by
Austin Mitchell
Labour MP for Great Grimsby
Speaking at the Baker Tilly Corporate Recovery Conference, 30th October
1998
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Insolvency is never far away from the headlines. It is kept in the
headlines by frauds, scandals and collapses inherent in a market economy.
It is kept in the headlines by the excessive fees charged by insolvency
practitioners for long running insolvencies, of which Atlantic Computers,
Bank of Credit of Commerce International (BCCI), J.S. Bass, Euroscan, Garston
Amhurst, Exchange Travel, Helene, Maples, Maxwell, Polly Peck, Wallace
Smith and Land Travel are just some of the examples. The Insolvency Act
1986 made accountancy (and law) trade associations regulators, but these
trade associations have shown little interest in effective regulation of
practitioners. The coming recession may generate fees for insolvency practitioners,
but it will also bring further critical public scrutiny. The recession
and the public disquiet will continue to highlight the need for an independent
and effective system of regulation.
The increased public attention on insolvency practices is inevitable because insolvency is a traumatic experience for employees, shareholders, creditors and many other stakeholders. It results in loss of jobs, savings, homes, investments, customer deposits and pensions for millions of people. Insolvencies result in loss of taxation revenues and destruction of the local economies. Insolvencies are an inevitable feature of market economies. Whether due to bad luck, competition, poor management, lack of investment in marketing, research, unfriendly bank, delays by major creditors in paying bills and other factors, most businesses will sooner or later be placed in the hands of an Insolvency Practitioner (IP) trading as a receiver, administrator, liquidator or a trustee in bankruptcy. The public expects the government to deal with the real/alleged failures of insolvency practices because under the Insolvency Act 1986 the government has granted the statutory monopoly of insolvency work to handful of accountants and solicitors.
To the public it appears that insolvency practitioners charge exorbitant
fees even though in major firms a considerable amount of insolvency work
is done by unqualified trainees. Insiders tell us that it is not unusual
for the firms to charge out their trainees at £70-£150 per
hour and senior managers and partners at £300-£500 an hour.
The insolvency industry is highly secretive about its affairs and has failed
to publish any information about its charge-out rates. In written
evidence to the Social Security Committee in 1993, the industry admitted
to making average charges (based upon charge out rates for trainees, seniors,
partners etc.) of as much as £191 per hour. This information was
secured by the House of Commons Social Security Committee for its investigation
into the Maxwell insolvency. By making such high charges, insolvency practitioners
had already run up a bill of £50 million and their final fees are
likely to exceed £100 millions.
FEES CHARGED ON MAXWELL INSOLVENCY PRACTITIONERS
£MILLION
RATE PER
FIRMS FEES (£)
HOUR
Robson Rhodes/Stephenson Harwood 6.1 111/174
Arthur Andersen/Allen & Overy 19.7
90/153
Price Waterhouse/Norton Rose & Others 24.7 120/191
Source: Social Security Committee, 1993.
In 1997, another Maxwell receiver, Buchler Philips, collected £1.67 million by selling off the assets and then charged £1.63 million in fees. This left just £40,000 for the long suffering Maxwell pensioners to share. Mr. Justice Ferris described the conduct of the receiver as “shameful”. The fees for the long running BCCI insolvency (started in 1991) have already exceeded US $400 million and the final cost is likely to be around $1,000 million. The BCCI depositors are still waiting for their money. At best, they will only recover a fraction of the amounts owed to them. As you all know in July 1998 Mr. Justice Ferris published a report on remuneration of insolvency practitioners.
The current system of ‘chaps regulating the chaps’ cannot secure public confidence. The public is far too sceptical of any cosy regulatory arrangements and will not believe that trade associations can regulate their members in the public interest. The insolvency trade associations were created to advance the economic interests of their members and this they have done very successfully. None have the independence from their members. None represents the wider public interest. In an age when financial services, food, the Police and even MPs themselves (remember the Nolan and the Neill Committees) are being regulated by independent bodies, there is no prospect that the public will have any confidence in the current mode of insolvency regulation.
