The Future of Bonding

The common meaning of bonding is ‘to bring together’, which is an interpretation in short supply when considering how the Insolvency Service views the current position on bonding arrangements for insolvency practitioners (IPs). In its recently closed consultation[1] in this area it painted a picture of a failing bonding system with much of the blame for this seemingly heaped on successor practitioners.

As probably the leading firm in investigating claims against IPs which at times requires making a claim against their bond, we actually have a more positive outlook for the future of bonding. We also refute the above view of successor practitioners who perform a valuable public interest role in uncovering any misconduct of former officeholders. Yes there are some real issues surrounding this area but hopefully the summary we provide of our response to the Insolvency Service’s ‘Call for Evidence’ (CfE) will show it’s not all Sturm und Drang.

Background

Bonds are a vital part of the system to deal with fraud or dishonesty of IPs alongside the regulatory role of the Recognised Professional Bodies (RPBs) and the investigatory work carried out by successor practitioners.

Bonding arrangements for IPs were introduced when the Insolvency Act 1986 brought in the requirement for IPs to be authorised by an RPB. Until the recent consultation there had been remarkably little by way of a formal review into bonding in the previous 30 years; while the ‘Insolvency Practitioner Regulation – Ten Years On review’ published in 1998 did touch on bonding, there have been, for instance, no changes to the monetary limits of the general and specific penalty sums since 1993.

Our response to the CfE

We demystified the work of a successor practitioner to demonstrate that the perceived view equating the job of a successor practitioner to that of making bond claims is wrong. Bond claims are not the most significant aspect of a successor practitioner’s work; they are not the largest asset; and do not constitute the greatest costs. The main financial benefit to creditors from regulatory successor appointments is actually the pursuit and realisation of claims not brought by the former officeholder.

Bond claims actually come about as a natural consequence of an independent review of the insolvency and that review may for example discover negligence and not fraud, or nothing at all.

On the central issue of improving or indeed replacing bonds we welcomed ways of exploring such possibilities but could see no grounds to support the premise of the CfE that they are not fit for purpose.

One of the options for reform proposed by the Insolvency Service is to have a claims management protocol. It was explained in the CfE that such a document would set ‘out the duties and responsibilities of each party’ involved in the claims process to ‘improve relationships’ and make it less ‘confrontational and adversarial’. We considered that this option would have little benefit as there is already a protocol in place which in recent times has become a lot more effective and can be improved further.

Our main proposal

There are just over 1,300 appointment taking IPs and many bond providers and so the limited pool from which to draw premiums is dispersed among the sureties. We have proposed that there is a public tender to procure the contract to bond the entire profession so that the successful bidder has a sufficient client base from which to draw premiums. This would protect against one or two really large settlements significantly impacting on future premium costs and would ensure that the risk to gross premiums ratio remains low.

A key element of this option would be to have a contractual rate set across the profession so that the cost of cover would be the same irrespective of the size of the practice: This would be much more equitable and fair than the current distorted market which penalises sole practitioners and small insolvency practices who have to bear the brunt of higher premiums.

Turning to some specific issues and where relevant our suggested proposals:

Fees
The common theme that ran throughout the CfE is that successor IP fees are not sufficiently controlled and are consequently too high. We found no evidence to support this. The costs of a successor are capped by realisations, resolutions of creditors and the negotiations with PII or bond providers.

There were various proposals in the CfE concerning the control of fees (ranging from a requirement that investigation costs must be proportionate to loss to the ring-fencing of proceeds from the investigation costs). We were unable to comprehend how a further fee regime just relating to bond claims could possibly work.

The inference that successor practitioner fees are too high actually contradicts the other suggestion in the CfE that there is not enough competition in this sector. If this is such a highly remunerated area there would be a surfeit of practitioners wishing to join the successor ‘gravy train’.

Dividends
The CfE made the bald assertion that after taking account of a successor’s remuneration ‘This can mean that little or no benefit passes to the creditors, who are supposed to be the beneficiaries of bond claims.’ We have identified that dividends paid following successor appointments in our cases are above the published averages and on occasion bond claims have funded the payment of creditors in full.

Premiums
The underlying assumption of the CfE is that the costs of bond claims are causing premiums to rise for which we could see no basis. On the contrary it would appear that the fees of successor practitioners are lower than the commissions charged by brokers who sell bonds, let alone the tiers of charges that occur higher up the insurance chain.

RPBs
We found that there is a great deal of evidence that RPBs do not understand the bonding regime and so we made a number of recommendations around the importance of monitoring bonding. In tandem with this we stressed the importance of IPs – and indeed RPBs – reporting potential claims to indemnity insurers and recommended training is provided to facilitate this.

We recommended that bonds should be written in favour of the Secretary of State rather than the RPB to avoid the conflict of interest and financial risk that they currently face.

Increase the ceilings of bonds.
We have suggested increases to the statutory limits to bond cover with a proposed rise in the specific penalty sum ceiling to £20m and that of the general penalty sum to £2.5m.

Changing the concept of release or discharge of officeholders
We considered the existing legislation on release and discharge and how it impacts on the ability of a successor practitioner to make bond and PII claims. We proposed that where an IP leaves office then they should receive their release or discharge at some later date, perhaps after 6 years. Bonds would then be required to meet all losses caused to the estate up to the date of discharge.

By making the above changes this would allow sufficient time for a successor to be appointed, to investigate any misconduct, and to make any bond claim. It would also reduce the damage caused by a malfeasant IP closing their cases from which they have stolen to avoid investigations funded by their bond. Finally it would deal with the issue of any post-removal from office theft.

If you wish to know more, our detailed submissions can be found below

Response to Call for Evidence dated 16 December 2016

Appendices to the CfE reponse 2016

[1] Call for Evidence Bonding arrangements for insolvency practitioners 15 September 2016