Oral evidence: Insolvency, HC 936-iWednesday 4 March 2015
Oral evidence, 4 March 2015.
Witnesses
Irene Graham, Executive Director of Business Finance, British Bankers’ Association, Phillip Sykes, Vice-President, R3: Association of Business Recovery Professionals, and Bob Pinder, Regional Director, Institute of Chartered Accountants in England and Wales, gave evidence.
Chair
Good morning and thank you for agreeing to help us with our inquiry. We need to crack on, but could I just ask you to introduce yourselves for voice-transcription purposes, starting with you, Irene?
Irene Graham
Irene Graham, British Bankers’ Association.
Phillip Sykes
Good morning. I am Phillip Sykes, the Vice-President of R3, which is the insolvency practitioners’ trade body.
Bob Pinder
Good morning. Bob Pinder, Director of the Institute of Chartered Accountants in England and Wales. We represent about 145,000 members around the world and we are the largest insolvency regulator, with about 750 IPs out of a population of about 1,750.
Paul Blomfield
I wonder if I can continue with the same theme I was asking the previous panel, on the relationship between banks and their customers and how you view that as having changed in terms of insolvency and access to finance over the last couple of years
Irene Graham
Firstly, it is very important to stress that banks have, and for a long time have had, business support units. Those business support units are designed to help businesses in difficulty by working with them to trade out of that difficulty. That is very important for the industry: to work with the business in a consensual relationship to help them work through the difficulties. In that regard, the banks have worked very closely with the Institute for Turnaround to make sure that businesses that are facing those situations are very clear of what they can expect from the bank and the relationship with the bank in that situation. Many thousands of businesses have been helped through difficulty through those business support units, and it is very important for the banking industry that those specialist units work with the customer and help them through the difficulty and help them trade out of that difficulty as far as possible.
Paul Blomfield
Can I turn to the Tomlinson Report, which highlighted that several banks had engineered either defaults on mortgage loans or breaches of covenants between lenders and borrowers? How has the banking sector as a whole responded to those accusations? What has been done to restore public confidence?
Irene Graham
The Tomlinson Report, as Mr Tomlinson himself acknowledges, is very much focused on one institution. It is not appropriate for me to talk about that institution’s relationships with its customers, so it would not be appropriate for me to discuss in detail Mr Tomlinson’s report. From a banking industry perspective, as I have said, we have worked very closely with the Institute for Turnaround, which is very active in helping businesses in difficulty, in creating public principles so that businesses are clear what to expect from their banks in relation to any instance where the business is going through a distressed situation and how the bank will help that.
Paul Blomfield
As Tomlinson highlighted, the issues that I have referred to may have been limited in terms of the institutions but did create a lack of public confidence in the banking sector as a whole. Do you not think there is a responsibility to respond to that?
Irene Graham
Overall, as an industry, we take the restoring of trust and confidence very importantly. A series of actions have been taken in relation to that in relation to a range of programmes to support businesses, through mentoring, access to finance and a range of new finance options for businesses, working with partners. There is a range of focus on that for the banking industry, alongside the governance of various aspects of the industry. In relation to specifically businesses going through distress, as I say, it is very important from the banking industry’s perspective that businesses understand how a business will be treated through that process, and that is something that is a matter of public principles that have been agreed with the Institute for Turnaround.
Paul Blomfield
Mr Sykes, in August last year you wrote to the Chairman from R3 stating that the Government had proposed a number of reforms in key areas since our report. What are those changes that were made on the back of the Tomlinson Report and, indeed, our report?
Phillip Sykes
You have got some written evidence from us that picks up on your last report and identifies where these changes have happened, but just to run through them very briefly for you, the first and perhaps one of the most important ones was the new Complaints Gateway. That is now in place. That is working well. There has been a first year’s report on that—“Report on the first year of the Complaints Gateway”—which you have probably got; if not, we can certainly let you have a copy of that. That is worth a read and it shows that that process is working really well. There have been quite a number of other changes. We have had just recently the announcement—which I think was alluded to previously—in relation to insolvency practitioners’ fees and a new regime for that, which is going to have an up-front estimate. That has come from a really good working relationship with the Insolvency Service. They started off by saying, “We think we should scrap hourly rates and just go for a percentage fee”, and we pointed out that historically just percentage fees had been very unpopular with creditor bodies going back quite a long way. We have had a really sensible discussion with them and now come forward with what looks as though it is going to be quite a sensible working process going forward. Other changes have been in relation to the continuation of supply for businesses that go into an insolvency process. In the past there was the continuation of the utility supply, but things have moved on so much that IT has become a critical supply, and that is now being dealt with in the new legislation. Also, there were all sorts of other suppliers of utilities who were not necessary in the original body, so that has been dealt with. We have also had the question of creditor engagement, which has been very much on our radar as a profession. We want as much creditor engagement as possible and the new regime on the fees will help that, because you will get an up-front estimate and then you can engage on that. HMRC in particular have been very positive about that. Looking back at where we were two years ago, there has been some really good movement, based largely on the Committee’s recommendations. There are one or two areas where nothing has happened, but in terms of bankruptcy the level at which you can petition for it has gone up to £5,000. That is going to make life better for quite a lot of people struggling at that level. All in all, quite good progress.
Paul Blomfield
You did say in your letter that you had concerns that some “policies could have a negative impact on both creditors and the UK’s insolvency regime”. What areas of policy did you have in mind? What posed the greatest risk, in your view?
