AABA

TURKEYS DON’T VOTE FOR CHRISTMAS, DO THEY?
(A Commentary on the final report of the Insolvency Reviewe Working Party)

Prem Sikka
Professor of Accounting
University of Essex
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Capitalism without insolvency, like Christianity without hell, is inconceivable. Sooner or later it catches up with most people. 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. Insolvency is a traumatic experience for employees, shareholders, creditors and many other stakeholders. It results in a 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 and call for an equitable treatment of all.

As insolvency affects a large number of stakeholders, its regulation continues to be a matter of social concern. This concern is heightened when it is realised that ‘insolvency’ is a state guaranteed market. Following the Insolvency Act 1986, around 1,800 accountants and solicitors belonging to a select few trade associations enjoy the state guaranteed monopoly of insolvency. They are regulated by no less than eight overlapping regulators. None owes a ‘duty of care’ to anyone. Unlike the sellers of sweets and potato crisps, the sellers of insolvency services do not owe a ‘duty of care’ to the individuals affected by their services. There are no performance measurement leagues or tables for insolvency practitioners. These impediments exist in a regulatory system that is primarily under the control of the insolvency industry itself. The plight of the stakeholders continues to be highlighted in parliamentary debates. Most recent examples are debates organised by Baroness Dean in the House of Lords (House of Lords Debates, 26 Jan 1999, column 936-951) and in the House of Commons by Conservative MP Richard Page (House of Commons Debates, 3 Feb 1999, column 934-936) and Labour MP Rudi Vis House of Commons Debates, column 1266-1272). These debates have further shown that the market and institutional structures for regulation of insolvency practitioners are inadequate.

Against the above background, the final report of the Insolvency Regulation Working Party (IRWP) is disappointing. In its 1997 election manifesto Labour promised to introduce ‘independent’ regulation of accountancy (including insolvency). However, neither before nor after the 1997 general election did Labour publish any proposals for regulation of insolvency. In this vacuum, the initiative passed to the eight bodies regulating insolvency practitioners. In November 1996, they formed a working party to review the first ten years of regulation. The final report (February 1999) is liberally sprinkled with phrases such as ‘the public interest’, but without any explanation of how these concepts have been operationalised.

IRWPwas a club representing the 'private' interests of the insolvency industry.

The IRWP consisted entirely of the representatives of the insolvency industry. With the best will in the world, these individuals worldviews are inevitably shaped and constrained by their education and business interests.
The IRWP had no representation from any consumer or stakeholder group.
The Department of Trade & Industry (DTI) was represented through the Insolvency Service. However, the DTI has too many conflicting tasks. It is simultaneously expected to champion the interests of the insolvency industry and represent consumers. It inevitably cannot do both well.
The IRWP met behind closed doors and its minutes are not publicly available.
It did not hold any ‘open’ hearings.
Thus its beliefs and value systems could not be challenged.
It invited public submissions, but only five were received from what the IRWP describes as the “Public”. Most came from the insolvency industry and its representatives. In any case the submissions probably enabled the IRWP to legitimise its views by dressing them up in the garb of public consultation. In the final analysis, they probably made little difference to the December 1997 interim report.

The report claims to scrutinise the first ten years of regulation, but is remarkable for a whole series of omissions.

The IRWP claims that the present mode of regulation works well. But no evidence is provided.
There are no statistics about the number of insolvency practitioners and the domination of the industry by major accountancy firms.
There are no statistics about the number and the nature of complaints, time taken to investigate and how the complaints have been resolved.
There is no information about the penalties that might have been imposed upon those disciplined whether working for small, medium or large firms.
There is no information about the performance of the insolvency industry e.g. the number of jobs that might have been saved or lost.
Atlantic Computers, Bank of Credit of Commerce International (BCCI), J.S. Bass, Exchange Travel, Helene, Maples, Maxwell, Polly Peck, Wallace Smith and Land Travel and are examples of the long running insolvencies generating huge fees for practitioners, but there are no case studies of any large or small insolvency to show the kind of problems which the regulatory processes manage.

The IRWP is keen to retain the present mode of regulation and does not seem to like the phrase “self-regulation”, characterised by Austin Mitchell MP as a system of “the Chaps regulating the Chaps” (page 28). It claims that the bureaucrats running the regulatory bodies do not have “any particular sympathy with an individual practitioner .....” (page 28). It also points to the presence of lay observers on the disciplinary panels to claim that the processes are not entirely self-regulation. Such assertions hardly bear scrutiny. The bureaucrats know which side their bread is buttered on. How many have ever dared to tackle major firms? When Coopers & Lybrand (now part of PricewaterhouseCoopers) admitted to flouting the ethical guidelines to secure the Polly Peck receivership, their partner was fined £1,000 (Mitchell et. Al, 1994) whilst the firm probably made more than £20 million from insolvency fees. How many partners from major firms have ever had their licence revoked? As regards the presence of the laypersons on disciplinary panels, one has to ask how are they selected? How many are hired because of their unease about the insolvency industry? They are hired and remunerated by the insolvency trade associations. The financial dependency soon encourages a certain kind of conformity and deference.