The 1,862 UK insolvency practitioners are regulated by seven Recognised Professional Bodies (RPBs) and the Department of Trade and Industry (DTI). The RPBs are trade associations and their main function is to represent their members and secure economic advantages for them. Wider stakeholder interests don’t form any part of their priorities. The RPBs do not owe a ‘duty of care’ to anyone. Neither the public nor any Parliamentary Committee elects or nominates any of their officers. The public does not have any access to their files and policy papers. In market economies, producers of baked beans, crisps sweets and drink are obliged to immediately name faulty goods and withdraw them from the public domain, but the RPBs are not obliged to immediately name any firm or practitioner whose work is found to be deficient. They do not compensate injured stakeholders. No injured stakeholder can appeal against their disciplinary decisions. None of this is surprising because the RPBs are trade association and were formed to advance and defend the economic interests of their members. As the President of the Society of Practitioners of Insolvency (SPI) put it, the “SPI must always acts in its members’ interests” (Insolvency Practitioner, September 1997, p. 3).
The Department of Trade and Industry (DTI) has the final responsibility for regulating the insolvency industry, but it rarely inquires into the progress of any insolvency. The DTI has too many conflicting roles. For example, it acts as the promoter, defender, protector, prosecutor and final arbiter of the insolvency industry. It does not have the political will to check the abuses. Ministers and senior civil servants are more likely to have meetings with the representatives of the industry rather than with the victims of insolvency practices. With conflicting roles, the DTI is not in a good position to safeguard the interests of stakeholders either. Successive Ministers have only been too willing to pass the buck to the RPBs and have done nothing for the long-suffering stakeholders. In this vacuum, there are allegations There is no independent ombudsman to hear any complaints, investigate or adjudicate the disputes.
The final decision to create an independent and effective system of regulation rests with the Department of Trade and Industry (DTI). But earlier this month the DTI Ministers gave in to the well oiled insolvency (accountancy and law) lobbying machine. The ministers want a quiet life. Instead of streamlining the current plethora of insolvency regulators, we are set to have new layers of bureaucracy.
Insolvency Practitioners and their Regulators
at 31st December 1997
Regulating Body Number of Practitioners
Institute of Chartered Accountants in England
& Wales (ICAEW)
844
Insolvency Practitioners Association (IPA)
308
Law Society of England & Wales
184
Institute of Chartered Accountants of Scotland (ICAS)
168
Association of Chartered Certified Accountants (ACCA)
127
Institute of Chartered Accountants in Ireland (ICAI)
73
Law Society of Scotland
33
Secretary of State for Trade and Industry
125
Total 1,862
Source: Insolvency Service Annual Report
Under the proposals accepted by the DTI, the present seven Recognised Professional Bodies (RPBs) will be overseen by a Review Board which itself will be owned by a Foundation financed by the usual vested interests. The real problem is the power of the RPBs, their failure to mount effective investigations and discipline partners from major firms. But the DTI has abdicated its moral responsibilities. The RPBs will retain all their current powers. If the stench of a scandal gets too strong then the Review Board might look into it,. But the Review Board itself will not owe a ‘duty of care’ to anyone. So what economic incentives will it have to deal with the complaints from the public. The public will continue to be fobbed-off. The cost of this oversight set up is likely to be around £2 million and no doubt accountants and insolvency practitioners will be expected pay extra. The real beneficiaries from the proposed structures will be the DTI Ministers and civil servants who will be able to pass the buck and say that investigating scandals and failures is someone else’s problem. So the insolvency scene will have seven RPBs, the DTI, the Society of Practitioners of Insolvency (SPI), the Foundation, the Review Board, within each RPB a number of authorisation and disciplinary committees, the Joint Insolvency Monitoring Unit (JIMU), the ACCA’s separate monitoring unit and myriad other organisations. All this to regulate just 1,862 insolvency practitioners.
None the current or proposed regulators have the necessary independence from the insolvency industry. None of the accountancy trade associations have the ability to regulate giant accountancy firms. Around half of the UK’s insolvency practitioners operate from highly secretive major accountancy firms, such as PriceWatehrouseCoopers, KPMG, Arthur Andersen, Deloitte & Touche, Ernst & Young, Grant Thornton, BDO Stoy Hayward and Pannell Kerr Forster. Their income is estimated to run into hundreds of millions of pounds. Their public accountability takes the form of ‘beauty parades’ in which they impress each other by revealing unverifiable figures (though the proposed Limited Liability Partnership (LLP) legislation might change this).
INCOME OF MAJOR ACCOUNTANCY FIRMS
1998 INSOLVENCY
FIRM TOTAL INCOME
FEES 1998 1993
£ms
£ms £ms
PriceWaterhouseCoopers 1,325 N/A 114
KPMG 726 39
58
Arthur Andersen 715
N/A 25
Ernst & Young 525
30 38
Deloitte & Touche 442
24 42
Grant Thornton 124 N/A
29
BDO Stoy Hayward 122 13.1
23
Pannell Kerr Forster 73
N/A 16
Source: Accountancy Age, 10 June 1993; 30 July 1998, p.12-13.