Phillip Sykes
There are a couple of areas that we were and, to some extent, still are concerned about. One was the complete abolition of physical creditor meetings. We have now reached a compromise with the Insolvency Service on that whereby it will be possible to have creditor meetings where a relatively small number—10% by number or value, or an absolute number of 10—require it. That element has been brought back. The other area where we do have concerns is that in the Small Business, Enterprise and Employment Bill there is a proposal that alongside directors’ disqualification proceedings there will be the ability to ask for a compensation order. 80% of disqualifications are made by undertakings, not through the court process, and our concern is that if you are sitting there as a director likely to be disqualified, and you may also at the same time be facing a compensation order, you are much more likely to resist giving that undertaking, because you then get clobbered with a compensation order. Our concern is that, given that there is only a limited amount of resource available to the Insolvency Service to prosecute delinquent directors, the more barriers that are put in the way of people putting their hands up and agreeing, yes, okay, they will give that undertaking, the more we will see the numbers drop off. We have enough concern as it is given the statistics: we report, say, 4,500 or 5,000 directors a year, and that leads to disqualification of around about 1,200. We do flag that as a concern.
Paul Blomfield
Is there any way you would seek to mitigate that risk, short of not making that change?
Phillip Sykes
Some of the things that have been proposed will help that. One is the fact that we are introducing electronic reporting on directors’ disqualification. The reports from the IP will have to be in within three months rather than six months, so that is shortening that process, and the Insolvency Service are taking powers that mean they can bring a prosecution for up to three years rather than two. Those are, if you like, mitigating steps, yes.
Mr Bain
One of the key issues that the Tomlinson Report highlighted is in relation to the nature of support that businesses receive once they have been referred to a bank’s recovery unit. Are you satisfied that these units now genuinely work to get businesses back on track, or is it still the case—as was highlighted by Tomlinson—that businesses are subject to extremely unfair and penal rates of interest and charges and are often asked to pay for reports and valuations on the basis of recommendations from the banks that are almost never in the businesses’ own interests?
Phillip Sykes
I am coming at it from the perspective of the insolvency practitioner brought in to advise either the company or the bank, and there are a couple of points to make. Business support units are there certainly, where appropriate, to support a company to come back to proper financial health and return to the good bank. The other role they have is to manage that debt on, and certainly they will be making it very clear to management that, “If you cannot get your act together to work with us in the way we want, you should look to refinance elsewhere”, and there has been a lot of that. In today’s market, I am finding that there are many more opportunities to refinance in a way there probably were not a year or two back. Those are the two aspects of it. From where I sit, yes, it is undoubtedly true that the business support units of banks are focused on a timescale. They have targets; they do not want these companies to be sitting in their business support units indefinitely; maybe two to three years is the sort of timescale that they want to either nurse them back to health, move them on or, in the worst case, some form of insolvency process. Equally, as has been mentioned in the previous session, banks have been selling off loan books. That is another exit route from business support units.
Mr Bain
We have heard that in some cases insolvency practitioners are seconded to the bank or even work for the bank itself, and in some instances have presented themselves to customers as bank employees. Does this not represent an unacceptable conflict of interest where this occurs?
Phillip Sykes
It would do if that individual was then to go on and take the insolvency appointment. The purpose of a secondment is transfer of knowledge in both directions; the secondee learns how the bank works, what the bank’s views are and the bank’s systems, and the bank gets the benefit of the expertise of the insolvency practitioner. In my experience, certainly, the banks take enormous care to ensure that if a secondee is working on a particular case then their firm will have no part in any enforcement proceedings.
Bob Pinder
I would just echo that as well, as a regulator. It was a question I put to one of the partners in one of the big four firms last year. It used to be quite prevalent that there were secondments, but he was saying that that is becoming less so these days because of the perception of conflict. When there is a perception of conflict, it can be deemed to be a conflict. There is a stepping away from secondments generally. They still happen, but it is not as prevalent as it used to be.
Mr Bain
Ms Graham, the charge, in a sense, against the banking industry is that it is keen at times to accentuate short-term profit from insolvency situations at the expense of looking at the long-term interest of business survival and hopefully growth again. How would you respond to that problem? That is what Tomlinson got to the heart of.
Irene Graham
Again, I repeat that Mr Tomlinson was very much focused on one institution. From the broader industry perspective, picking up your earlier question, the statistics that I have available would say that seven out of 10 businesses that go into business support units are nursed back to health and nursed back into businesses that are surviving. That shows the measure of focus the banks do put on helping a business through that.
Chair
What period of time does that cover?
Irene Graham
That covers a number of years—an average figure.
Chair
Could you give further details to the Committee year by year, going back, maybe, 10 years?
Irene Graham
I will see how far back that can go. I will certainly follow it up with the Committee separately, if I may.
Chair
Thank you.
Irene Graham
I spoke a number of times about principles. It is very important for the bank that there is no conflict of interest, and it is very important that there is an independent valuation and an independent practitioner. It is important also that businesses understand what they can expect. The principles relate to fees, complaints and how a business will be addressed. As my colleagues here have said, there is no interest for the bank to have anyone working on an insolvency who has a conflict of interest.
Mr Bain
Where companies are forced to refinance and the bank concerned gets a higher margin on the new loans, do you have information from across the sector of what sort of margins the banks make on such loans? What is the average margin?
Irene Graham
I am afraid I do not have that information. As an association, we have to be careful about taking anything that is related to pricing information. I do not have that with me today.
Mr Bain
Would you be able to provide that to the Committee?
Irene Graham
I will seek to see what we can do in relation to the association rules, which say we are not allowed to get involved in pricing.
