an agency agreement with a limited company through
which fact-find fees for trust deeds were paid to the company. There was commonality of
ownership with the IP’s firm and the limited company. This fact was not disclosed to the creditors in
the trust deeds. The Investigation Committee considered that there was a breach of Section 5.5 of
SIP 9 as the IP had not disclosed and been open about the relationship between the two
companies. The Committee further determined that the omission represented a breach of the
fiduciary duties owed by the IP to third parties.
As the IP accepted the charge against him, the matter was dealt with by way of a consent order for
reprimand, with a fine of £5,000.
Case 6
In Scotland, all applications for sequestration must be accompanied by an application fee payable
to the Accountant in Bankruptcy. Some IPs are attracting work by agreeing to meet the application
cost for sequestration on behalf of debtors if debtors are referred to them by the Citizens Advice
Bureaux. Such a practice is contrary to the code of ethics as the IP is making a payment towards
the introduction of insolvency appointments. It is irrelevant that the payment is being made to the
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Accountant in Bankruptcy and not to the referrer as the IP is benefiting from increased levels of
referred work by making payments in specific cases.
Case 7 (this was not an insolvency case, but demonstrates similar principles when dealing with
commissions)
In a significant number of instances the firm had not disclosed commission received from property
transactions, amounting to a substantial sum of undisclosed profits. The Committee determined
that the firm was in breach of the Code of Ethics in that it had not disclosed commission received
from these property transactions. A similar issue of non-disclosure had arisen on the previous visit.
The Committee determined that the firm should retrospectively account for all commission received
in the previous 6 years from both regulated and non-regulated activities by writing to each client to
disclose the amount received and either:
1. Obtain the client’s written consent to retain each receipt of commission; or
2. In instances where the firm does not obtain written consent to retain each commission, repay the
commission to the client.
The firm was required to submit a detailed report to the Committee which included a full list of
clients and the outcome of each case. In response, the firm carried out a very extensive review of
both regulated and unregulated work carried out in the previous six years involving the review of
individual invoices with total fees in excess of £225m. The actual commission received was around
£3.4m. As this was a repeat breach the firm was also offered a regulatory penalty of £26,000.
Common sanctions guidance
On 5 June 2013, as part of the publicity for the launch of the insolvency complaints gateway, the
BIS minister Jo Swinson announced that the insolvency regulators had developed common
sanctions guidance for insolvency complaints. The following RPBs are implementing this common
guidance: ICAEW, ACCA, IPA, ICAS and CAI.
The common sanctions guidance aims to provide transparency and ensures that, if the findings
against an insolvency practitioner are consistent, the outcome and sanction across the RPBs are
comparable.
Developing the common sanctions guidance was actually a JIC initiative which came out of
discussions at one of the JIC’s strategy days. The guidance is something that goes to the heart of
the JIC’s mission statement. Part of the JIC’s purpose is to “facilitate discussion between
authorising bodies in order to ensure that, as far as possible, insolvency practitioners are dealt with
uniformly by such authorising bodies”. The JIC facilitated a series of meetings for professional
conduct staff – those who deal with complaints and any subsequent disciplinary process – from the
RPBs. So the guidance was developed by specialists with detailed knowledge of how the RPBs
deal with complaints.
The guidance is not a tariff and does not bind each RPB’s processes to a fixed sanctions regime.
Although it gives an indication of the level of sanction to be imposed, each disciplinary committee
or tribunal will use its own judgement to set a sanction appropriate to the circumstances of the
individual case. When a disciplinary committee or tribunal considers what would be an appropriate
sanction, it will refer to this guidance and may, within its discretion, vary the sanction depending on
aggravating and mitigating factors.
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Review of the Statements of Insolvency Practice project
During the spring, JIC consulted on changes to SIP 3 (IVA) and SIP 16 – pre-packaged sales in
administrations. The consultation was open to all insolvency practitioners and other interested
parties. There was also a shortened more focussed consultation on SIP 3A (trust deeds). At the
same time, a working group has been developing a revised version of SIP 3 (CVA)
These consultations have now closed and the responses have been analysed.