N/A = Not Available
Individuals from the major firms will continue to control major working parties and committees. Whilst the RPBs make example of small practitioners, none will challenge the major firms. Some years ago I pursued the matters arising out of the Polly Peck receivership. In violation of the ethical codes issued by the accountancy bodies Coopers & Lybrand (now part of PriceWaterhouseCoopers) secured the Polly Peck receivership even though they had previous business links with Polly Peck and its directors. After two years of public ridicule, the ICAEW eventually held a disciplinary hearing behind closed doors. It frightened the partners by fining them £1,000. The firm and its quaked in their boots and laughed all the way to the bank. Coopers is estimated to have made more than £25 million in fees from this receivership alone.
Any durable solution for securing confidence in the insolvency industry will require an independent and effective system of regulation. Neither the current nor the industry’s preferred system provide this. I will sketch the alternative system which is inevitable.
PROPOSALS FOR REFORM
Having eight bodies to regulate some 1,800 insolvency practitioners has created a mess. The plethora of overlapping structures, results in duplication and waste. The regulatory bodies have become adept at playing ‘pass the buck’. Media stories, television and radio programmes have all provided voluminous evidence showing that Chaps regulating the Chaps is an unmitigated disaster. The DTI is proposing this mess worse but creating new layers of bureaucracy. The insolvency trade associations are well able to formulate and represent the interests of their members. They have not and cannot safeguard the interests of stakeholders. None of the RPBs are concerned with stakeholder interests. These need to be safeguarded by a statute-based body, an Insolvency Commission, independent of the DTI and the insolvency trade industry. The insolvency Commission would be solely concerned with safeguarding the interests of insolvency stakeholders.
It is now firmly recognised in areas as diverse as banking, pensions, financial services, health, hygiene, safety at work, the police and food that for regulation to be genuinely independent, the processes of regulation must be independent of established vested interests in the form of accountancy and law firms and their trade associations. For the insolvency sector, this principle requires the setting up of an independent Insolvency Commission that would be responsible for accrediting, licensing, monitoring and disciplining all insolvency practitioners. This body would be statute-based.
The Insolvency Commission would have an executive comprising members directly concerned with the interests of all those affected by insolvency, including creditors, shareholders, bank depositors, directors, consumers and environmentalists. Its executive could be nominated by the President of the Board of Trade. The criteria according to which someone has been nominated shall be publicly declared. To ensure that Ministers do not subvert the direction of regulation by stuffing the Insolvency Commission with Party political appointments, the House of Commons’ DTI Select Committee shall have a right to examine, take evidence and/or scrutinise the appointment of any person to the ‘new body’. Only those persons approved by it shall be eligible to take seats on the Insolvency Commission. To prevent ‘capture’ and stagnation of the Commission, executives shall initially be appointed for a term of three years only. None shall be able to serve more than two terms.
The Insolvency Commission would also be accompanied by an independent Ombudsman with powers to hear and investigate complaints. Of course, the parties affected could still seek judicial reviews should they so wish.
No member of the executive committee of the Insolvency Commission shall be in full or part-time employment, or have any commercial interest in any organisation which is to be regulated by that body. No member of the executive committee shall hold any office of any insolvency, accountancy or law trade association during the term of his/her office with the Insolvency Commission.
The Insolvency Commission needs input from insolvency practitioners. But it does not follow that these practitioners need to be representatives of any trade association. They shall be appointed on the basis of their personal characteristics. Indeed, the Insolvency Commission shall not have direct representatives of any particular insolvency, accountancy or law trade associations. The practitioners on the Insolvency Commission will neither be in majority nor in any significant numbers, as to enable them to exercise control or exert disproportionate influence. Indeed, no stakeholder group would be in majority. This means that all issues would need to be negotiated by the various parties. They should be resolved on the basis of what is socially desirable rather than what some technical logic or in-built representation suggests.
As far is possible, all the proceedings of the Insolvency Commission shall be in the ‘open’. Its minutes and agenda papers should be publicly available for a small subscription. The public and press must be able to attend, record, observe and report its meetings. Such processes will help the Insolvency Commission to secure social legitimacy and will also make its ‘capture’ difficult. At the commencement of each meeting, each member of the Commission shall state whether the issues under consideration present any conflict of interests, and if so they should be publicly declared. Each members shall state that s/he has not reached any private agreement with any other member or any external party over the issues being concerned.