Mr Bain
It is a very important point, because the key thing that comes from Tomlinson is the sense about the lack of impartiality of the whole insolvency process. Something that he was driving at and we want to get to the bottom of in our investigation is what safeguards are there to ensure that all the professionals who are involved in insolvency operate and are seen to operate, from the point of view of business and the public, in an independent manner. What recommendations would you make as to how the situation could be improved?
Irene Graham
There is a very important point to make: any insolvency practitioner is acting on behalf of the court, and the first and foremost priority that the practitioner has is to all creditors. That is their requirement under the law. It is also very important that they are members and part of regulated institutions that my colleagues here and others that you have heard from earlier oversee and regulate. It is very important from the banking industry’s point of view that that regulation and oversight is robust. That is very important. On the valuation side, it is also important for us. Banks have panels of valuers that are regulated by RICS. That is an important part of the process. We will continue to work with RICS and others on making sure that that is a robust process and conflicts of interest are addressed.
Mr Bain
The FCA is undertaking an investigation and review, which is due to report this summer. Do you think that there is a case for reviewing the Insolvency Act 1986 itself?
Irene Graham
My colleagues would be better to answer that point. The FCA review is into one institution and I do not know yet what that will say.
Bob Pinder
Are you saying reviewing the Insolvency Act in relation to Tomlinson?
Mr Bain
Yes.
Bob Pinder
What I would suggest is that we await the outcome of the FCA report, and if that suggests that there is an issue with the Insolvency Act 1986, the Insolvency Service will look to take that on board. Do not forget that there is a whole raft of consolidation of rules and legislation in the new-rules project that is ongoing now and being run by the service, so we will see a raft of new rules next year. If there is an opportunity to reflect on the FCA report following Tomlinson, then that is what will happen.
Mr Bain
You would advocate a change in culture rather than a change in the law.
Bob Pinder
If that is what the FCA report suggests, yes.
Phillip Sykes
Just to amplify that, there have been, since your last report, a number of changes. One I did not flag up was the report relating to pre-packs. As from this year, there will be an independent oversight of pre-pack transactions. Some of the changes that have been made, like the new gateway for complaints and so on, are changing the culture and are making step-by-step accretion, improving the existing Act. My own view and that of our members is that the Insolvency Act works pretty well. You get the US Chapter 11 viewpoint, which some people like, and then you get the European harmonisation viewpoint, which says it should all be much more court-driven. We have in many ways the best of both those worlds, and we have an Insolvency Service that is very aware of what is happening in the market and seeks to respond to it by amending rather than completely revamping existing regulation.
Mr Walker
In terms of support for SMEs, it is quite striking, Phillip, that you were saying earlier that there are many more opportunities to refinance than two or three years ago; there are some of the lowest interest rates we have ever seen on an underlying basis and over quite a long period of time; and yet the SME Finance Monitor finds that only a third of small and medium-sized businesses are currently using external finance. That is the lowest level that we have seen to date. Does the banking sector see that as a problem, or do you think it is because of the rise of alternative finance and alternatives to mainstream banking?
Irene Graham
That particular question is much more on not using any type of external finance and using internal resources. In terms of the question that the monitor asked about ability to gain finance when seeking it, around seven out of 10 businesses themselves say that they are successful in getting finance. The monitor reflects that, of those seeking it, seven out of 10 did get the finance they wished to. Many businesses do also—and it has been the case historically—use their own cash reserves and their own dividends, etc, in terms of investing into business. The other thing that is important from the monitor is that there is a perception of businesses that they will not be successful in getting finance. They are much more likely to get finance than they realise. That is something we are very focused on—trying to encourage businesses to come forward and ask for finance and know they have the opportunity to get it.
Mr Walker
We have heard quite a lot of evidence during our Support for Business inquiry about the increased availability of alternative sources of finance, and that is competition for the banks.
Irene Graham
We are very supportive of that.
Mr Walker
What can be done to help match small businesses that are seeking finance with the alternative credit providers who are looking to offer it? Do you feel the banks have a role in that, or is that too much working with the enemy?
Irene Graham
Not at all. We are very supportive of working with alternative finance. There are a number of direct partnerships between banks and community finance institutions or peer-to-peer institutions. Many banks already signpost thousands of businesses to alternative finance providers and also to accountants and brokers where the institution itself cannot help. That is very much fundamentally something that happens already. We are also working very closely and very much support the Small Business, Enterprise and Employment Bill, which is seeking to implement a referrals process more systematically. So, the banks already do have signposting and referral partnerships; this will bring an added layer to that and we are very supportive of that and working very closely with the Government in relation to that. Most importantly, it is for the business to get the right finance at the right time. We very much do a lot of access-to-finance sessions with angel investors and community finance institutions and also equity providers like the Business Growth Fund and the asset financers, really focusing on the fact it is most important businesses get the right type of finance and the right mix, and sometimes that will not be from the bank. How we can help in passing them on to others is an important factor in our access-to-finance agenda.
Mr Walker
We focused in a lot of this on the relationship between the creditors and the insolvency providers. To what extent can insolvency providers be signposting the borrowers rather than just the creditors to some of the solutions? Do you feel there is a role for the sector in that?
Phillip Sykes
Yes. They do so on a fairly regular basis. There is a big broking community out there, and one of the brokers’ routes to market is marketing to insolvency practitioners—saying, “Look, bring us your problem children that you get involved in and we will see if we cannot find an answer for you”. That already exists. Certainly within my own firm, we have a specialist team that looks at providing finance for people who are referred to us who have difficulty. Most firms of accountants you will find will have people within them, on the corporate-finance-type side, who are looking at how to access finance for whatever size of business the practice deals with.
