Further to my earlier post on insolvency practitioner (IP) regulation in the UK, and contrary to expectations,[1] the UK government has backed away from replacing the four recognised professional bodies (RPBs) with a single government regulator, for the moment.
But it has announced plans to introduce new rules requiring the regulation of insolvency firms, other than sole trader IPs, in line with the regulation of audit and legal[2] services.
Currently, UK regulation only extends to individual IPs, in their personal capacity, which is the case in Australia. On the other hand, Australia has government regulators, two of them, with only limited professional body involvement.
Here are some comparisons.
The UK
Firms
The UK reform is said to be necessary as the size and complexity of insolvency firms and of ‘volume-based’ business models increase. There will be a basic set of qualifying principles for the statutory authorisation and regulation of firms, and a requirement for each authorised firm to appoint a senior responsible person, who will be registered as such with the firm’s RPB.
Register
The UK also proposes to introduce a public register of all individuals and firms authorised to provide insolvency services, noting any who are subject to disciplinary or other sanctions.
A single government regulator
The UK government will not at this stage pursue the idea of a single government regulator, although it will legislate for one should it prove necessary. In the meantime, the government proposes to provide the RPBs with additional regulatory tools.
The decision was based in part on the view that the potential costs of setting up and servicing such a regulatory body could be disproportionate to the limited size of the profession. The body would need to be self-funding and this could potentially result in a heavier financial burden on those regulated, in particular on smaller practices. Given these issues, the government said it will instead focus on improving the existing regulatory framework.
When?
The UK government says it intends to legislate for this “when parliamentary time allows”. In advance of legislation, the government will work with the RPBs to assess what steps towards firm accountability can be taken within the parameters of the current framework.
Australia
Australia has about 650 registered liquidators and about 200 registered bankruptcy trustees; practitioners are often registered as both. There is a government bankruptcy trustee which handles over 80% of all bankruptcies; there are over 9,000 personal insolvencies a year. There is no government equivalent in corporate insolvency; liquidators handle about 8,000 corporate insolvencies a year.
Firms
Australia does not regulate insolvency firms as such but does adopt a direct government regulatory model over practitioners, through two government regulators – ASIC and AFSA. The concept of a single government regulator has a different meaning in Australia.[3]
While not regulating firms, the regulators’ practice guidance requires satisfactory levels of support for practitioners from their firms. Australia’s rules are worded differently depending on their application to liquidators or trustees although in the end are broadly the same. Many insolvency firms have both trustees and liquidators.
These issues are discussed in Should the firms of insolvency practitioners be regulated, along with the practitioner? – Murrays Legal
Australian Registers
The UK’s proposed public register of all individuals and firms would be equivalent to Australia’s registers of trustees [7] and liquidators.[8]
A single government regulator
This means one thing in the UK – a government regulator to replace the four RPB regulators; and another thing in Australia – one government regulator to replace the two existing regulators. These, respectively, seem a possibility in the UK and an impossibility in Australia.
Cost comparisons
Interestingly, while the UK government has shied away from direct regulation, one reason being the high cost that would be imposed on the profession, a reason for Australia not implementing full co-regulation UK-style was that it would
“transfer the cost of determining market entrants from the Government (through the regulators) onto private professional bodies. It would also transfer the cost of disciplining practitioners onto these bodies”.
Further,
“up-front and ongoing funding for this reform would need to be obtained from industry members. Given the small size of the industry (685 registered corporate insolvency practitioners and 208 registered trustees), 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.”[4]
It was noted however that once established,
“self-regulatory schemes tend to be more flexible and impose lower compliance costs on industry participants than direct government regulation”.
Also, in introducing its new insolvency regulatory regime in 2019, New Zealand opted on costs grounds for the English system of co-regulation above direct state regulation.[5]
Conflict?
Another reason given in the UK for not having a government regulator is the potential for a conflict of interest, or a perception of such, given the government is a creditor in many insolvencies. That has not been raised as an issue in bankruptcy in Australia, with the government likewise being a constant creditor through the Australian Taxation Office (ATO) and also with the Official Trustee in Bankruptcy and the Inspector-General as regulator housed in the same agency, AFSA.[6] AFSA does have its own independence standards: Bankruptcy trustee independence – Murrays Legal. The ATO is also a significant creditor in corporate insolvencies, which are regulated by ASIC.
The major Australian accounting, audit, and consultancy firms
Finally, “firm” issues are under scrutiny by the PJC of the Australian parliament in relation to the conduct and ethics of the local operations of the major accounting, audit, and consultancy firms[9] as to their regulatory, technical, and legal settings, and broader cultural factors.
Although not focused on insolvency firms, the inquiry may find certain negative features in major firm settings. There are a significant number of firms in excess of 20 liquidators. See also my comments on a submission to that inquiry about ‘masculinity contest cultures’.[10]
Reforms?
Reforms suggested by the current Australian PJC inquiry into audit and accounting firms may impact upon insolvency regulation, as may reforms pursued in the UK.
Although there are no specific reform recommendations from the PJC Report on Corporate Insolvency of July 2023 as to ‘firm’ issues, a number cover insolvency practice issues including registration requirements, gender, remuneration, independence, pre-insolvency advice and a government liquidator. Also, the PJC Report recommended there be examination of a single insolvency law and a single regulatory scheme.
The government is yet to respond to these.
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[1] UK insolvency practitioners to come under direct government regulation – Murrays Legal for which I relied upon this statement in the House of Commons: “we can go further on insolvency reform. It is the Government’s intention, when parliamentary time allows, to move towards a system of regulation with a single independent regulator, and away from the recognised professional bodies that we see today. I am very keen to take that forward when parliamentary time allows”: The Parliamentary Under-Secretary of State for Business and Trade (Kevin Hollinrake), Hansard, House of Commons, p 176WH, 14 June 2023”.
[2] For example, UK law firms must have a compliance officer who is a member of the firm responsible for compliance with regulatory arrangements in accordance with rule 8.5 of the SRA Authorisation Rules.
[3] Improving the regulation of insolvency practitioners in the UK and Australia, Moffatt, P., Mason, R. and Murray, M. NTU UK, 2022.
[4] Explanatory Memorandum to the Insolvency Law Reform Bill 2015, paras 9.149-9.151.
[5] New Zealand Ministry of Business Innovation and Employment Report No. 1 of the Insolvency Working Group, on insolvency practitioner regulation and voluntary liquidations, 27 July 2016, paras 142-144.
[6] Monitoring and inspection of bankruptcy trustees and debt agreement administrators | Australian Financial Security Authority (afsa.gov.au)
[8] Insolvency statistics – Series 4A Registered liquidator lists | ASIC
[9] Ethics and Professional Accountability: Structural Challenges in the Audit, Assurance and Consultancy Industry – Parliament of Australia (aph.gov.au)
[10] The Society of Corporate Law Academics (SCoLA) 31 August 2023.
