An independent WebsiTE

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related policy and law reform, in Australia and internationally. No legal advice is offered or given.

A review of Australia’s insolvency practitioner regulation system

Given a choice between a good insolvency law and poor practitioners, and good practitioners and a poor insolvency law, the latter is preferred.  Australia seems to be working its way towards poverty on both counts, with its insolvency practitioners (IPs) highly and expensively regulated quite at odds with the co-regulatory trends elsewhere.      

At the 3 year anniversary of those regulatory changes, a recent article[1] provides a report of IP’s views of the changes that is instructive in adding to other recent research findings of negative features of reforms in Australia that have impacted the effectiveness of the insolvency system.

Described as an ‘early’ review, the surveys were taken in October 2018, only 20 months after the new law commenced. The survey questions themselves and the responses are instructive in themselves.  But more significantly, the surveys don’t reveal the full story of what many would see as continued excessive regulation of IPs claimed to be needed to address negative perceptions of the profession.

Some background

Insolvency has always been difficult to sell, even after its initial practitioners – 19th century money lenders and charlatans – made way for the creation of the accounting profession and its expertise; though the image of insolvency practice – ‘making money out of the misfortunes of others’ – has remained.

Nevertheless, at federation, Australia took an elevated view of the roles of the profession, to the extent of requiring aspiring trustees to appear before a bankruptcy judge and be cross-examined as to their skills and qualities. Liquidators hung onto the coat tails of auditor registration.

In the 1980s, registration and discipline of trustees was delegated to a committee interview process, while liquidators were merely assessed ‘on the papers’, with their discipline being taken on by a statutory board. The courts remained in both cases for more serious matters.

Recommendations for co-regulation were made by the 1988 Harmer Report, and by other inquiries, including in 2010 for unified regulation of the personal and corporate regimes. All were, ominously, ignored.

In the early 2000s, political and media hype created a ‘crisis’ – an industry ‘spiralling out of control’[2] – which then led ultimately to the ‘reforms’ under the Insolvency Law Reform Act 2016.[3]

ILRA 2016

The Act increased regulation of IPs, with universal committee processes for trustee and liquidator registration and discipline, and otherwise introduced an extreme range of regulator, creditor and court powers over both.

It left alone the potential problems of two separate regulators and policy departments, the idiosyncrasies of the Australian court system and other inadequacies of the law itself.

No industry association is resourced or structured enough …

At the time, the government had two broad options, to continue direct government regulation, or introduce co-regulation, following a trend in the UK, NZ and India, and a trend more generally in professional regulation.

Co-regulation is ‘where a scheme is developed by industry with some government involvement but industry is fully responsible for its implementation’.[4] Accepting the crisis theme and a negative ASIC survey, the government dismissed the co-regulation option, for reasons that remain quite extraordinary, namely that[5]

  •  there was no professional body or industry association resourced or structured to undertake co-regulation;

  • any such body would need to be substantially reformed with up-front and ongoing funding needed from IPs;

  • given the small size of the industry (685 liquidators and 208 trustees), the cost per IP of maintaining the infrastructure for effective co-regulation (ongoing ‘surveillance’, dispute resolution, and CPD etc) was seen as prohibitive; even though

  • self-regulatory schemes tend to be more flexible and impose lower compliance costs than direct government regulation, citing a conference paper by a retired judge in part support.[6]

The only ‘professional body or industry association’ to which the government was referring would have been ARITA, which is rather damning of the profession generally although only if the government views are considered credible.

Other negative factors of co-regulation were a potential for anti-competitive restrictions on practitioner numbers and ‘community cynicism’ about self-regulation simply being a form of self-protection.

The government did accept that the cost of co-regulation would be lower compared to a purely regulatory system.

A point was reached where a request to government by CAANZ to be termed a ‘professional’ rather than an ‘industry’ body was rebuffed.

2020

Such a negative government view in any area of regulation can have and maybe has had unwanted outcomes.

What followed was a rather supine acceptance of the direct regulation arrangement by AFSA (personal insolvency IPs) and ASIC (corporate insolvency IPs), the former comprising over 90% of the latter.

ARITA did at one stage suggest its own discipline ‘tribunal’[7] but later settled into its limited role in choosing committee participants and operating its own member discipline regime.

What limited authority was given by the ILRA to ARITA and the accounting and legal bodies has been ignored. One was to have a statutory right to refer IP misconduct to AFSA or ASIC; another was to be given access to confidential conduct information. After 3 years, there is no report of any use of that authority.