Mr Walker
When they are coming to you as an insolvency practitioner, presumably it has reached a stage where insolvency is considered the most likely outcome, but we hear the banks saying that they can turn around seven out of 10 businesses in some of these situations. Is there a proportion that you are seeing that are coming to the insolvency practitioners and are then getting turned around and not having to go through the full insolvency process?
Phillip Sykes
Yes, absolutely.
Mr Walker
Could you give an idea of the scale of that?
Phillip Sykes
The scale is a difficult one, because when Irene talks about seven out of 10 being turned around and going back, they will not have ever come near an insolvency practitioner. Certainly, if it is referred to an insolvency practitioner or to a restructuring group to look at, it is usually looking at other alternatives: “What is the way forward?” “Is there a real issue?” As to what the proportion of those would be that fail or do not fail, it varies enormously from sector to sector and year to year, to be honest.
Mr Walker
If there is any detail that you might be able to write to us with, that would be quite interesting.
Phillip Sykes
I will look within R3; we will see what sort of information we have on that as to numbers that come in.
Bob Pinder
Anecdotally, if you talk to some of the peer-to-peer lenders, they would tell you they have no bad debts.
Mr Walker
Yes. That is the interesting point. The Chairman and I attended an event talking about alternative finance. There is great excitement around this area and there is great interest, but there was a feeling amongst some of the people there that it could be storing up some problems for the future.
Bob Pinder
We run an annual conference, and certainly one of the sessions we are running this year is getting IPs and those alternative finance providers together to talk through some of the issues. It is very topical.
Mr Walker
From an R3 and, indeed, ICAEW perspective, what would be the insolvency procedure if, let us say theoretically, a business was funded outside of a traditional banking intermediary—say from crowdfunding—and it went into insolvency? How would you advise in that type of situation?
Phillip Sykes
There are so many different structures within crowdfunding that it is quite difficult to give you a precise answer to that. The main point, really, is that the Insolvency Act as it currently stands is perfectly capable of dealing with pretty much any structure that you throw at it. Crowdfunding could literally just be a bunch of people tossing some money in, in which case they will just be unsecured creditors like any other creditor. It may be that they are doing it through a single conduit, in which case there will be an IP who will deal with that conduit—that company—which is no different, really, from a banking syndicate, where you have a lead member of that syndicate and you deal with them. There is nothing that new under the sun when it comes to it; the difference is the way people are being accessed to put their money in. The structures when you get to the engagement with the company are not so very different.
Mr Walker
One of the arguments that has been put to me is that the real risk in terms of crowdfunding things is not the downside but the upside. If you have a business that had substantial assets and effectively went out of business, how do you determine who is the real owner in a situation where it has been crowdfunded and the structure in terms of equity and debt is not as clear as it might be otherwise?
Phillip Sykes
If you have got a problem with the documentation, you have got a problem with the documentation, and you may end up having to go to court to get something to deal with that. Because it is such an unregulated area, there are no norms and so, yes—it is a perfectly valid point—you could end up with some very unclear documentation as to whether you are a shareholder, some sort of bondholder or purely an unsecured creditor, levels of priority, and so on. I do not disagree.
Mr Walker
You mentioned earlier the point about security of supply. It was the R3 campaign “Holding Rescue to Ransom” that was addressing that issue. How well do you feel that has been addressed now? Do you think that issue is fully dealt with, or do you think it is something that needs further action?
Phillip Sykes
It needs to be kept under review. Certainly the proposals that have been made we welcome hugely, but it needs to be kept under review. It did not go as far as we would have liked, as you know, but then perhaps ours was a counsel of perfection. I do think that the culture has changed in the sense that creditors will try to work with an insolvency practitioner. It is not unreasonable in certain circumstances that they should have some form of lien security, and you would be going against well-established English law if you were trying to get rid of some of those—and they are referred to as being ransom creditors. We really welcome the steps that have been taken, particularly on the IT front. We are still looking at the whole merchant-acquirer area and how that works. To take it further, yes, quite possibly; you just have to be aware as to how the market is changing and where those key suppliers are. Again, that is something the Insolvency Service has regularly on their radar and, if they do not, we will be reminding them about it.
Caroline Dinenage
The Daily Telegraph reported in October last year that over half of UK start-ups fail within five years. We would be very interested in hearing your views on why that happens, but, as we have not got masses of time, perhaps you might want to put that to me in writing after the event. Really, the question is: do insolvency practitioners take a different role when dealing with very small companies in difficulties, or is it just very much a broad-brush approach?
Phillip Sykes
No. If you are an insolvency practitioner, every case is different. Although the law, as applied, is the same, the people you are dealing with and the assets you are dealing with are going to be different in every case, and you tailor your approach to what you are dealing with. If you are dealing with a small start-up, that may well be a situation where you end up selling that business back to the existing management because all the intellectual property is in their head and they are the ones who will take it forward. Then there are regulations around that as to what they can and cannot do going forward. The answer to your question, “Do you adopt a different approach to small start-ups?” is you adopt a different approach to pretty much every company you deal with. It does depend on the personalities and the assets and what you get to deal with.
Caroline Dinenage
According to R3, late payment caused 20% of insolvency last year. Has the Prompt Payment Code made any difference? What steps should be taken to ensure that the signatories of the Prompt Payment Code adhere to its regulations?
Phillip Sykes
There is quite a lot of regulation out there, because as well as the Prompt Payment Code, for larger companies you have also got the accounting reporting requirements as to what sort of code they are adhering to and what they do and what they have. That information appears in their accounts. The trouble with the Prompt Payment Code—if you can call it trouble—is that it is purely voluntary. It is at the behest of the creditor to invoke it. I think it is true to say that there is not really yet a culture in commerce today where people automatically reach for it. That is something that possibly will change, although it has to be said when interest rates are as low as they are at the moment, if you are trading okay there is no massive push for it. It would be good if one did see a cultural change so that people really felt that they should be abiding by that code and not just at the behest of the supplier.