There was broad support for the changes to SIP 3 (IVA) and the working group has now reviewed
the consultation responses to see whether there should be any changes made to the consultation
draft and the working draft of SIP 3 (CVA). The next step will be a consultation on SIP 3 CVA with
the aim of introducing both SIPs early in 2014.
In the meantime, it was decided to delay issuing a revised SIP3A in the knowledge that the
Scottish Government were introducing new Protected Trust Deed Regulations in late 2013 and
which would result in a further revision of SIP3A being required once the detail of those
Regulations were known. The working group set up to look at the revised SIP3A has met to
discuss the revisions required following commencement of the new Protected Trust Deed
Regulations and is currently considering whether the changes required will require a further
consultation period.
Pre packs can be controversial subject and can provoke strong reactions. So it’s not surprising that
there was less consensus in the responses to the SIP 16 consultation. The working group’s review
of the responses lead to some changes to the SIP and the revised SIP 16 was issued on 1 October
2013 with an implementation date of 1 November 2013.
The JIC is to hold a strategy day in December 2013 and will be discussing which SIPs should be
considered for revision next. If you have any view on the current SIPs or wish to identify a
particular SIP for review please contact the JIC secretary at [email protected] .
Statement of Insolvency Practice 9 - clarification
There has been some debate within the compliance community about the meaning of paragraph
23 of Statement of Insolvency Practice 9 (Payments to insolvency office holders and their
associates). This is the paragraph which states, “When approval is sought for the payment of
outstanding costs incurred prior to an officeholder’s appointment, disclosure should follow the
principles and standards contained in this statement.”
The question being asked is whether this paragraph can be used as an implied authority to seek
approval post appointment in a CVL, to pay pre appointment costs beyond those provided for in
statute, on the basis that the disclosure required in SIP9 is provided.
The JIC wishes to make it clear that this paragraph does not extend the statutory provisions as to
the costs which are permitted to be paid post appointment out of estate funds in any insolvency
procedure. Practitioners are reminded that SIP9 requires disclosure to be given in relation to fees
and costs that are permitted by statute and divergence from the legislation cannot be justified by a
personal interpretation of the meaning of anything contained within a Statement of Insolvency
Practice.
There will be no revision of SIP 9 in the immediate future as Professor Kempson’s report
suggested a major revision of the SIP, and we are waiting to see the government’s response to her
recommendations before looking again at SIP 9.
Changes in the pipeline
New insolvency rules committee
The insolvency rules committee has begun to meet to consider changes to the insolvency rules.
The Insolvency Service is planning a full public consultation on the changes to the rules this year.
As with the red tape challenge project, JIC will maintain a watching brief on the progress of the
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project and seek to identify any proposed changes which would require a change to the standards
it issues.
Review of IPs’ fees
Professor Elaine Kempson published the outcome of her review into IPs fees in July 2013.
Professor Kempson’s report makes a number of recommendations to increase the transparency of
the fee approval process and to increase the role played by unsecured creditors. She also
recommends the revision or replacement of SIP 9. JIC is awaiting the government’s response to
Professor Kempson’s report and will work with the Insolvency Service once that response is issued
if changes to standards are required.
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About the Joint Insolvency Committee
The Joint Insolvency Committee (JIC) was formed in 1999 and provides a forum for discussion and
promotes consistency of approach across bodies which authorise insolvency practitioners in Great
Britain. Its mission statement is to:

Consider, maintain, improve, develop and promote insolvency standards and
guidance of a regulatory, ethical, or best practice nature by means of debate
and agreement within the Committee.

Discuss any such matters with any other appropriate bodies.

