Why the insolvency industry needs reform

The Conversation

Proposed laws to reform the insolvency industry are long overdue. Under the changes, liquidators will require a licence and creditors will be able to remove poorly performing practitioners. The reforms aim to improve consumer confidence in an area that has been plagued with controversy. However, they still fail to meet the need for transparency around corporate insolvencies.

The industry already has a chequered history when it comes to attempted reform. Proposed changes stalled last year. Regulation of the industry has been the subject of eight major reviews and inquiries over the last 25 years.

In 1998 the Harmer Report outlined the shortcomings of the regulatory system governing insolvency practitioners. It cited failures within the industry to respond quickly to complaints against practitioners. Other criticisms included a lack of established professional conduct standards and ethics.

Practitioners' remuneration levels were also not determined nor reviewed by an industry board. Rather, the market was relied upon to set reasonable fees.

Although a professional code of conduct now exists 25 years later, the same criticisms can still be made today. Successive reviews have made similar recommendations to tackle these shortcomings; most of them still have not been implemented. As a result, the insolvency industry is open to criticisms of over-servicing, excessive fees and self-interest.

The largest 13 insolvency firms comprise 39 per cent of the market. They may be more deserving of (but better able to deal with) such criticisms than smaller individual practitioners, which represent 29 per cent of the market.

The industry overhaul

The planned changes aim to remove unnecessary costs from the insolvency industry. This should result in around $55.4 million per year in compliance cost savings. Submissions on these changes are due in late December.

Under what has been dubbed as a user-pays system, they require liquidators to be licensed and to undergo continuing education. The result is the government can reap big fees in exchange for licences.

Registration must be renewed every three years. For this to occur, written evidence of adequate professional indemnity insurance and compliance with continuing professional education conditions must be provided. The circumstances where registration may be cancelled or suspended have been widened. These include any offence conviction involving fraud or dishonesty.

There have been highly publicised accounts of poorly behaving liquidators. Stuart Ariff, who is serving a six-year jail sentence, provides the most notorious example. However, the Ariff case is considered exceptional and not reflective of the majority of insolvency practitioners.

A lack of licensing within the industry has not led to an increase in the number of badly performing insolvency practitioners. Rather, its absence has meant the small number of dishonest practitioners remains undetected. Licensing will increase public confidence in the industry.

Where creditors are unhappy with the performance of a liquidator, they will be able to remove that practitioner and appoint another. To do so, the majority of creditors in number and value must pass a resolution at a creditors' meeting. No particular grounds for removal are required.

However, the former administrator may apply to the court to be re-appointed. The court may re-appoint the administrator if it is satisfied the removal was improper.

Increasing consumer confidence

These changes finally act on the unanswered criticisms of the Harmer Report. The regulation of personal and corporate insolvency regimes will now be consistent.

This will cut compliance costs across the industry. A system of licensing will maintain educational standards and experience. So does the ability to cancel or suspend licences. These measures increase consumer confidence in the professionalism and competence of the industry.

Yet more can be done. More public education about a liquidator's role and the nature of the work is needed.

The changes also fail to address a common theme in previous reviews: there is no adequate and publicly available corporate insolvency data. This information is needed for effective policymaking, public debate, regulation implementation and ongoing review. It is imperative that such data be independently collected, maintained and available to the public free of charge.

Jennifer Dickfos does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published on The Conversation.