202 the context of corporate insolvency law

regulatory system under which only full-time professionals would be allowed to act. Final problem areas were identified in the liability of IPs to disciplinary action under two regimes – for example, as solicitor as well as IP – and the ‘practitioner-led’ nature of insolvency regulation.

Reforming IP regulation

Proposals for reforming IP regulation have ranged from the radical to the modest and the major options can be dealt with under four headings: insolvency as a discrete profession; an independent regulatory agency; departmental regulation; and fine-tuning profession-led regulation.132

Insolvency as a discrete profession

It might be argued that many IPs engage in insolvency work as their primary role and that they should be controlled by a single professional body. Against such a suggestion, however, it can be said that the majority of IPs are in general practice as either accountants or lawyers and that there is benefit in having the relevant RPBs monitoring and regulating the full range of their members’ activities, not just insolvency; that the interweaving of insolvency and general practice work, notably the use, in insolvency work, of general practice infrastructures and staff support mechanisms, calls for such ‘full-range’ control.133 In order to establish a discrete insolvency profession it would, moreover, be difficult to avoid demanding that all IPs be full-time insolvency workers. Such a requirement, it could be cautioned, would lead to a thinning of the ranks of IPs, a reduction in the breadth of experience of the average IP and an undesirable narrowing of the range of practitioners available to debtors, creditors or others. It is the part-time nature of much IP work, it can be said, that ensures that there are sufficient IPs in practice to meet demand when insolvency peaks and to offer choice to the public.134

132 For proposals see IRWP Consultation Document; Justice, Insolvency Law; IRWP Review. Not under discussion here is a return to the pre-Cork world that placed unqualified debtor/creditor appointees in charge of insolvency processes, a position that the Cork Committee viewed as incapable of sustaining public confidence.

133The IRWP Review (p. 35) contends that co-operation with regulators is likely to be higher where regulation is by professional peer group rather than a body distanced from the home profession and that more rigorous regulation is likely to be provided by a peer group ‘with its own reputation and self-interest at stake’.

134See IRWP Consultation Document, p. 27.

Establishing an insolvency profession might thus enhance accountability in one respect and diminish it in another. It would provide one body to be held responsible for regulation in the sector and would offer a focus for public attention. It would, on the other hand, offer little assurance that the public interest was being considered more properly in self-regulatory decisionor policy-making than under the present system. It would, moreover, replace dual scrutiny (as IP and as accountant or lawyer) with single scrutiny by the insolvency regulatory agency. If there is seen to be value in having specialist scrutiny of work done qua accountant or lawyer during insolvency processes then abandoning dual scrutiny may materially weaken accountability in spite of the capacity of a specialised profession to develop particular expertise in insolvency work. Transparency of regulation might be expected to be unaffected by professionalising insolvency practice in itself though the consistency brought by a move to a single professional body could have some enhancing effect. As for efficiency and effectiveness, the move to a less flexible single profession might prove detrimental if a move to full-time professionalisation prejudiced the production of a cadre of qualified IPs from which clients could choose.

On balance, the enhanced focus offered by a single profession does not seem to compensate for the losses involved in such a reform, notably the

ensuing narrowing of experience that would be offered by the average IP, the shrinking of the body of IPs and the loss of dual scrutiny.135

An independent regulatory agency

An alternative to the ‘single profession’ approach would be retention of dual controls (by the IP regulator and the ‘home’ RPB) but with IP regulation given over to a single independent agency. At present, insolvency practitioners (IPs) number around 1,700136 yet are regulated by eight recognised professional bodies (RPBs). It is not surprising, therefore, that calls for rationalisation are regular.137 More remarkable is how many professionals seem to accept the case for rationalisation. In the

135The IRWP Review (not unsurprisingly) also concluded that regulation through the present professional RPB should be retained (p. 36).

136See note 30 above; Walters and Seneviratne, Complaints Handling.

137See V. Finch, ‘Regulating Insolvency Practitioners: Rationalisation on the Agenda’ (2005) 18 Insolvency Intelligence 17.

204 the context of corporate insolvency law

autumn of 2004 an R3 survey of members revealed that 79 per cent of respondents believed that there should be a single regulator.138

Why did nearly four out of five respondents favour a single regulator? The R3 returns suggest that what advocates of reform were looking for was an increase in the efficiency of regulation and an increase in fairness.139 What most of them did not favour was a shift from self-regulation to governmental regulation – 69 per cent favoured self-regulation and less than half thought that public perceptions of regulation would be improved by external regulation.

