Sweeping reforms to modernise the insolvency sector announced

Central to these reforms is the introduction of new rules mandating the regulation of firms providing insolvency services, aligning the sector with other regulated industries such as audit and legal services. Presently, only individual Insolvency Practitioners (IPs) are subject to regulation, leaving firms unaccountable for potential failures. As the insolvency landscape has evolved significantly since formal regulation was first introduced in 1986, extending regulation to firms addresses a gap in coverage and offers heightened protection for those using insolvency services.

The reforms follow the release of the government’s response to a consultation on the future of insolvency regulation by the Insolvency Service, which received strong support from respondents. The necessary legislation will be introduced as soon as parliamentary time allows.

Among the key reforms is the establishment of a public register that will feature a comprehensive list of individuals and firms authorised to provide insolvency services. Importantly, this register will indicate whether they are subject to sanctions by regulators, enhancing transparency and enabling users of insolvency services to make informed choices.

While the four recognised professional bodies (RPBs) currently overseeing individual IPs will continue their oversight, the government will collaborate with RPBs to implement transformational improvements to the regulatory framework, without requiring new legislation. These enhancements aim to foster increased public trust in the crucial work performed by the insolvency sector.

The government has proposed the power to implement a single regulator if deemed necessary, and the possibility of introducing a single regulator will remain under review.

Kevin Hollinrake, Minister for Enterprise, Markets, and Small Business, emphasised the government’s commitment to effective regulation of the insolvency profession, saying, "This forward-looking package of reforms reaffirms the government’s commitment to ensuring the insolvency profession is effectively regulated, with a regulatory framework fit for the future. These reforms will deliver transformational improvements, modernize the regime, and, crucially, increase public confidence."

Additional reforms stemming from the consultation include the reformulation of ethical and professional standards within the insolvency profession to enhance adaptability to changing circumstances, the development of a compensation and redress scheme for individuals affected by insolvency professionals’ mistakes or misconduct, and adjustments to the Insolvency Practitioner security (‘bond’) scheme to cover losses in cases of fraud or dishonesty, with some coverage levels increased for better creditor protection.

These reforms represent a significant stride toward a modernised and more accountable insolvency sector, ensuring its continued integrity and reliability in an ever-changing economic landscape.

Christina Fitzgerald, Immediate Past President of R3, the UK’s insolvency and restructuring trade body, and a Director at Isadore Goldman, responds to the Government’s announcement on the future of insolvency regulation, “Today’s announcement is welcomed and we are pleased that the Government has listened to the profession’s concerns about the creation of a single Government regulator. The proposals outlined seek to evolve our framework in a way which we hope will preserve the best of our current approach, while taking into account the changes in the demands on the framework and the profession over the last 40 years.

“We are also pleased that the Minster has recognised the quality of the work done by members of the profession, who every year rescue thousands of businesses, save tens of thousands of jobs and help return billions of pounds to the economy.” 

“Turning to the details of the announcement, the introduction of firm regulation should improve professional standards and has been supported by the wider profession. The decision to reform the bonding regime is also welcomed as this has been needed for a number of years. However, we urgently need more detail on how these changes will work in practice, and hope their introduction won’t affect the profession’s ability to support financially distressed businesses and individuals. 

“It is important that any regulatory changes do not impose onerous burdens on the profession and such regulatory changes should be introduced in such a way so that they support diversity, choice and a breadth of provision within the market.

“We understand the rationale behind the compensation scheme, but have significant concerns it could lead to a wave of unsubstantiated claims and the creation of a PPI-style claims management industry, which could place an unwanted and potentially unmanageable burden on the smaller practices within the profession, have consequences for the profession’s ability to deliver for clients and creditors, and potentially undermine the UK’s national and international reputation for having an effective insolvency framework and profession.

“We look forward to seeing the full details of the proposed changes and working with the Government to ensure that the new regime helps further improve public confidence in the profession and the work it does every year to rescue businesses, save jobs, return money to the economy, investigate director misconduct and help people return to a more secure financial place.”

Responding to the findings, StepChange Director of External Affairs and Operating Subsidiaries Richard Lane said, “Proposals to regulate all firms offering insolvency services – particularly the volume IVA providers that dominate the market - is welcome and has the potential to tighten up the system and reduce the risk of harm to financially vulnerable individuals. The rules around how these firms are regulated will need to add significant power to a regulatory structure that has not been able to get on top of problems in the IVA sector up to now. 

“The sector needs more than just regulation of firms, which is why it’s welcome to see government’s intention to take control of standards and standard setting in the IVA market, which we hope will quickly lead to better outcomes for consumers. The government’s intention to introduce a better system for redress is something we have long called for, and we urge the Insolvency Service to move this forward as a priority. 

“However, without a single regulator we may continue to see fractured oversight of the IVA sector. Recognised Professional Bodies need to be clear how their approach will change to address the concerns raised in this consultation.”