How does an Ethics Code more than triple in size overnight?\u00a0 In my view, largely by adding lots of unnecessary words.\u00a0 The devil, however, is in finding the detail hidden within the new Code that affects how we should be viewing and handling things differently from 1 May.<\/p>\n
A primary reason why the new Code is substantially longer is that we now have \u201crequirements\u201d \u2013 highlighted in bold and given an \u201cR\u201d paragraph number \u2013 and \u201capplication material\u201d, identified by normal text and \u201cA\u201d paragraph numbers.\u00a0 This application material is \u201cintended to help an insolvency practitioner to understand how to apply the conceptual framework to a particular set of circumstances and to understand and comply with a specific requirement\u201d (1.4 A1).\u00a0 So don\u2019t be misled into viewing \u201cA\u201d paragraphs as optional guidance: although all the \u201cshall\u201ds appear in the \u201cR\u201d paragraphs, the language of most of the \u201cA\u201ds indicates that they also are necessary to achieve compliance.<\/p>\n
Although I have tried to highlight the main areas of change, I do recommend that you read through the Code in its entirety yourself.\u00a0 There is a great deal more detail to explain RPB expectations and you could find that the particular circumstances of you or your firm and your engagements gives rise to ethical threats that you may have overlooked in the past.<\/p>\n
The ICAEW\u2019s version of the new Code can be found at www.icaew.com\/-\/media\/corporate\/files\/technical\/ethics\/insolvency-code-of-ethics.ashx?la=en<\/a> and the IPA\u2019s version of the new Code is at www.insolvency-practitioners.org.uk\/regulation-and-guidance\/ethics-code<\/a> (although the IPA hasn\u2019t amended the text of the page to highlight that the link is not <\/em>to the Code that came into force in 2009, nor have they archived the accompanying docs that relate to the old Code).\u00a0 The ICAEW\u2019s Code has an additional \u201c2\u201d at the start of each paragraph (to fit the insolvency section into its overarching Code).\u00a0 In this article, I have used the IPA\u2019s numbering.<\/p>\n <\/p>\n Why now?<\/u><\/strong><\/p>\n Do I think that the implementation date of the new Code should have been postponed?\u00a0 Yes, I do!<\/p>\n True, we have been waiting a loooong time for a revised Code \u2013 the JIC\u2019s consultation on a draft revised Code concluded in July 2017.\u00a0 However, the new Code is so<\/em> much different from the old one (and from the 2017 draft), it is not at all an easy read at 70 pages, and there are many new requirements in there.\u00a0 Therefore, expecting IPs to have absorbed and adapted systems to the new Code and to have trained staff by 1 May is grossly unfair in these extremely difficult times.\u00a0 Shame on you, IS\/RPBs!<\/p>\n <\/p>\n Surely the Fundamental Principles are the same?<\/u><\/strong><\/p>\n Generally, yes of course.\u00a0 Some look a bit different now, though.<\/p>\n \u201cIntegrity\u201d<\/strong> has been beefed up.\u00a0 In addition to the \u201cstraightforward and honest\u201d statement, we now have that an IP (R101.2):<\/p>\n \u201cshall not knowingly be associated with reports, returns, communications and other information where the insolvency practitioner believes that the information:<\/p>\n The Code allows IPs to be viewed as not in breach of this where they \u201cprovide a modified report\u201d (101.2 A1), although I guess they could still have fallen foul of the principle of professional competence and due care by allowing the incorrect or misleading statement to be released in the first place.<\/p>\n As another solution, the Code requires an IP to \u201ctake steps to be disassociated\u201d (R101.3) from such information when they become aware of having been associated with it.\u00a0 Thus, it goes further than the advertising and marketing requirements of the old Code, capturing the spoken word and information that might wriggle out of \u201cadvertising\u201d, and it makes clear that the IP need not have a marketing agreement with the party issuing the information, the IP just needs to be \u201cassociated\u201d with it.<\/p>\n Having said that, the Code\u2019s \u201cAdvertising, Marketing and Other Promotional Activities\u201d section (360) has also been expanded on, making unacceptable standards more explicit.<\/p>\n \u201cConfidentiality\u201d<\/strong> has also grown by a page and a half.\u00a0 Comfortingly, though, this Code has elevated the requirement for transparency, i.e. to report openly to creditors etc., by putting it up-front at R104.2, rather than buried as at para 36 in the old Code.