Official Report: Minutes of Evidence

The Chairperson (Mr McGlone): With us today are Mr Richard Monds and Mr Jack Reid. It is good to see you both again. Thank you for your help in clarifying quite a few issues for us; that has been very useful. Do you want to make an opening statement to the Committee on where we are in the round?

Mr Richard Monds (Insolvency Service): I do not have an awful lot to add, Chair, to what we said at our most recent meeting a couple of weeks ago. In the interim, we responded to a last-minute question about partial authorisation. There seemed to be a little bit of clarification required, which we provided to the Minister. I think that they have communicated the matters that were raised then with you. At last week's meeting, we have had further clarification about the backlogs in the service and a couple of matters relating to Justice Deeny's comments on the draft legislation. We are preparing a response to that, which will be issued to you from the Minister in due course. That is the up-to-date situation.

The Chairperson (Mr McGlone): It would be helpful to Members if you outlined the detail of the new clause you are introducing.

Mr Monds: Jack, do you want to say a few words about that?

The Chairperson (Mr McGlone): Tell us how it will work.

Mr Jack Reid (Insolvency Service): Is that the clause about regulation and the regulatory bodies?

The Chairperson (Mr McGlone): The regulatory objectives and the like.

Mr Reid: The clause has been included to address the concerns that were raised by Mr Jim Allister. It will not create the code of conduct for insolvency practitioners (IPs) that he was after; it takes a different and perhaps more effective route to regulating or policing their conduct. Regulatory objectives will be put in place that the regulatory professional bodies will be required to adhere to in their regulation of insolvency practitioners. There will also be penalties that will apply to the recognised professional bodies (RPBs) if they do not maintain a satisfactory standard of regulation. The Department will also have the power to intervene directly by applying to the court for action to be taken against an insolvency practitioner, if a recognised professional body is dilatory in doing so.

The Chairperson (Mr McGlone): Grand. That appears to cover quite a bit of it. Will you talk me through the process? The regulatory objectives in clause 14A and article 350C are to have a system that:

Who makes sure that that happens? Do you have to wait until someone lodges a complaint with you? In that case, you will not be aware of it until something goes off the rails.

Mr Reid: Not necessarily.

Mr Monds: It will be the responsibility of the recognised professional bodies to ensure that the regulatory objectives are put in place by which the insolvency practitioners whom they authorise must abide. The Northern Ireland Insolvency Service and the Insolvency Service in Great Britain will carry out regular monitoring of the recognised professional bodies by going into an organisation and looking at what monitoring functions are carried out and how they do them. We do this on a rolling basis in partnership with our colleagues across the water. There is an annual programme of inspection whereby every recognised professional body is inspected every couple of years to ensure that they have in place appropriate, suitable and robust processes and procedures for monitoring the insolvency practitioners whom they regulate and authorise. That is the monitoring process.

The Chairperson (Mr McGlone): Just talk me through this. I am trying to narrow this down to a problem situation, where either the insolvency practitioner has overlooked something or dealt with matters unprofessionally or shoddily. What is the process then? In other words, how do you discover that other than by doing an audit? Are these just spot checks? Obviously, you do not go into every insolvency practitioner.

Mr Monds: We carry out monitoring reviews of the recognised professional bodies. They authorise individual IPs, of which there are hundreds around the country. There are seven recognised professional bodies responsible for authorising IPs.

The Chairperson (Mr McGlone): Who checks that the work is being done properly?

Mr Monds: The recognised professional body will carry out monitoring inspections of their insolvency practitioners.

The Chairperson (Mr McGlone): On a spot-check basis.

Mr Monds: I am not entirely sure, but I imagine that they do so regularly, and there are reviews.

The Chairperson (Mr McGlone): I am not saying that this is a huge problem, but it has been highlighted. A member of the public, for example, may draw a case to your attention by saying, as in the case highlighted by Mr Allister: "We have been really badly treated here and are out of pocket substantially". What is the process for drawing it to the Department's attention under this proposed new clause?

Mr Monds: Initially, the complaint would be made to the recognised professional body. In the case that Mr Allister referred to, the recognised professional body was the competent authority that licensed that IP. Under this legislation, the Department will no longer be responsible for licensing or authorising IPs. We will just carry out the monitoring of the recognised professional bodies. Any complaints against an insolvency practitioner will be made to the recognised professional body, which will carry out a review and investigation of the circumstances. They will be able to impose a range of sanctions, including and up to removing authorisation.

The Chairperson (Mr McGlone): I have one final question before I hand over to Paul. Some of those regulatory and professional bodies are not based here. How do you work cross-jurisdictionally?

