After some long period of deliberation, the UK government has decided to itself take a direct role in the regulation of its insolvency practitioners (IPs), which it likens to Australia’s approach, as one example, but, unlike Australia, the UK also proposes to regulate insolvency firms.
The UK is therefore to do away with its current co-regulatory framework delivered through four membership bodies (the UK has around 1,570 IPs of which around 1,290 are appointment takers) along with the Insolvency Service as an oversight regulator – the ‘regulator of the regulators’. It proposes a single government regulator. It says it believes that regulation through membership bodies may not always be wholly effective and that effective regulation “can best be achieved by a more active role for the Government in regulating the profession”. See The future of insolvency regulation – GOV.UK (www.gov.uk)
The single regulator would have powers to authorise, regulate and discipline Insolvency Practitioners, as well as set regulatory standards; and the power to regulate firms providing insolvency services.
The UK government says it believes this approach would be
“in line with current principles of effective regulation, namely that it should be transparent, accountable, proportionate, consistent and targeted, with the independence and accountability of regulators helping to ensure public confidence”.
Firms would have to meet certain threshold requirements before registration, including being able to demonstrate their solvency and that they have sufficient qualified Insolvency Practitioners and administrative support staff to carry out the level of work undertaken.
Elements of co-regulation seem intended to remain, the UK government recognising the
“wealth of knowledge and skill amongst the existing 4 RPBs, which it is keen to retain”.
It therefore proposes that the new regulator should be able to delegate certain functions to other bodies with suitable expertise and experience.
Care needed in assessing Australia’s approach
While this UK announcement bears closer consideration, there are elements of Australia’s approach, in comparison, about which there should not be any misapprehension.
Unlike the UK, which only introduced IP regulation in 1986, Australia has a long history of IP regulation. From the time of its first federal Bankruptcy Act, in 1928, its bankruptcy trustees were authorised as such only on personal application in open court to a Judge of the Bankruptcy Court. It was only in the 1980s that this devolved to a committee process by way of a viva voce interview, by senior members of the profession and of the regulator, the Inspector-General in Bankruptcy. This model was also applied to disciplinary action. This model still remains.
Corporate insolvency regulation was a matter of separate state law, and only in the 1980s did the federal government take on a role, with the corporate regulator ASIC authorising liquidators under a loose approval arrangement ‘on the papers’, but with discipline handled through a statutory board.
Importantly, there is a government role in personal insolvency, through the Official Trustee, which administers the vast bulk – 80% – of Australia’s bankruptcies; 20% is handled by the private profession of trustees. But there is no government role in corporate insolvency – all company insolvencies are administered by the private profession of liquidators.
There has always been little connection in Australia between personal and corporate insolvency registration and regulation, although in 2017, corporate insolvency adopted many of the established registration and regulation processes of personal insolvency.
The law adopts a highly regulatory approach,
one example being this provision about meetings of creditors:
“s 75-65 Conducting meetings (1) The trustee must open a meeting of creditors and introduce himself or herself and, if the regulated debtor is present, introduce the regulated debtor. (2) If the regulated debtor is not present, the trustee must announce that fact and, if the trustee is aware of any reason why the regulated debtor is not present, must state that reason. (3) In the case of a deceased debtor, the trustee must …” etc etc.
Co- or direct regulation – Australia’s rationale
The decisive direction taken was in 2017, when the Australian government continued with direct government regulation, as the UK is now proposing, but between two separate government regulators, ASIC (corporate) and AFSA (personal), which the UK certainly has no reason to propose.
Hence, the concept of a single regulator in Australia is different from that in the UK.
Australia did consider the co-regulatory model of the UK noting that such a model would transfer the cost of determining market entrants from the government regulators onto private professional bodies; and the cost of disciplining.