Caroline Dinenage
How would that cultural change come about?
Phillip Sykes
The press would help; if Government is focusing on it. Government is doing its bit, after all, by trying to stick to the 30-day rule, although that does not always happen. There is that aspect. Certainly a number of the large companies are also trying to do it. The more people that do it, the more you will see it coming into the culture that when you agree to pay somebody on 30 days you mean it and you will do it. It is moving, but it is very slow.
Chair
Thank you. That concludes our questions, except I have just got one to the BBA. In the previous panel, Mr Healey of NARA said that some banks appointed unregulated receivers to carry out administration. Were you aware of this? What do you think the scale of the problem is? What do you think the motives are?
Irene Graham
I was not aware of that. My understanding is the bank really looks at appointing those that are regulated and normally has a panel of those. I do not, therefore, know of the instances where it is not a regulated practitioner. Whether that is down to the borrower’s adviser’s request for a particular receiver or whether it is given a particular instance—that in the area, or whatever, there is not a regulated receiver—I do not know, but my understanding certainly from the industry has been where possible, as you suggested, they seek to appoint those that are regulated, either through NARA or RICS.
Chair
From my position and observation, I would reasonably expect there to be regulation for a purpose and you would reasonably hope that banks would understand and accept that purpose and underpin it by only employing those that conform to that regulation. Could you talk to Mr Healey and, indeed, anybody else who might be able to give an insight into this issue and send us some supplementary evidence based on the research that you do with them?
Irene Graham
I certainly will do so.
Chair
Thank you. That concludes this session of questioning, and we now move on to the Insolvency Service. Examination of Witnesses
Witnesses
Sarah Albon, Chief Executive, Insolvency Service, Graham Horne, Deputy Chief Executive and Director of Operations, Insolvency Service, and Anne Willcocks, Director of External Affairs, Insolvency Service, gave evidence.
Chair
Can I thank you for agreeing to help us with our inquiry? We are somewhat depleted in numbers because this is coincidental with Prime Minister’s Questions and there are members who are involved in that. However, we have quality if not quantity. Please introduce yourselves for voice-transcription purposes, starting with you, Graham.
Graham Horne
Graham Horne, Deputy Chief Executive of the Insolvency Service.
Sarah Albon
Sarah Albon, Chief Executive of the Insolvency Service.
Anne Willcocks
Anne Willcocks, Director of External Affairs, Insolvency Service.
Chair
I will repeat what I said to the first panel. Some questions will be person-specific. That does not preclude any others from jumping in and adding to them. Equally, on the more general ones, if you feel that your views have been adequately expressed by another speaker, do not feel obliged to participate. My first question is to you, Sarah. You only started in the job last month. I am sure you are totally settled in now—feet under the table, etc. What are your main priorities to start with?
Sarah Albon
As you say, I have been in post now for just four weeks. It makes sense for a new Chief Executive, particularly one who is new to the organisation, to spend a bit of time understanding that organisation and understanding the work that it does and not to jump to conclusions about what needs to be changed, but I can certainly give you a few observations.
Chair
If you could just keep them brief, I would be grateful, but yes.
Sarah Albon
I will. I have come to an organisation that, as this Committee is only too aware, has gone through a period of really considerable change. Externally, insolvency cases handled by the service have dropped from 80,000 some five years ago to an expected out-turn of between 20,000 and 23,000 cases this year. As you would expect from anybody, it has had to respond to that. There has been a significant reduction; staff numbers have halved and 15 out of 36 offices have closed. That is inevitably quite bruising on an organisation, but in spite of that there have been some real positives. Customer satisfaction is at 95%. Recently, they have retained customer service excellence accreditation, and stakeholder confidence, which I know has been, again, something that this Committee has focused on and been concerned about, has increased to 73%. We have been launching new services. Online redundancy claims will enable 75,000 claims a year to be made online and we expect to maintain the levels of disqualification this year at about 1,200. That is not to say that I am coming into an organisation and complacently sitting around thinking, “This is fantastic. It is all going in the right direction. There is nothing more to be done.” You always want to do more to push to greater standards of customer service improvement, and we have to be aware that the workload is still in decline, so we are likely to face further challenges on efficiency. Supporting the service to continue to focus on improving the services that it offers to the range of customers that it has, and to maintain the focus on integrity and confidence from the public in the overall insolvency regime whilst bearing down on internal cost will prove to be a challenge. I plan to spend another few weeks really reflecting on what I am seeing and discussing that with my senior leaders before I reach any conclusion about courses of action or new strategies.
Chair
I have a question about your approach to insolvency. If you have a company that has become insolvent, what is your priority? Retrieving money for the lender? Preserving jobs? How do you influence administrators, or do you just leave it up to them to determine?
Sarah Albon
Whether it be an official receiver or an independent insolvency practitioner, the regime will set out certain statutory obligations on what they have to do in an insolvency. Clearly, if a company is insolvent, there is a duty to creditors that has to be followed. At the same time, if jobs can be preserved, if there is a part of the company or all of the company that can be rescued and continue to trade, I do not think there is likely to be a conflict with the interests of creditors, because in an insolvent situation inevitably you have not got enough money to pay everybody everything that is owed. If you can keep a company going properly and appropriately solvent, everybody would win from that situation.