Other professions have been through the mill of regulatory reform and it is worth reviewing the case for a single IP regulatory agency in the context of other movements towards ‘single regulator’ regimes.140 The best known of these movements produced the Financial Services Authority (FSA) in November 2001 when it took over the functions of nine different regulatory bodies. More recently, there have been debates about the case for a single legal services regulator and the Clementi Report of 2004 reviewed a number of institutional reforms that ranged in radicalism and included a single regulator option.141

In the financial services and legal sectors a number of concerns and rationales have underpinned debates about regulatory reform and it may be useful to assess whether these have resonance in insolvency. With regard to legal services it was argued at the time of the Clementi Review that seven concerns about the regulatory system provided a platform for reform.142 Those concerns related to, first, the complaints system, and in particular the failings of the solicitors’ complaints system. A second worry was a perception that self-regulation was suspect because it no longer commanded public confidence, or (on a harder-line view) because it was inherently flawed. A third issue concerned what has been dubbed ‘the regulatory maze’ – the institutional complexity of a regulatory system in which more than twenty regulators exercised a diversity of

138See Verrill, ‘R3 Regulation Survey’, p. 27. (Though 59 per cent of R3 members stated that none of the existing regulatory bodies was best qualified for the role of single regulator.)

139As noted, 57 per cent of respondents pointed to room for improvement on efficiency and 62 per cent on fairness: ibid.

140For an account of changes in professional self-regulation see M. Moran, The British Regulatory State (Oxford University Press, Oxford, 2003) pp. 79–86.

141D. Clementi, Review of the Regulatory Framework for Legal Services in England and Wales (DCA, London, December 2004) (‘Clementi Report’).

142See R. Baldwin, M. Cave and K. Malleson, ‘Regulating Legal Services – Time for the Big Bang?’ (2004) 67 MLR 787.

sometimes overlapping regulatory functions.143 A fourth point that critics made was that the regulatory system left considerable areas of service provision uncontrolled – that there were ‘regulatory gaps’ that could prejudice consumer interests. A fifth issue was whether the regulatory system could cope with new ways of providing services, new business structures and multi-disciplinary partnerships, or whether it locked providers into old-fashioned structures. Accountability and transparency were a sixth anxiety and concerns centred on issues such as public involvement in regulatory decisions and policies and the adequacy of information flows for consumers. A final issue was the efficacy of various price control mechanisms and their effect in limiting the cost of legal services.144

In the financial services sector, the drive towards control by a single

regulator agency has been said to have centred around five failings of the pre-FSA regime.145 The first weakness was that, due to the changes in

products, it had become difficult to regulate according to the function being carried out. This meant that the boundaries between regulators no longer reflected the economic reality of the industry.146 It was argued, secondly, that the proliferation of existing regulators (nine in number) did not achieve the economies of scale that were obtainable with a single regulator. Similarly, it was contended that economies of scope were not being achieved as a single regulator could deal with cross-sector issues more efficiently than a multiplicity of regulators. A fourth criticism of the pre-FSA regime was that it failed to offer a single, coherent regulatory approach or philosophy – one that might much more easily be provided

143See Clementi Report, pp. 1–10.

144In January 2006 the Law Society formally split into three distinct bodies, each with its own Chief Executive: the Law Society, the Legal Complaints Service (LCS) and the Solicitors Regulation Authority (SRA). The Legal Services Act 2007 set up the Office for Legal Complaints to administer an ombudsman scheme that will deal with all consumer complaints regarding legal services. The Legal Services Board was set up by the 2007 Act as a single independent oversight regulator with the responsibility of supervising approved regulators. For arguments that the RPBs controlling IPs should not combine regulatory and representative roles and that there should be a clearer distinction between the functions of R3 and the RPBs see G. Jones, ‘RPBs and Conflict’ (2007) Recovery (Spring) 3.

145See C. Briault, The Rationale of a Single National Financial Services Regulator (FSA Occasional Paper, Series 2, London, May 1999); Briault, Revisiting the Rationale for a Single National Financial Services Regulator (FSA Occasional Paper, Series 2, London, February 2002).

146See M. Taylor, Peak Practice: How to Reform the UK’s Regulatory System (Centre for the Study of Financial Innovation, London, 1996) p. 4.