Just as turkeys never vote for Christmas, the IRWP was never going to call for the end of self-regulation, streamlining of the regulatory system, eliminating overlapping and wasteful structures or consolidating the eight regulators into one. Instead, the IRWP recommends the formation of new quangos. Its proposals include the formation of an umbrella body, the Insolvency Practices Council (IPC), to oversee the eight regulatory bodies. These proposals closely mirror those applied to the regulation of auditing. Following, the government’s proposals for regulating auditing, it is quite likely that 60% of the membership of the IPC may come from outside the industry.

The IPC will, however, be a toothless tiger unable to intervene in any specific or live case. It will be able to make general observations and recommendations, but the present regulatory bodies will retain all their licensing and monitoring powers, pretending that they can combine their trade associations and regulatory functions. The financing for the IRWP will come from a yet to be formed “Foundation”, which will raise money from the City interests. Big business is not in the habit of giving away money without some strings. In due course, no doubt, it will be rewarded. Interestingly, the IRWP does not recommend ‘sunshine’ for the IPC or the Recognised Professional bodies (RPBs). What will flourish behind closed doors?

The IRWP rejects the call for the creation of an ‘independent stakeholder body’ for regulation of the industry. This is dismissed as “impractical” and something which would “obscure ministerial accountability” (page 50). Little analysis or argument is provided. On the contrary, the ministerial accountability is confused in the current system of regulation. Ministers play pass-the-parcel rather than accepting responsibility. There is nothing “impractical” about the proposals, as the Treasury is implementing a similar system for the regulation of the financial services sector. The Financial Services Agency will be independent of the Treasury and will be answerable to Parliament. A similar structure is perfectly feasible for the insolvency industry.

In theory, the insolvency processes and the activities of the insolvency practitioners can be the subject of judicial reviews. But in practice, nearly 12 million individuals are unable to get any access to courts and legal aid. They certainly cannot afford to pursue insolvency practitioners through the courts. They need alternative means of securing reviews, justice and redress. The situation is crying out for an independent ombudsman. However, the IRWP is not keen on this (page 37) and claims that this would not bring practical benefit. It shows no sympathy for the plight of the victims of poor practices and expects them to just accept the final judgement of the regulator. What does the IRWP expect the real/alleged victims of poor insolvency practices to do?

There is always a likelihood that any regulatory system will fail. Therefore, compensation schemes are need to recompenses the ‘injured’. The IRWP does not want this either. It wants a system which preserves the present regulatory structure, no ombudsman and no compensation scheme.

The IRWP does not indicate the economic or social costs of its proposals. Inevitably, the practitioners will pay more to finance the new structures. This would drive some practitioners out of the market. Around half of the UK’s insolvency practitioners operate from highly secretive major accountancy firms, such as PricewaterhouseCoopers, KPMG, Arthur Andersen, Deloitte & Touche, Ernst & Young, Grant Thornton, BDO Stoy Hayward and Pannell Kerr Forster. The IRWP proposals would encourage further concentration of insolvency work in major firms. The IRWP has no proposals for encouraging banks, financial services companies and other to enter the insolvency jurisdiction and expand the supply of insolvency practitioners either.

In a press release dated 26 November 1998, the Secretary of State for Trade & Industry, Stepehen Byers (previously at the Treasury) stated that “The Financial Services and Markets Bill will, by creating a single regulator with a single authorisation process, a single compensation scheme, a single ombudsman, and a single appeals tribunal, reduce the amount of regulation whilst at the same time provide for greater accountability”. In his new job at the DTI, he appears to have abandoned these principles. He would probably accept the IRWP report even though it violates all the principles specified above. The reasons for this are that the DTI’s main brief is to appease big business. In any case, the government does not have legislative time to introduce any radical change. At best, the government will only tweak the proposals.

The IRWP proposals also give a relatively cost-less insurance to DTI Ministers and civil servants. Any problems can be shunted off to the eight regulators, who will continue to take flak for any real or perceived problems. Whilst the credit for good news, if there is any, will be taken by the Ministers and civil servants.

In the medium to long-term, the IRWP proposals would not dampen down public anxieties about self-regulation, insolvency practices, the absence of an ombudsman, or a compensation scheme. With more complaints and new overlapping quangos, the cost of self-regulation will inevitably rise to a point where the insolvency industry will itself feel that HMS Self-regulation has been so badly holed that it needs to be abandoned. At that point, all the licensing, monitoring and other powers of the eight regulatory bodies are likely to be transferred to a statute-based equivalent of the IPC leaving the recognised professional bodies to do what they are good at - that is representing the narrow economic interests of their members.

References

Insolvency Regulation Working Party, (1999). A Review of Insolvency Practitioner Regulation, London, DTI.

Mitchell, A., Puxty, A., Sikka, P. And Willmott, H., (1994). Ethical Statements as Smokescreens for Sectional Interests: The Case of the UK Accountancy Profession, Journal of Business Ethics, Vol. 13, No. 1, pages 39-51.