\u00a0 Most of the new text are statements of the obvious, e.g. being alert to the possibility of inadvertent disclosure in a social environment or to family and not using confidential information for the personal advantage of the IP or of third parties.<\/p>\n \u201cProfessional Competence and Due Care\u201d<\/strong> is now accompanied by a new 1.5 page section, \u201cActing with Sufficient Expertise\u201d, but I saw nothing in here that I thought really needed to be said.<\/p>\n \u201cProfessional behaviour\u201d<\/strong> contains a subtle change: no longer must IPs only avoid action that discredits the profession, but they are required to avoid \u201cany conduct that the insolvency practitioner knows or should know might discredit the profession\u201d and they \u201cshall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession\u201d (R105.1).<\/p>\n <\/p>\n What about the Framework Approach?<\/u><\/strong><\/p>\n Yes, we still have the basic framework of:<\/p>\n And in case there was any risk that we might forget this, it is provided in full twice (at 1.5 A1 and R110.2) and then appears in the introduction to almost every other section.\u00a0 In fact, the word \u201cframework\u201d appears 45 times in the new Code (and only 6 times in the old Code).<\/p>\n <\/p>\n Ok, so what has changed?\u00a0 More paperwork, right?<\/u><\/strong><\/p>\n Yes, of course!<\/p>\n Some have expressed the view that the requirements to evidence pre-appointment ethical considerations<\/strong> haven\u2019t increased, if we\u2019d been documenting things properly in the first place.\u00a0 As the old Code had a simple \u201crecord considerations\u201d message, there is some truth in that, but it is difficult to deny that the new Code reflects the record-keeping mission creep that the profession has seen over this century.<\/p>\n To avoid doubt over the extent of documentation required, we now have a list of six items to be documented at R130.2 \u2013 they are what you would expect, but you would do well to ensure you\u2019re your Ethics Checklists specifically prompt for these items.<\/p>\n In addition, this list of six items should define the structure for documenting your ethical considerations when a threat arises after appointment<\/strong> (130.1 A1).<\/p>\n Under the old Code, we were required to keep threats under review<\/strong>, simple as that.\u00a0 This has survived the revision (R210.7), but we now have added \u201capplication material\u201d \u2013 210.7 A1 \u2013 that helps define what such a review process should look like:<\/p>\n Again, periodic review checklists may need to be enhanced.<\/p>\n <\/p>\n Other paperwork: using specialists (Section 320)<\/u><\/strong><\/p>\n To be honest, I never did like the old Code\u2019s \u201cobtaining specialist advice and services\u201d section.\u00a0 Its meanings were ambiguous; I never really understood in what circumstances periodic reviews had to be conducted and whether these were to be on a firm-wide or a case-by-case basis.<\/p>\n The new Code leaves us with no (ok, fewer) doubts.<\/p>\n The four \u201cR\u201ds in the section are key:<\/p>\n So every time an IP plans to instruct a third party (or another department within the firm) to provide advice or work, they need to determine whether the instruction is warranted and then why they have decided on the particular provider, having in mind the need to achieve best value and service.\u00a0 Then, they need to review periodically whether best value and service is being achieved for each appointment.<\/p>\n This sounds like another checklist or file note process per instruction together with more prompts on case reviews.<\/p>\n To reduce the detail required on each case\u2019s instructions, it may be possible to create a firm-wide process evaluating the value and service provided by regular suppliers \u2013 in effect, an approved supplier list.\u00a0 This would seem particularly relevant when using a specific service provider (e.g. storage agents, insurers\/brokers and pension and ERA specialists) across your whole portfolio.<\/p>\n <\/p>\n And more disclosure to creditors?<\/u><\/strong><\/p>\n Oh yes!\u00a0 In relation to using specialists, the Code says: \u201cDisclosure of the relevant relationships and the process undertaken to evaluate best value and service to the general body of creditors or to the creditors\u2019 committee\u201d (320.6 A6) is an example of a safeguard to address a threat arising from instructing a regular service provider in the firm or those with whom there is a business or personal relationship.