206 the context of corporate insolvency law

by a unitary regulator. Finally, as in legal services, it was argued that a multi-agency regime did not offer the levels of accountability and transparency that a single agency could develop.

In the insolvency context it is clear that a number of the above concerns have been voiced by various parties and that, on some fronts, responses are already being implemented. Thus, regulatory proliferation and institutional complexity are problems that have been acted on in so far as the Joint Insolvency Committee (JIC) and the Insolvency Practices Council (IPC) were put in place following the ‘Ten Years On’ review of insolvency regulation of 1998.147 These two bodies have taken numerous steps that are designed to encourage consistency of approach across regulators, to make regulation more efficient and to make regulatory processes simpler and speedier. Concerns about accountability and transparency have also been responded to in so far as the IPC offers increased public oversight of the profession. It remains the case, however, that R3 members and others are still worried about regulatory efficiency, fairness and complexity.148

That said, the case for independent regulation seems to have little support among R3 members who, as noted, strongly endorse selfregulation and who doubt whether external regulation will improve the profession’s image. Here there seems a contrast with experience in the solicitors’ profession where, at least on complaints issues, many commentators and participants allege that in the years up to 2004 there was a collapse of confidence in self-regulation.149 It may well be the case that insolvency practitioners are prepared to argue that they have at no time suffered the kinds of attacks on self-regulation that solicitors have experienced during the last decade.

Might, however, a new insolvency regulatory agency produce a more efficient and coherent regulatory regime than alternative arrangements? On efficiency, it might be objected that creating an independent agency could increase regulatory costs for a number of reasons. First, the existing RPBs rely to a considerable extent on regulatory services that are

147IRWP Consultation Document; see further Finch, ‘Insolvency Practitioners’. On the JIC see p. 185 above. The IPC was created in 2000 and comprises a team of five lay members and three professional advisers. It examines ethical and professional standards in the insolvency profession and puts proposals to the RPBs and, in so doing, meets with public interest groups and takes part in dialogues with the JIC, the IS, the RPBs and R3. Its chairman at the time of writing is Mr Geoffrey Fitchew.

148See Finch, ‘Controlling the Insolvency Professionals’; Verrill, ‘R3 Regulation Survey’.

149See Clementi Report, p. 2 and the consequent changes referred to above.

volunteered by members and the JIC operates, in turn, on the goodwill of the licensing bodies for staffing and accommodation. Such volunteered services are cost free to those involved in insolvency services. It is true that, at the end of the day, professional costs under such a system will be borne by the general users of accounting or legal services (many of whom will be subsidising insolvency regulatory work), but the effect is to produce low-cost controls that would be difficult to match in a fully costed, unsubsidised and independent regime.150 A second fear could be that a new independent agency might tend to put up costs by regulating in an excessively restrictive manner.151 Under the present system, the RPBs exert control with reference to the standards of acceptable professional conduct. These may be formulated in broad terms, nonlegalistically.152 An independent regulator, exerting control not through professional codes and standards but through enforceable rules, is more likely to become enmeshed in legalism and the minutiae of compliance.153 The fear is that this would, again, tend to increase costs, would demand that IPs devote more time to compliance work and would be likely to reduce the general efficiency of insolvency regimes.

The responding argument is that a move from control by professional standards to control via rules could be expected to lead to greater transparency and increased assurance to the public and that this more than justifies the modest addition in costs that may be involved. It might also be contended that a dedicated agency would be better positioned to keep its eye on how IPs perform in relation to insolvency matters than would be the case with a professional body concerned also with a host of other affairs.

Turning to coherence, proponents of a single agency would argue that it is likely to be better placed than current regulators to develop a single, transparent and consistent set of regulatory policies and processes. In response, though, it might be replied that a single self-regulatory body might offer such coherence and openness and that rationalisations and harmonisations can provide these gains without losing the advantages of

professionally based regulation. It has been contended, moreover (notably by the Chairman of the JIC),154 that the JIC benefits from the diverse

backgrounds of the licensing bodies, as it can draw on their experience in

150 This is not to say that ending such subsidies might not prove attractive to some members.

151See generally E. Bardach and R. A. Kagan, Going by the Book: The Problem of Regulatory Unreasonableness (Temple University Press, Philadelphia, 1982).

152See J. Black, Rules and Regulators (Clarendon Press, Oxford, 1997) ch. 1. 153 Ibid.

154See letter from Ian Walker, (2004) Recovery (Autumn) 29.