A point was reached where a request to government by CAANZ to be termed a ‘professional body’ was rebuffed.

Nothing in the 5 years since would suggest any prompt in 2020 for a change in the government view. There was no statutory review required of the ILRA and unless and until something happens Australia has full-on and expensive IP regulation. Other insolvency professional bodies, the new AIIP and TMA, have no discipline process, perhaps wisely.

New Zealand

In 2020, Australian IP regulation stands out, not necessarily well, with legislation adopting existing NZ co-regulatory reforms commencing in July 2020, adopting the approach applied in the UK since 1986.

The NZ law will allow professional bodies to carry out the ‘frontline regulation’ with an independent government regulator monitoring and assessing those bodies’ effectiveness. This was seen as the most cost-effective option in NZ because it could leverage off an existing self-regulation system set up by CAANZ and RITANZ.

NZ in fact specifically rejected Australia’s approach,[8] one reason being that a government regulatory agency would not have as ‘good an understanding of the market as a professional body’.

NZ also saw opportunities for its new practitioners to practise in Australia under the Trans-Tasman Mutual Recognition Arrangement.

Special? or aggrieved?

Australian insolvency practitioners might properly feel either special or aggrieved at their high-level regulation from above, if not below. The survey responses suggest the latter.

Community under-confidence in IPs has become a mantra, without acknowledging the many inherent unrealistic expectations of insolvency law generally. The article refers to this lack of confidence as a reality but no comparison is made with, say, lawyers and accountants, and politicians. My own informal survey showed a wide range of lawyer misconduct, including within government, of misappropriation of funds, forgery, breaching a court order and drug use and trafficking.[9]

Blame shifting is a common ploy to distract from a lack of attention to and interest in reform.

Just as crime, industry and financial regulation needs some finesse so too does professional regulation. A regulatory culture based on ‘formal, precise rules, with adversarial and punitive enforcement and an underlying distrust of the regulated community’[10] is not healthy. The negative consequences of the approach taken to IP regulation in Australia may be seen in these survey responses. The recognised ability of IPs to innovate and develop insolvency law and practice may falter in the face of excessive regulation.[11]

A broader comment about both surveys is the lack of appreciation of Australian insolvency practitioners of how closely they are regulated, compared with other jurisdictions. This might suggest an inward-looking industry at odds with the increasing internationalisation of its world.

In a related insolvency law context, a US correspondent recently referred to

‘Australia’s pointless and anachronistic formalism, born of an 18th-century distrust of all debtors’

noting that the UK has moved on but that Australia hasn’t, with a comment that our excessive regulatory law

‘abandons fiscal responsibility and rational cost-benefit analysis’.

Next: the regulators.

[1] An early response to the regulatory changes under the Insolvency Law Reform Act 2016: a survey of registered liquidators and registered trustees (2019) 27 Insolv LJ 211, Catherine Robinson, UTS.

[2] Adele Ferguson. See A Miscellany of insolvency issues past and upcoming (2011) 11(5) INSLB 86 at 87, M Murray.

[3] Reform of practitioner regulation (2012) 12(5) INSLB at 106, M Murray.

[4] Industry Self-Regulation in Consumer Markets, Taskforce on Industry Self-regulation, August 2000

[5] [9.150] Ex Memo to the ILRB 2015.

[6] At [9.151]. See Bankruptcy and Insolvency: Change, policy and the vital role of integrity, Michael Kirby, IPA National Conference, 19 May 2010, p 25.

[7] See (2015) 27(1) A Insol J 14; also Umpteen professional bodies regulating insolvency practitioners – overkill? or a spreading of the risk? www.murrayslegal.co.au 8 January 2017.

[8] Review of Corporate Insolvency Law, Report No. 1, Insolvency Working Group, July 2016, NZ.

[9] The Regulation of Australia’s Insolvency Practitioners, Law Council Conference, 27 September 2019.

[10] Regulator Engagement with Small Business, PC, 2013.

[11] Rescuing Business, Carruthers & Halliday, 1998, p 526 ff.

Share on facebook
Share on google
Share on twitter
Share on linkedin

Leave a Reply

Your email address will not be published. Required fields are marked *

Latest

Popular

Featured

Stay Up To Date With Murrays Legal Commentary

Subscribe now