<\/p>\n The new section, \u201cAgencies and Referrals\u201d, also provides as an example safeguard similar disclosure to address threats created by any referral or agency arrangement (330.5 A2).<\/p>\n <\/p>\n What about disclosure of ethical threats generally?<\/u><\/strong><\/p>\n This is an area that appears to have been watered down.\u00a0 The old Code stated that generally, it would be inappropriate for an IP to accept an appointment where an ethical threat existed (or could reasonably be expected to arise) unless <\/em>disclosure were made prior to appointment to the court or creditors.<\/p>\n However, the new Code simply requires IPs to consider <\/em>disclosure of the threats and the safeguards applied (210.5 A3)\u2026 although as disclosure is <\/em>a safeguard, IPs would do well to disclose wherever this is practical (200.3 A3).<\/p>\n <\/p>\n New Section (330): Agencies and Referrals<\/u><\/strong><\/p>\n I would strongly urge you to read through Section 330 in full and consider how this impacts on your firm\u2019s processes and communications.\u00a0 There are a lot of disclosure and other safeguard requirements, which, when you think about it, could encompass a number of dealings.<\/p>\n For example, at the immaterial end of the spectrum, how do you decide where to send directors who have a Declaration of Solvency to swear?\u00a0 Do you recommend the solicitor around the corner (or, now, one who is prepared to witness swearings remotely)?\u00a0 Such referrals, even if the decision is a geographical no-brainer, must be subject to the rigorous evaluation and disclosure standards.<\/p>\n Of course, there will be other more material referrals, e.g. when assisting businesses outside (or prior to) formal insolvency or when conflicted from taking on an appointment or from advising directors personally, as well as recommendations made to individuals in IVAs.\u00a0 These will require substantial documentary evidence that the appropriateness of the referral or introduction has been carefully and objectively considered and that a great deal of information (including the alternatives) has been provided.<\/p>\n <\/p>\n Any change to referral fees?<\/u><\/strong><\/p>\n There are some subtle changes in Section 340.<\/p>\n The new Code repeats the old Code\u2019s principle that the benefit of any referral fees or commissions received post-appointment must be passed on to the insolvent estate.\u00a0 The new Code extends the reach, though, in stating that no associate <\/em>(as well as neither the IP nor their firm) may accept a referral fee or commission unless it is paid into the insolvent estate (R340.7).\u00a0 Associates include connected companies and those with common shareholdings or beneficial owners (340.8 A1).<\/p>\n The new Code also puts a duty on IPs who do not control decisions on referrals to get information on referral fees received (340.8 A6).\u00a0 This could be challenging for IPs in large firms or with a wide network of associates.<\/p>\n Its reach also extends to \u201cpreferential contractual terms\u2026 for example volume or settlement discounts\u201d \u2013 these must also be passed on to the insolvent estate in full (R340.8).<\/p>\n Also, whereas previously the IP only needed to consider<\/em> making disclosure to creditors, now, where an insolvency appointment is involved, any referral fee or commission payments must be disclosed to creditors (R340.6 and 7).<\/p>\n <\/p>\n What about paying referral fees out<\/em>?<\/u><\/strong><\/p>\n The new Code is more direct in stating simply that an IP \u201cshall not make or offer to make any payment or commission for the introduction of an insolvency appointment\u201d (R340.4).\u00a0 It also wraps the firm and associates in this prohibition and, again, if the IP does not control the referrals paid out by their firm or associates, they nevertheless need to ascertain what they are (340.8 A6).<\/p>\n I am not sure why we have now lost the old \u201cfurnishing of valuable consideration\u201d prohibition.\u00a0 After all, not every benefit is couched as a \u201cpayment\u201d.<\/p>\n But then the old Gifts and Hospitality section has been substantially lengthened from half a page to four and a half pages, so non-monetary inducements connected with improper motives are caught elsewhere.<\/p>\n <\/p>\n \u201cInducements, including Gifts and Hospitality\u201d (Section 350)<\/u><\/strong><\/p>\n This is another section that I\u2019d recommend reading in full, as it has been beefed up.<\/p>\n The old Code had included assessing the appropriateness of a gift by having regard to what a reasonable and informed third party would consider appropriate.