The Insolvency Commission shall advance and defend stakeholder interests. It would be responsible for drawing up and revising insolvency regulations by establishing committees to undertake this work. Its members could be seconded from diverse constituencies (including insolvency practitioners) to undertake this work. The formulation of all rules and regulations shall be preceded by full consultation, inter alia discussion documents, draft documents, public hearings etc. All the documents and back ground papers should be available to the public.
All the policies shall be made by the executive committee and be based upon a simple majority. Details of voting shall be appended to each document finalised by the body. Dissenting views and opinions, if any, shall be attached to any policy document issued by the Commission. The executive committee should explain the sense in which the policies being proposed are an ‘improvement’.
The Insolvency Commission shall specify the training and education aspects of insolvency practitioners. The Commission shall have the powers to prescribe and revise recognised qualifications. Hopefully, these qualifications will encompass more than just technical skills and would require practitioners to study the social and economic consequences of insolvency as well. The recognised insolvency qualifications could be provided by established accountancy or law trade associations, but not necessarily limited to these trade associations. A variety of organisations could offer recognised qualifications.
The Insolvency Commission shall be responsible for monitoring all licensees. It will have powers to publicly name and shame persons/firms with poor record. Any practitioner criticised will be required to publicly state the steps that s/he is taking to remedy the problems highlighted by the regulator. The Commission shall have full powers and resources to investigate the overall standards of any licensed person/firm to enable it to determine whether the person/firm is a ‘fit and proper’ to undertake insolvency work. The regulator will have the right to expand the supply of insolvency practitioners by inviting, subject to suitable safeguards, additional players to enter the insolvency jurisdiction. It could invite pension funds, trade unions, banks and financial services businesses to enter the insolvency jurisdiction.
The Insolvency Commission shall have adequate resources and rights to investigate matters of the public interest. These include incidences of real and/or alleged failures and conflicts of interests. All investigations should be completed on a timely basis. Its annual report shall explain the reasons for any investigation which is not completed within 12 months of commencement. The President of the Board of Trade shall make a written and/or oral statement to the House of Commons explaining the reasons for the delay. The body shall owe a ‘duty of care’ to all parties affected by its operations.
The body shall be able to suspend/withdraw licences and levy unlimited fines for non-compliance with its rules. It can also mount civil and criminal proceedings where necessary. It shall have a statutory right of access to any document, record and notes to enable it to determine whether the licensee is a fit and proper person. It shall also have a statutory right of information and explanation from any person involved with the conduct of the insolvency under investigation. Anyone who knowingly or recklessly misleads the regulator shall be deemed to have committed a civil and/or criminal offence. The Insolvency Commission shall fully co-operate with other regulators (e.g. Inland Revenue, Financial Services Authority) and exchange information in its possession. It will also develop policies and procedures which will give nominees of stakeholders a statutory right to examine the relevant files and papers of the insolvency practitioner.
All licensees would be required to publish meaningful information about their affairs. This could include matters such as the fee income, the time taken to complete receiverships, details of competitive tenders received for the sale of assets and businesses in receivership, what percentage of assets realised were swallowed up in fees, the number of jobs lost/rescued.
To speed up insolvencies, the Insolvency Commission , in co-operation with other regulators, shall develop policies and procedures under which insolvency practitioners shall have a statutory ‘right of access’ to all the working papers and files of auditors. It is anticipated that if the audit work has been competently performed and recorded, the auditor working papers will enable the insolvency practitioners to quickly become aware of corporate structures, location of assets and other complexities.
The Insolvency Commission would be financed through a number of ways. Rather than the licensing fees being disbursed over eight regulatory bodies and their numerous overlapping structures, the fees would go solely to the Insolvency Commission. This could be supplemented by sale of literature (e.g. insolvency regulation), donations, contribution from general taxation and levies. For example, the cost of registering businesses, filing the annual accounts and returns for major companies could be increased.
The Insolvency Commission would be the responsibility of the DTI. Thus the President of the Board of Trade would be answerable to Parliament for its activities. The DTI Select Committee should examine the operations of the Insolvency Commission at regular intervals and make suitable recommendations.
The above are modest proposals. In the time available I have only outlined
some proposals for insolvency regulation. These would need to be supplemented
by changes in banking and legal practices. But without regulation that
is independent of the insolvency trade associations, there would be no
long term public confidence in insolvency practices.