Chair
You partly anticipated this next question in your previous answer. We reported in 2013 that the reduction in costs and staffing may put pressure on you. Are you satisfied now that you have the resources necessary to carry out the range of responsibilities that will confront you?
Sarah Albon
Yes, I am. What I have seen is a very constructive relationship between the team at the Insolvency Service, BIS—who partially fund, where we do not get money from fees—and the Treasury, but it is the case across the whole of the public sector, clearly, that there is real constraint on the ability to spend money, and that is entirely reasonable. We have had to face a situation of significantly and swiftly declining workload. That is difficult for an organisation, but it is completely appropriate that you respond to it and reduce your resource in order that you can still deal appropriately with the workload that you have.
Chair
What you have said is quite correct. The problem is if your workload suddenly expands and you only have a reduced capacity to deal with it. What do you have within your organisation that could anticipate changes in the workload and maybe an increase in that workload?
Sarah Albon
We have a well-qualified and professional modelling team, who have built up a good understanding and a good working econometric model of the wider economic factors that tend to cause a shift in insolvency. They have a good view of the leading indicators that would suggest that there will be a change in the level of insolvencies coming through. Together with that econometric modelling, we have a group that we call the consensus group, which is a group of internal and external experts who take the raw model and bring their expertise and their working knowledge to that model and challenge it. From that, we form a view of the likely trend in the different types of insolvency. That enables us to plan ahead both for downturn and upturn, to the extent that that is possible. I am satisfied that if we saw an increase in insolvencies, we would be able to respond to that. Clearly, as any organisation, if we saw an overnight doubling or trebling of the level of insolvencies, which is extremely unlikely, that would be a challenge for us. It would be a challenge for any organisation that had a sudden turnaround and a sudden increase in work. Having said that, we have some areas of our work that are discretionary; we have an ability to use external professionals ourselves and instruct outsiders if we need to do that to deal with burdens on supply. Our agenda to digitalise the parts of the process that we can also will allow us over time to use fewer people doing some of the processes, which means that we are not quite so vulnerable to change in workloads as we would have previously been.
Caroline Dinenage
I just want to know—I am not sure who wants to answer this—how you would describe the trends within the latest insolvency figures.
Sarah Albon
Broadly still down, but the curve is getting flatter. Graham, I do not know if you want to pick up.
Graham Horne
Yes. We are expecting a 15% drop in this year’s numbers over last year’s numbers, and we think next year there will be a similar drop in case numbers. We are making some changes to petition levels, which should further depress bankruptcy numbers. We really think 2015-16 will be down on 2014-15 and do not really anticipate any increase in cases at least until 2016-17 and possibly even later than that. The econometric models are also not showing any signs of an upturn in case numbers.
Anne Willcocks
It is perhaps worth saying that it is debtors petitioning for their own bankruptcy that have particularly been the ones that have fallen so steeply. Those are the cases that have caused this huge drop.
Caroline Dinenage
So that has gone down.
Anne Willcocks
That has gone down dramatically. It is falling at a slower rate than before, but that is where the drop has been sharpest. The key factor that seems to influence that is the overall level of household debt. There are other factors that also play a part, but the household debt factor is the one that has the biggest correlation, with quite a significant lag. We monitor that very closely to see what is happening.
Mr Bain
In our 2013 report, the Committee was sceptical that the income-generated model for the Official Receiver’s Office was likely to be sustainable. Given the fall in insolvency casework that you have pointed to this morning, what work have you and the organisation been doing to improve the sustainability of the Insolvency Service’s funding?
Sarah Albon
The service has been working closely with BIS colleagues and with the Treasury to look at how fees may be modelled in the future, but through that process we have not found that the fees in that Official Receiver work have been insufficient to cover the work that remains. The challenge for us has not really been that the fees were not enough; it is just being able to respond sufficiently quickly to reduce our resource to match the work. I do not think it would be appropriate for fee payers or, frankly, for central Government funders to be left in a position where we do not reduce our resource to match our workload and somebody else has to pay for us to stay inefficient. I do not think that is a tenable proposition.
Mr Bain
Are you confident that the structures that you have put in place in terms of fees will see you through to the next Spending Review in the next Parliament without the need for further changes?
Sarah Albon
After the election, and in the context of the Spending Review, I would expect to want to discuss with incoming Ministers and with the Treasury what our ongoing fee structure should be in Official Receiver but also across the range of our activities. You should always look to keep under review structures and to understand both the effect that a fee structure can have in the policy world and the behaviours a particular fee structure will drive as well as overall the income and the benefit that is coming for us.
Mr Bain
Also in that report in 2013 we were critical about the levels of stakeholder confidence in the Insolvency Service’s investigations and enforcement regime. You have said that stakeholder confidence has increased from 69% last year to 73% now.
Sarah Albon
73%, yes.
Mr Bain
What work are you doing to further increase that and see that improvement sustained?
Sarah Albon
We have just had the results of the latest stakeholder survey. We use an external body to go to stakeholders on our behalf and to survey their satisfaction. That is a range of different stakeholders, from a group of people who know us very well—the insolvency-practitioner profession, accountants and lawyers—to independent directors of companies, many of whom will not have had any direct contact with us at all and, indeed, will not necessarily welcome any. The thing I have been particularly taking confidence in myself coming in is that the groups of people who are showing most confidence in the work of the Insolvency Service are those who know us best and have most dealings with us, which is not always the case in all confidence surveys. What do we do to stay confident? There are two strands always. Partly it is about a communication strategy. People who have not come across your organisation and have had no dealings with it are likely to be neutral at best unless you spend some time and effort in explaining to the wider world what you do and what your successes are. There is always something about communication, but at the heart of it there is doing a good job. You are unlikely to get confidence from your stakeholder community unless you are doing well. That is really why I am saying that it certainly gives me confidence coming into the organisation to see that those with the greatest confidence are the ones that are closest to what we do.
