A bill introduced into the New Zealand parliament would mean that if ABC Insolvency Firm took a role as investigating accountant to assess and report to a bank on the security of the bank’s position, and whether the bank should appoint a receiver, the bank would not be able to engage ABC as receiver if that were the advice, which the bank accepted. Rather the bank would need for find another insolvency firm.
There is potential there for an expansion of this idea to other areas – dentists and surgeons for example.
New NZICA guidance issued – IS: Insolvency Services – covers what it terms “informal insolvency services” including investigation reports, with comparisons made with Australia’s APES 330.
Financial Professional Services Trading Advice Transparency Bill
This private members bill introduced into the New Zealand parliament on 21 October 2021 says it “would prevent financial advisers who recommend that a third party take over the management or disposal of a business or its assets from performing such a function themselves”. Financial Professional Services Trading Advice Transparency Bill – New Zealand Parliament (www.parliament.nz)
In more detail, the explanatory note says that the intent of the Bill is that
“professional advisers [who] recommend receivership, liquidation, or administration of a business, or any other status requiring a third party to manage the ongoing trading or management of the business, or disposal of its assets (such as being appointed a receiver), may not, having provided the initial advice, undertake any of those subsequent roles in respect of the entity in question”.
It goes on to say that an
“inherent conflict of interest exists in a case whereby provision of the initial advice for which the professional services firm is appointed could result in subsequent fee-earning business in respect of the entity in question, depending on the particular advice given. This bill removes that conflict”.
This on-going issue has been considered before, both in NZ and Australia, and no doubt elsewhere but more often by lawyers and accountants, only.
From a behavioural economics viewpoint, this Bill might have a point. Whether consciously or unconsciously, any adviser might tend to recommend an option that keeps them involved and earns money. That might be reinforced by the terms of the recommendation itself containing particular approaches that only the adviser might have available as to how best the recommendation should be carried through.
Further, and this applies more generally, those advisers from an insolvency practice perspective might be said to tend to see the world that way:
if you’re a hammer, everything looks like a nail, if you’re a barber, everyone needs a haircut.
Or that might be a perception by some. These are apart from the biases that can tend to influence any of us given the nature of the business, and its personnel.
Doctors and plumbers?
But given these tendencies of human nature, there does not seem to be a logic to confine this Bill to the narrow circumstances proposed. The Bill should usefully be extended to, say, doctors and dentists, plumbers and mechanics, in so far as they diagnose a problem and then recommend action be taken. There would be many others.
In any event, lawyers such as myself and accountants are not the ones to assess this – rather those in the behavioural economics and related social science disciplines are the ones to advise. Their advice would necessarily have been sought before an important bill like this was brought before the NZ parliament. If what I outline has some basis, that advice would need to cover the extent of the problem, and what other options might be available to counter it. In fact, “the problem” needs to be better defined, as well as the harm it causes, relative to any other approach, from a legal and economic perspective. The costs and time of having one person advise and another person implement the advice would have to be considered as no doubt those proposing the Bill have done so.
Changes to some of the professional and ethical standards
This has coincided with changes to some of the professional and ethical standards for accountants. The New Zealand Regulatory Board has issued a revised NZICA insolvency services standard, IS: Insolvency Services that will apply to all NZICA members and all insolvency practitioners licensed by NZICA from Monday 1 November 2021. See NZICA makes changes to their professional and ethical standards – RITANZ.
The revised standard reflects changes to the law in New Zealand, in particular, its new insolvency practitioner regime, and the NZICA Code of Ethics. CAANZ notes that the Australian Accounting Professional and Ethical Standards Board (APESB) has issued APES 330: Insolvency Services which is similar to IS but designed to interact with other APESB pronouncements and to ensure compliance with Australian law.
As to the subject of the Bill, one difference between IS and APES 330 is said to be that IS provides for both “formal” and “informal” insolvency services. IS therefore provides (among other things) requirements for agreeing upon the scope and basis of appointments for informal insolvency services. These are described as including “advice to business entities or creditors of businesses (including investigating accountant reports) on business strategies so as to avoid insolvency, how to best organise a business to achieve and maintain viability or to reorganise/restructure a business, and advice of a similar nature”. Those proposing the Bill will need to assess that.
This Bill was drawn from the ballot of Private Members Bills, entitling the proposer of that Bill to have it presented to parliament. This process is not known in Australia. NZ is fortunate to have had such an important issue raised by the chance draw from a ballot.