\u00a0 However, the new Code makes the connection more directly with motive:<\/p>\n It goes further than this too, even stating that the Code\u2019s requirements (including the \u201cA\u201ds) \u201capply when an insolvency practitioner has concluded that there is no actual or perceived intent to improperly influence the behaviour of the recipient or of another\u201d (350.9 A3).<\/p>\n Examples of such inducements that might still create threats are where (350.9 A3):<\/p>\n The Code also imposes an obligation on IPs to remain alert to inducements being offered to, or made by, close family members and requires IPs to advise the family member not to accept or offer the inducement, if it gives rise to a threat (R350.12 and 13).<\/p>\n <\/p>\n New Section (390): \u201cNOCLAR\u201d<\/u><\/strong><\/p>\n Presumably, accountants are already familiar with this acronym for \u201cnon-compliance with laws and regulations\u201d.\u00a0 The new section in the Insolvency Code certainly seems to be a lift-and-drop from the accountancy code, but in my view a clumsy one.<\/p>\n For example, instead of referring to the \u201cfirm\u201d, which had been nicely defined and otherwise used throughout the Code (except where other lift-and-drops have been unsuccessful), this section refers to the IP\u2019s \u201cemploying organisation\u201d, which I think could mislead some into assuming that IP business owners do not need to apply many of the requirements.<\/p>\n But more fundamentally, this section fails to acknowledge IPs\u2019 relationships with insolvents.<\/p>\n I can see how accountants working with live clients need to understand how they should react when they discover that their client has breached a law or regulation.\u00a0 Although of course IPs often deal with live clients, the vast majority of their time is taken up as office holders over non-trading entities and individuals and it\u2019s those engagements that \u2013 very often \u2013 reveal non-compliances committed by the insolvent.<\/p>\n The new Code makes no distinction between non-compliance committed by: (i) the IP\u2019s\/firm\u2019s clients; (ii) the entity\/individual over which the IP has been appointed office holder; or indeed (iii) the IP or their staff themselves.\u00a0 I think that each of these situations gives rise to different concerns and so they each deserve a different approach.<\/p>\n In a nutshell, the core requirements of this section are: to explore all non-compliances (including suspected or prospective non-compliances); and then, unless they are clearly inconsequential non-compliances (except where they are money laundering related etc.), to report them upwards within the firm and, where appropriate, to those charged with governance of the entity\/business and to appropriate authorities.\u00a0 In addition, if the case is an MVL of an audit client or a CVA, the IP must consider communicating it to the audit partner\/auditor (R390.12 and 13).<\/p>\n The Code also imposes similar exploration and internal reporting duties on insolvency team members.<\/p>\n Of course, there is an expectation that this will all be documented, although the Code only encourages <\/em>IPs\/team members to document the matter and actions taken (390.16 A2 and 390.20 A2).<\/p>\n Setting aside all the \u201cconsider\u201d and \u201cwhere appropriate\u201d steps, what does this section actually require an IP\/team member to do in all circumstances?<\/p>\n In my view, these cumbersome NOCLAR requirements are OTT for the vast majority of non-compliances committed by insolvents (e.g. do IPs really need to discuss all director misconduct with \u201cthe appropriate level of management\u201d?) and indeed a fair number of those committed by the IP\/staff.\u00a0 You might be able to rely on the \u201cclearly inconsequential\u201d paragraph (390.6 A2), but experience with RPB monitors has taught me that there are diverse opinions over what non-compliances are inconsequential.<\/p>\n <\/p>\n New Section (380): \u201cThe insolvency practitioner as an employee\u201d <\/u><\/strong><\/p>\n Although clearly this section is most relevant in the volume IVA market, it is an important section for all IPs who act as employees.\u00a0 Unsurprisingly, it reinforces the message that, even as an employee, the IP has a personal responsibility to ensure that they comply with the Code (R380.5).<\/p>\n Having said that, some statements seem to me unfair or perhaps the writers are simply treating IP employees as ethical novices.\u00a0 For example, 380.5 A2 describes a circumstance that might create ethical threats: where the IP is \u201celigible for a bonus related to achieving targets or profits\u201d\u2026 but nowhere does the Code highlight that the business\/beneficial owner IP might be exposed to a similar self-interest threat.