Facilitate discussion between authorising bodies in order to ensure that,
as far as possible, insolvency practitioners are dealt with uniformly by
such authorising bodies.
The JIC has 3 primary regulatory tools by which it can fulfil its mission statement – the insolvency
code of ethics, statements of insolvency practice, and insolvency guidance papers.
The JIC usually meets four times a year but works through the year and with sub-groups between
meetings. Each authorising body is represented on the JIC, usually by an insolvency practitioner
supported, where appropriate, by staff from the authorising body they represent. The JIC also
welcomes a number of observers who play a valuable role in updating JIC on issues from within
their remit. Details of the authorising bodies, JIC members and observers are shown later in this
newsletter.
The chair of JIC during 2013 was John Milsom, representative of ICAEW, and secretariat support
for the committee is currently provided by ICAEW.
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Members of the JIC
John Cullen
The Association of Chartered Certified Accountants
Joan Houston
Chartered Accountants Regulatory Board
(Chartered Accountants, Ireland)
Carl Faulds
The Insolvency Practitioners Association
John Milsom
(chair)
The Institute of Chartered Accountants in England & Wales
Brian Milne
The Institute of Chartered Accountants of Scotland
Roy Roxburgh
The Law Society of Scotland
Paul Caldicott
The Solicitors Regulation Authority
Nick Howard
The Insolvency Service
Clare Doherty
The Insolvency Service Northern Ireland
Marc Henstridge
(lay member)
Association of British Insurers
Philip King
(lay member)
Institute of Credit Management
Representative of
(lay member)
HMRC
Observers of JIC
Representatives of
The monitors of the authorising bodies, R3, the Accountant in Bankruptcy,
Law Society Northern Ireland
Other bodies
Association of Business Recovery
Professionals (R3)
8th Floor,
120 Aldersgate Street
London EC1A 4QJ
www.r3.org.uk
The Accountant in Bankruptcy
1 Pennyburn Road
Kilwinning
Ayrshire KA13 6SA
www.aib.gov.uk
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The bodies which regulate insolvency licence holders in Great Britain and/or in
Northern Ireland
Recognised professional bodies
Name and address
Website
The Association of Chartered Certified Accountants
(ACCA)
29 Lincoln’s Inn Fields,
London
WC2A 3EE
www.accaglobal.com
Chartered Accountants, Ireland (CAI) 1
47-49 Pearse Street
Dublin 2
www.charteredaccountants.ie
The Insolvency Practitioners Association (IPA)
Valiant House
4-10 Heneage Lane
London EC3A 5DQ
www.insolvency-practitioners.org.uk
The Institute of Chartered Accountants in England &
Wales (ICAEW)
Metropolitan House
321 Avebury Boulevard
Milton Keynes
MK9 2FZ
www.icaew.com/insolvency
The Institute of Chartered Accountants of Scotland
(ICAS)
CA House
21 Haymarket Yards
Edinburgh
EH12 5BH
www.icas.org.uk
The Law Society of Scotland
26 Drumsheugh Gardens
Edinburgh
EH3 7YR
www.lawscot.org.uk
The Solicitors Regulation Authority
For the Law Society (SRA)
The Cube
199 Wharfside Street
Birmingham
B1 1RN
www.lawsociety.org.uk
www.sra.org.uk
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Other regulators
The Insolvency Service
4 Abbey Orchard Street
London
SW1P 2 HT
www.bis.gov.uk/insolvency
The Insolvency Service Northern Ireland
Fermanagh House
Ormeau Avenue
Belfast
BT2 8NS
www.insolvency.detini.gov.uk
The Law Society of Northern Ireland2
96 Victoria Street
Belfast
BT1 3GN
www.lawsoc-ni.org
1
The Chartered Accountants Ireland, under the provisions of its Bye-Laws, established the Chartered
Accountants Regulatory Board (www.carb.ie) in April 2007 and has delegated regulatory functions to
this Board.
2
This body has observer status on JIC
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