Following the UK government’s consultation in December 2021 which called for responses to new proposals in reforming the regulations regarding insolvency, the government has introduced a significant overhaul of insolvency regulation.
The reforms aim to create more transparency for clients, lawyers and professionals within the insolvency sector. The change is likely to have a profound impact for those firms who offer insolvency services as well as insolvency practitioners.
What are the issues?
The current framework is highly regarded for its effectiveness, deriving from the formal insolvency regulation established in 1986 ensuring fair and equitable outcomes. But this longevity has led to calls for the framework to evolve in line with modern practices and to expand its scope to cover work undertaken by firms as well as increase confidence with enhanced transparency.
Government’s response and proposals
The government has confirmed the following changes, although they are all subject to wider consultation and implementation in the coming months:
- Regulation of firms offering insolvency services – a new framework will maintain regulation and statutory authorisation which will co-exist with the regulation of insolvency practitioners
The framework will require that each firm appoints a senior individual who will be registered with the regulatory body, a sanctioning system, an arrangement to recover costs from regulated firms and will prevent unregulated firms from conducting insolvency services
- A public register of insolvency practitioners and firms – a mandatory public register of authorised insolvency practitioners and firms providing insolvency services, that will include details of any sanctions registered against such individuals and firms. The longevity of the sanction appearing on the register will be dependent upon the severity of the sanction
- A compensation scheme – a new compensation scheme to provide redress for poor conduct which adversely impacts parties within the proceedings
- Insolvency practitioner security and the bonding regime – a strengthened bonding framework to include an increase in cover from £250,000 to £750,000. The current minimum requirements of a bond will be extended and includes a period of run-off cover for a minimum of two years after an insolvency practitioner has left office.
What does this mean for the future of insolvency?
Although the government is currently reluctant to introduce a single regulator of insolvency practitioners, it continues to work with Recognised Professional Bodies in the coming months to consider this position.
Firms offering insolvency services will be held to greater standards in upholding ethics and professionalism along with individual insolvency practitioners. The public register of authorised bodies and sanctions will improve transparency and allow businesses and creditors to make more informed choices, but the costs of the new obligation have yet to be worked out.
This article was co-authored by Rozerin Isik Paralegal and Helen Green Senior Associate.