However, despite the presence of ARITA in Australia, the government said there was no industry association that was resourced or structured to undertake a co-regulatory role across the whole insolvency industry. Any industry association willing to undertake these obligations, it said, would need to be substantially reformed, with up-front and ongoing funding needing to be obtained from members. Given the small size of the industry (685 liquidators and 208 bankruptcy trustees for a 25m Australian population), the cost per industry participant of maintaining the infrastructure needed for effective co-regulation (including ongoing surveillance, dispute resolution, and continuing professional education etcetera) “may be prohibitive”.
The government went on to acknowledge that once established, self-regulatory schemes tend to be more flexible and impose lower compliance costs on industry participants than direct government regulation. It also said that it is recognised that industry members can (unsatisfactorily) be harder on misconduct than generalist tribunals because of the appreciation of the damage that reports of errors or neglect can have on the reputation of the professional as a whole. Industry members would be expected to be able to quickly perceive where unprofessional errors have occurred. Also, by providing more power to industry bodies, there is an increased potential for new entrants to suffer from anti-competitive behaviour, leading to increased costs. It also referred to community cynicism regarding industry regulating itself.
What the Australian government did not refer to was a system introduced, perhaps as an unwise afterthought, of devolving some token regulatory tasks to the insolvency and accounting regulatory bodies, including ARITA, and also to the legal regulatory bodies around the country – 14 bodies in all – all no doubt willing to assist ASIC and AFSA: see Bodies everywhere — the role of professional bodies in regulating insolvency practitioners in Australia: (2018) Insolvency Law Bulletin 94.
The UK announcement does say that the collected wisdom of the insolvency bodies should be enlisted. The UK was always unusual with its multiple regulatory bodies, dating from the effective manoeuvering efforts of the UK accounting profession in the 1980s, and each would not doubt have its different approach and perspective.
Care needs to be taken
in drawing any comparisons with Australia’s bifurcated approach. It at least, in theory, had the potential feature that one regulator’s approach could be benchmarked against the other. But that does not happen between AFSA and ASIC, though academic analyses draw some unhappy comparisons, which may offer useful comparative insights for the UK inquiry.
In that respect, in proposing to do away with four competing regulatory bodies, an aim of the UK changes is to promote consistency, and apart from the law itself, much of government regulation is determined by the views of the minister, department and regulatory body from which it is conducted. In the UK that appears to be from the one line of authority.
In contrast, in Australia, personal insolvency is regulated by one minister – the Attorney-General, one department, one regulator AFSA and under a federal court system, with the regulator in another role as the Official Trustee itself conducting the majority of bankruptcies. Corporate insolvency is regulated by another minister – the Treasurer, one department and regulator ASIC and under a federal-state court system; there is no government role as liquidator. Whatever the law might say, consistency of approach does not prevail.
One thing is apparent, that the regulation of corporate insolvency by ASIC is far more expensive, and is imposed as a cost on the liquidators themselves, than regulation of personal insolvency by AFSA, where the cost is levied not upon trustees but upon asset realisations, ie, on creditors.
Two important issues
Two final comments are made, for now.
Information technology and AI in IP regulation?
One is the rather startling lack of comment by the UK government, in a paper referring to the ‘future of IP regulation’, on the use of information technology and AI in IP regulation. As one example, under other jurisdictions’ framework of a government Insolvency Portal, through which all matters of all IPs are conducted, the consequent accessibility and transparency makes regulation much easier. Finland is an example. See my TIP – The Insolvency Portal | Murrays Legal
“Everything’s going fine!”
Two, the assumption is made by the UK government, and by all governments selling the need for increased IP regulation, that the system which IPs are required to work is just fine or even if not, that it has little or nothing to do with IPs ability to properly conduct matters, despite any inherent perverse incentives. As is being suggested in Australia, the system is faulty, despite what may be the best efforts of the profession, but the blame is, as usual, directed at the practitioners, rather than at the government allowing the system to continue. It happens that the government is the largest beneficiary as creditor of the insolvency system. In one respect, we agree with the UK, that a greater role of government is required: see Reinventing the Australian Insolvency System | Murrays Legal; Rethinking Insolvency Law | Australian Insolvency Law.
Views are sought
in the UK by 25 March 2022.