Mr Monds: I think that five of the bodies operate in both —

Mr Reid: Six of the seven are recognised in both jurisdictions. They are recognised by the Secretary of State in Great Britain and by DETI in Northern Ireland. If someone in Northern Ireland has a complaint about the way in which their case has been dealt with by an insolvency practitioner who is licensed by an RPB operating in Northern Ireland, they would make their complaint to that recognised professional body in the first instance.

The Chairperson (Mr McGlone): What happens if the response of the professional body is inadequate or not up to standard? Does the Department kick in then?

Mr Reid: That would have to be looked into. That is outside statute law: it is procedural. In Great Britain, a system has been established to deal with the issue that you raise. There is a facility to make all complaints about the conduct of insolvency practitioners directly to the Insolvency Service, which screens them to decide whether they have merit. If they have merit, the service refers them to the recognised professional body. Again, I am not entirely certain, but I imagine that they can monitor the recognised professional body to ensure that it takes adequate action. All recognised professional bodies are required to have a complaints procedure in place.

The Chairperson (Mr McGlone): I will ask the inevitable question: why not incorporate something like that into the Bill?

Mr Reid: The system has been put in place in an adequate manner in GB without legislation. It does not affect anyone outside government: it is internal to the operation of the Department of Business, Innovation and Skills in England. It should be possible for a Department to establish an administrative procedure and control the actions of its own staff without having to enshrine the procedure in legislation.

Mr Frew: After your questions, Chair, and the answers, I am more confused than ever. What is the difference between regulatory functions and regulatory objectives and the code of conduct?

Mr Reid: In broad terms, the professional bodies carry out the functions. The regulatory bodies have two main functions, one of which is to authorise consultancy practitioners to license them to do their jobs. The other function is to monitor their performance to see whether they are doing their jobs satisfactorily. The objectives will be the standards against which the monitoring will be performed.

Mr Frew: So if something goes wrong or a client or customer feels wronged, DETI will have a monitoring role with no real enforcement powers or teeth.

Mr Reid: DETI will have very clear and powerful enforcement powers against the regulatory professional body — it could not be more powerful — if it does not perform its function and adequately address complaints from the public.

Mr Frew: Can you illustrate what those functions are? What are those powers, in simple terms, and when they will be applied? We have seen it so many times in the public sector when there is a complaints process. It is simply a process whereby, when you get to the end of it, the complainant will not be satisfied, and the problem has been smothered or suppressed. Someone gets a rap on the knuckles, says that they are sorry and that it will not happen again, and we all move on. How can you assure the Committee that that will not be the case in any complaints procedure and that DETI's powers will be used to the full and that there will be an appetite to bite? Can you explain exactly what those powers will be?

Mr Reid: I am not sure that the scenario you describe is necessarily the fault of the presence or absence of powers in legislation. It is a matter of the culture of the organisation whether it utilises the powers that are in the legislation. I can assure you that this new provision in the Bill creates an extensive range of powers. They range from a public reprimand for recognised professional bodies that are not adequately discharging their function of supervising the conduct of insolvency practitioners right up to withdrawal of their recognition. Financial penalties can also be imposed on them.

If someone makes a complaint to a recognised professional body, and that person feels that their complaint has not been adequately dealt with by that body, they will be able to make a complaint to the Department. In turn, it will be for the Department's insolvency practitioner control unit to look into the complaint as to whether it was valid or the recognised professional body had dealt with the complaint properly and had taken effective action against the insolvency practitioner concerned.

If DETI considers that the recognised professional body has fallen short in taking that action, these sanctions, which are set down in legislation, will be available to be put into effect against the body. They are a graduated and tailored range of sanctions, unlike what was available to the Department in the case of the insolvency practitioner whose conduct gave rise to this issue. The problem with that insolvency practitioner was that the Department had only one sanction available to it, which was to be able to withdraw the person's authorisation as an insolvency practitioner. Obviously, that was a draconian measure because it would remove his livelihood. It was ultimately taken in this case, but there were concerns about that person over a period of years although nothing sufficient to warrant the extreme measure of withdrawing his licence.

Mr Frew: So this amendment has a wider spectrum of sanctions.

Mr Monds: Yes, we can do more things.

Mr Frew: That means that you will bite more often if there is wrongdoing, and you will not be de-incentivised from taking action because you have only one tool.

Mr Monds: That is right. In the case that we are talking about, given that the only sanction we had was to remove his livelihood, there was a lot that we had to go through to be assured that that was the right action. We can do a number of things now. We can issue a direction to force the body to act in a certain way, financial penalties can be put in place, or we can issue a reprimand. We can do those things, right up to the removal of a licence or authorisation. There is a graduated number of things that we can go through in a series of stages.