Mr Bain
If I can turn to the issue of pre-pack administrations and the Graham Review, that review recommended voluntary scrutiny of pre-pack administrations, and the Government accepted the recommendations but said they would “loosely” scrutinise what the Insolvency Service was doing in terms of that. What view do you have on how workable the Graham recommendations are?
Sarah Albon
We think they are workable. We are hopeful that we are close now to seeing the pool of specialists being ready and launched. That should give greater confidence to creditors that where there has been a pre-pack it is appropriate and it has got the best deal for creditors. We have continued to monitor compliance with the existing statement of insolvency practice, SIP 16, and will continue to do so. We have got in the Bill that is going through Parliament backstop powers to step in and to do something about that on a compulsory basis rather than a voluntary basis, but we are hopeful that the voluntary measures will work. We need to recognise that pre-pack is not necessarily a bad thing. It is a bad thing to the extent that creditors do not get the value that they should from the overall administration. We need to strike the right balance between transparency, giving confidence to creditors that the process has been appropriate and fair and that the value in the assets has been the right one, but without acting in an overly draconian way if that is not necessary. We will continue to monitor it and, as I say, we have the legislative backstop if it is required.
Mr Bain
It is in the Small Business, Enterprise and Employment Bill, yes. On that issue about how you are looking into how the insolvency industry is implementing the recommendations of the Graham Review, what metrics are you putting together to analyse how they are implementing it—to look at their performance?
Sarah Albon
Can I ask my colleague Anne, who has been much more directly involved and will get the detail of that right? I am otherwise probably going to say I am going to have to write to you, but I suspect Anne has the knowledge in her head.
Anne Willcocks
As part of Teresa Graham’s report, she had in-depth research done by the University of Wolverhampton, so before considering or advising Ministers on whether to use the reserve power, we would want to see how some of those metrics had moved, because some of the understanding behind the recommendations was that in a connected-party pre-pack the outcomes were not as good as in unconnected pre-packs. Therefore, if one looks again, hopefully that will give us some idea of whether this—the greater transparency and the stronger SIP 16, because that is being revised as well to be further strengthened—is working. We can look at how well there is compliance with the new SIP 16, and we will also want to talk to creditors about their perception of how it is working and whether they feel this is working well.
Chair
Just before you come in with your next question, William, earlier, Sarah, you said you were “hopeful” it would work. Could I just stress that this is an issue that we have looked at on several occasions and, whilst I cannot commit any future BIS Select Committee, I suspect that future BIS Select Committees will want to monitor it? Could I say that I think we will be looking for a rather more robust approach than being hopeful? We would like to see a very close monitoring and, indeed, if it is not working well, then we would expect to see proposals from you.
Sarah Albon
I fully accept that. I had not intended to imply from that that our plan was to simply hope it would be okay and do nothing more. As Anne says, we intend to monitor it closely. We took the backstop statutory powers because we accept that if this does not work on a voluntary basis then we would need to do something that was compulsory, and we will only know if we need to use those powers if we have proper and appropriate monitoring and transparency about that. Indeed, I am sure that the scrutiny of any future Committee will play an important part in helping Government determine how well the overall regime is working and whether or not further action is required.
Mr Bain
If I could just specifically ask Anne, one of the recommendations of the Graham Report was that SIP 16 was to be amended to require valuations to be carried out by a valuer who holds professional indemnity insurance, and the purpose of that was to increase confidence that the sale would be for a fair price. Is there evidence that you have that indicates that that is being done so far?
Anne Willcocks
The SIP16 is in the process of being revised and is close to coming out.
Mr Bain
Would that be before the dissolution or is it likely to be after the end of March?
Anne Willcocks
It is very close, but there is not very much time left before dissolution.
Mr Bain
We shall wait and see on that one. Pre-packs by their very nature have to be undertaken very quickly. There have been some questions raised about who would form a pre-pack pool on such limited and short notice. What response would you have to that issue and also the connected question about whether there is a risk that the pool would fail to attract the right calibre of members?
Sarah Albon
Anne will be able to say more about the calibre of members, but the intention is to have a sufficiently sized pool who understand the requirement, as you say, to act swiftly when required so that, without over-burdening any one member of it, we are able to respond at appropriate speed. Anne, I do not know if you want to say more about the recruitment process and the quality.
Anne Willcocks
Yes. This is not something that we are running; it is being run by the industry, but they advertised for pool members and got a very good response of, I gather, quality candidates. I do not think they have concerns about the quality of the people who have put themselves forward.
Chair
Can I just come on to regulation? Can I first of all raise a question that was put to the previous panels? We have heard that in some cases insolvency practitioners are seconded to the bank or, indeed, work for the bank itself. I can quite understand why a bank may wish to have a secondee and there would be a contractual relationship between them, but in some instances they have presented themselves to customers as bank employees. Are you aware of this? Do you think, if it is taking place, it is a conflict of interest? If so, what do you think you should do about it?
Sarah Albon
IPs are governed by an ethical code of conduct and they are officers of the court, so they are under strict rules about which appointments they can and cannot take. I do not know, Graham, if you want to say any more about anything you may have come across practically.
Graham Horne
I suppose it is a question of: if they are working for the bank, are they acting as an insolvency practitioner? They probably are not; they are acting as a bank employee. Presumably, therefore, if they are representing themselves, they are representing themselves as an employee of the bank. It is a question of on what basis they are working for the bank. They could not be working as an insolvency practitioner within the bank envelope, because they are only an insolvency practitioner if they are carrying out insolvency work. As Phillip Sykes said, they would be not capable to take an appointment had they been involved in the bank.