<\/p>\n However, the section cuts to the core in highlighting the tension that an IP seeking to administer engagements ethically may experience with their superiors and peers across the rest of the firm.\u00a0 The Code doesn\u2019t pull punches: in some circumstances, an IP\u2019s efforts to disassociate themselves with the matter creating the conflict may demand their resignation from employment (380.7 A1).<\/p>\n <\/p>\n My other gripes<\/u><\/strong><\/p>\n Ok, this is just a final section to allow me to get some gripes off my chest.\u00a0 My main ones are:<\/p>\n It took a debate with my partner, Jo, for me to understand that these requirements did not apply to a specific kind of conflict situation.\u00a0 The problem I have is that this section, which refers to \u201cresolving ethical conflicts\u201d, sits awkwardly alongside the rest of the Code, which refers to \u201cmanaging ethical threats and keeping them under review\u201d.\u00a0 In my mind, an ethical conflict is only resolved by removing it entirely, e.g. by walking away from an appointment, whereas in most circumstances an IP applies safeguards to manage threats to an acceptable level.<\/p>\n Last year, there was some consternation over the ethics of retaining an appointment over an MVL converting to CVL.\u00a0 The example in the old Code made no sense.\u00a0 It had stated that: \u201cWhere there has been a Significant Professional Relationship, an insolvency practitioner may continue or accept an appointment\u2026\u201d\u00a0 But the old Code had explained that a relationship is denoted as a Significant Professional Relationship (\u201cSPR\u201d) where, even with safeguards, the threats cannot be reduced to an acceptable level, so the IP should conclude that their appointment is inappropriate.\u00a0 Therefore, how was it possible for an IP to continue with an appointment in the face of an SPR?\u00a0 The new Code was the ideal opportunity to fix that.\u00a0 But there has been no change: paragraph 520.4 still states that in some cases an SPR will not block an IP\u2019s appointment or continuation in office and this conflicts with R312.7, which more strongly states that, in the face of an SPR, the IP \u201cshall not accept the insolvency appointment\u201d.<\/p>\n I have similar issues with the example at 510.2, which deals with an IP accepting an appointment after having worked as an investigating accountant for the creditor.\u00a0 For starters, not all IPs are accountants, but they may still do investigation work for a creditor \u2013 the text indicates that those IPs are in the scope of the example\u2026 so why not change the heading?!\u00a0 More importantly, the instructions include impossibilities: they state that, where the secured creditor is seeking to appoint the IP as an administrator or admin receiver, the IP needs to \u201csatisfy them self (sic.) that the company\u2026 does not object to them taking such an insolvency appointment\u201d.\u00a0 But it then explains that an IP may still take the appointment, even if the company does object or where the directors haven\u2019t had an opportunity to object\u2026 so the IP doesn\u2019t<\/em> need to \u201csatisfy them self\u201d then?!<\/p>\n On the bright side, at least IPs taking on Scottish or Northern Irish appointments are now better represented in the examples section.<\/p>\n <\/p>\n And now the marketing footer<\/u><\/strong><\/p>\n My partner, Jo Harris, has recorded two webinars covering the new Ethics Code (there was just too much for one sitting).\u00a0 We have also: created new checklists to address the new sections such as instructing specialists and dealing with referrals; substantially revised our main ethics checklists to address specifically the new Code\u2019s requirements; and enhanced other docs like progress reports and case review forms.<\/p>\n If you would like more information on signing up for access to our webinars, document templates \u2013 we\u2019re offering the ethics templates as a standalone package or you can subscribe to all our document packs and future updates \u2013 or technical support service, please do get in touch with us at info@thecompliancealliance.co.uk<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":" How does an Ethics Code more than triple in size overnight?\u00a0 In my view, largely by adding lots of unnecessary words.\u00a0 The devil, however, is in finding the detail hidden within the new Code that affects how we should be … Continue reading \n
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