It is hoped that these things will not be needed; even last week, we got notice of someone in GB who had been struck off because of wrongdoing in the past. It happens, but the more remedies we have to action against complaints, hopefully the more people will be aware that more low-level action is being taken as part of a range of sanctions.

Mr Reid: There is an implicit threat against the recognised professional bodies to keep them on their toes. That is what is termed in GB at Westminster as a backstop power, which they hope will not have to be used but is there if it is needed. It means that all the recognised professional bodies could be swept away and replaced with one single regulator of insolvency practitioners. That implicit threat will help to keep them on their toes when it comes to regulating their members effectively.

Mr Frew: That is very useful. Is there anywhere in the world that has the same process and procedure?

Mr Reid: We are replicating GB legislation. GB has people who carry out policy research, and I am aware that they explore what is being done in other parts of the world. However, because they carry out that procedural examination and arrive at the conclusion that it would be desirable to take these measures, we do not replicate that in Northern Ireland. From my reading, I believe that there are similar measures in Australia, but I am not 100% certain of that.

Mr Frew: That is very useful. Thank you.

Mr Dunne: Thanks very much, gentlemen, for coming in again. Who sets the standards that the bodies are regulated against?

Mr Reid: To a degree, the legislation sets them. That is the purpose of having regulatory objectives. Those will be the standards. The standards will be to have:

Those will be the standards that will ultimately fall on insolvency practitioners to observe because the recognised professional bodies will be monitoring them to ensure that those standards are met.

Mr Dunne: Who establishes them? Do you have an input into them? Does DETI have an input into the standards?

Mr Reid: These standards correspond to standards that are included in the Westminster Small Business, Enterprise and Employment Bill. A very detailed code of conduct is already in effect that applies to insolvency practitioners, which prescribes all actions that they are to take in administering cases. That is the Insolvency Rules (Northern Ireland) 1991. Those are some of the most draconian measures applying to a profession that I have ever seen. The insolvency profession is far more heavily regulated than, for example, the medical, dental or veterinary professions. In fact, criminal sanctions are laid down for certain matters in those rules — for example, penalties for not filing returns on time — and some things could lead to the person being fined or imprisoned.

Mr Dunne: Why did the case that has been highlighted locally fall down? Was that because of the application of the regulations?

Mr Reid: I think that it was the fault of the person, not the absence of a code of conduct or rules. If a car drives through a red traffic light, it is not the fault of the traffic lights. There is no point in putting a second set of traffic lights in place, because the culprit is the driver. In that case, the culprit was the insolvency practitioner.

Mr Monds: As I mentioned, we had only one sanction against the person and could either find for or against him. If we found something sufficient to remove his licence, the bar of getting the evidence is so high that it would have taken a long time to assemble it. You also have to give the person the opportunity to come back on the matters, and there is an appeals process. It is a long drawn-out process to get to that point.

With the new legislation, graduated actions can be taken. That will hopefully bring them into line before we have to take the nuclear option of removing someone's licence.

Mr Reid: The system worked. A review of that person was carried out, and an insolvency practitioner from Scotland was brought in to carry out a review of that person's conduct. The Department commenced proceedings to have him disqualified from acting as an insolvency practitioner, and that would have happened had he not resigned.

Mr Dunne: Does DETI have an audit programme of the regulatory bodies?

Mr Monds: Yes. We carry out regular monitoring of all the regulated professional bodies. For those regulated professional bodies that operate in GB and Northern Ireland, we carry out joint monitoring with our GB colleagues.

Mr Dunne: How do you carry that out if the office is not in Northern Ireland?

Mr Monds: Our staff go to the office wherever it is and spend a few days going through the books, interviewing staff and reviewing their processes and procedures. They pick a sample of cases to ensure that the regulated professional bodies are carrying out scrutiny of the insolvency practitioners to ensure that they are abiding by their —

Mr Dunne: It is really a compliance audit.

Mr Monds: Yes.

Mr Dunne: Is that programmed?

Mr Monds: Yes, on a regular basis.

Mr Dunne: Do you also look at local practitioners? Do you visit them and do audits?

Mr Monds: The Department is responsible for authorising only one insolvency practitioner at the moment, and we carry out a detailed review of that individual. With the passing of the legislation, the Department will not be a competent authority to authorise and will no longer authorise any insolvency practitioners directly. All authorisations will be carried out by one of the seven recognised professional bodies, and we will no longer carry out reviews of the insolvency practitioners whom we are authorising.

Mr Dunne: It would be done through the regulatory bodies.

Mr Monds: Yes.

The Chairperson (Mr McGlone): No other member has anything further to add. Thanks very much for your time and for clarifying those issues for us.