Chair
Yes. It would be perfectly legitimate to advise but not to carry out.
Graham Horne
Yes.
Chair
That is the distinction, and certainly we have had anecdotal evidence that this has taken place.
Graham Horne
I have not seen any evidence to that extent, but we would want to look at that very carefully and consider whether it should be the subject of a complaint to the regulated body.
Chair
Just more generally, what steps are you taking to improve regulation of the market? I appreciate, Sarah, having only been in post four weeks or so, you may wish to delegate this one.
Sarah Albon
Yes. I can tell you some of it and I would invite my colleagues to chip in and add to what you have recognised kindly, Chairman, as my own fairly limited knowledge. We are taking steps to strengthen the regulatory regime. We act at the moment as both regulator directly and oversight regulator, and we have recognised that there is a potentially inherent conflict in that for us, and so we are stepping away from the role as a direct regulator of IPs and strengthening our powers as an oversight regulator of the individual professional regulatory bodies. As an oversight regulator, really all we have previously had the power to do is to say, “You can no longer act as a regulatory body”. That is a nuclear power and one that is, therefore, unlikely to be used. There is an argument, therefore, it is unlikely to be effective and you rely on relationships—and they can be very powerful, but it is not enough. We are taking powers to have financial sanction over the individual regulatory bodies if we think that is appropriate and also, if we find a case where we think the regulatory body has not acted appropriately and has not taken an appropriate sanction over one of its members, we will have the power to refer that to the court and to effectively intervene in an individual case and to seek to have a sanction imposed against an individual practitioner. Anne, I do not know if you want to chip in on any of that.
Anne Willcocks
Certainly. The other thing that the Small Business, Enterprise and Employment Bill does is give regulatory objectives. That will apply both to us as oversight regulator and to the individual RPBs. In terms of how we are operating, we are trying to be much more transparent about how we act as oversight regulator. We have set out monitoring principles so that people understand what we do. We are now publishing our monitoring reports and what the response is from the regulatory body and, if there are follow-up visits—which there are if there is anything worrying—then we publish those as well. We have agreed common sanctions across the different RPBs, because it is really important to try to drive consistency across the different bodies. The ICAEW and the IPA have agreed to have a common reviewer of complaints. Then we have got this new gateway for complaints, which is within the Insolvency Service. This not only gives us a bit of a feel for how quickly the regulatory bodies are dealing with complaints and what the outcomes are, but you can also see themes emerging. If we see there are a lot of complaints about IVAs, then that is something we can pursue and see what action we need to take on that particular issue, because it may be one of perception or there may be something regulatory that we need to address. That will be a really helpful tool going forward for us and it is more accessible; people can understand where they have to complain to.
Chair
Can I just raise an issue that was raised by R3? They have expressed concern about the expanding role of the Insolvency Service in terms of its duty as an oversight regulator. In many ways we welcome that, but we have to recognise that you do have budget restraints and being given extra roles and responsibilities within the straightjacket of a particular budget is going to cause you difficulties. How would you respond to this concern?
Anne Willcocks
This function is funded by a specific fee, which is paid by the regulatory bodies, and we are going to be looking again at that fee to make sure that it does cover what is needed.
Chair
They have been warned.
Anne Willcocks
They have been warned. It will take a bit more resource to make sure that we are properly resourced to do this.
Chair
My supplementary to that, which you have probably anticipated, is: would you need extra resources from the Government?
Sarah Albon
I think not, because it is appropriate that those that are regulated bear the cost of that regulation and that we are transparent about what we do so that they can bring pressure on us if they think that we are not being efficient in the use of the fees that we raise.
Chair
Lastly, you have mentioned this Complaints Gateway. How long has it been established? What use has there been of it so far? How well-known is it as a service?
Anne Willcocks
We set it up in June 2013. In the first year there were 941 complaints, which is more than there were to the recognised bodies before, so it is already showing that people have found out where to come. Of those, 170 were rejected—things like complaints that people lost money in insolvency, which is obviously not a regulatory matter. Then we had 547 complaints in the next six months. Given that it is from a standing start, it is already getting a good level of complaints and we will try to make sure that, with gov.uk, which is getting a lot of hits for insolvency, we signpost people well, and we will try to work with others who signpost creditors and others to make sure they know where to complain. We are constantly looking to make sure that we have got the right routings so that people do find it and do know where to go.
Chair
That is all very interesting. You said that losing money is not in itself a justification for a complaint, but presumably the processes or potential perceived conflicts of interest or procedures would be a basis for complaint.
Anne Willcocks
Absolutely.
Chair
Could you send us a breakdown of those complaints that you have had, what they covered and what the outcomes were?
Anne Willcocks
Yes, certainly. We did publish a report after the first year, and we can let you have that.
Chair
That would be very helpful.
Anne Willcocks
In our annual review of our oversight role, we will be updating that. The first one has already been published and the next one will be published shortly, and we will certainly send that to you as well.
Chair
Thank you very much. Have either of you any further questions? That concludes my questioning and that of the Committee, then, so can I thank you for your co-operation and just repeat what I said to the other panels? If in retrospect, when we have read through the transcript, we feel that we need to ask you one or two further questions, we would be very grateful for your co-operation in responding to them. Similarly, if you feel that perhaps you would like to elaborate on an answer that you have given to one of our questions today, feel free to do that in the form of supplementary evidence. Thank you very much. Oral evidence: Insolvency, HC 936-i 36