Issues for discussion. David Stallibrass World Bank January 2011

Transcription

1 Issues for discussion David Stallibrass World Bank January

2 Contents The OFT where we re coming from Insolvency regulation in the UK a paper utopia How it works in practice a mixed bag Why it doesn t work incentives Choices for the future 2

3 Role of the OFT Make markets work well for consumers Long-term consumer welfare We are not a regulator Make the market structure deliver Macroeconomi c effect Consumers hold firms to account Competition between firms Firms have incentives to deliver Efficient market outcomes 3

4 Insolvency regulation a paper utopia IPs appointed by Company Directors to work in the interests of all stakeholders Unsecured creditors able to oversee / veto actions of insolvency practitioner through meetings / committees Professional self-regulatory regime to maintain standards and trust in the market, and protect consumers Consortium of regulators work together to set principles based, proportionate regulation Government ultimately responsible for regime through providing licenses to self-regulatory bodies 4

5 Insolvency regulation a paper utopia IPs appointed Insolvency by Company Practitioners Directors to effectively work in the appointed interests by of all stakeholders secured creditors Unsecured Unsecured creditors able creditors oversee rarely / have veto incentive actions of and insolvency ability to practitioner through exercise meetings their / rights committees Professional self-regulatory Low trust in regime regulatory maintain regime by standards Insolvency and trust in the market, Practitioners and protect and consumers creditors Consortium Slow, of regulators inconsistent, work and together highly to proscriptive set principles regulatory based, proportionate system regulation Government Limited ultimately levers responsible for government for regime to control through system, providing and licenses unable to self-regulatory exercise bodies oversight 5

6 Where secured creditors are paid in full, the market appears to work well Secured paid in full, 37% Secured not paid in full, 63% But if paid in full, their interest ceases Where bank is not paid in full, it cares about every recovered, and every spent on IP fees The bank has the power and incentive to oversee IP Stakeholders suggest that, when not paid in full, bank interests are likely to be a good proxy for everyones 6 interests Source: 500 administrations started in 2006, stakeholder interviews and submissions

7 Regulatory system insufficiently protects unsecured creditors Place-holder text that sets maximium size of text When secured creditors are paid in full, unsecured creditors are unable to effectively control IP fees and actions. Place-holder text that sets maximium size of text They depend on regulation to ensure that IPs comply with ethical standards. Place-holder text that sets maximium size of text This requires consistency to ensure that regulatory interventions deter, and are not seen as random. Place-holder text that sets maximium size of text This requires dealing with rogue firms effectively Do you think that the w ay your regulator enforces regulations effectively deters and deals w ith any rogues in the profession? 0% 50% 100% Very effective Effective Not effective Do not know 7 Source: survey of Insolvency Practitioners

8 0 Discount Evidence of this decreased control can be found in IP fees for administration Comparison of difference between amount IP paid, and amount IP billed, in administration Only difference is relative ability of secured and unsecured creditors to exert downward pressure on price Analysis corrects for effect of fees being bounded by amount recovered Discount - Actual and Predicted from Regression Analysis 0 200, , , ,000 1,000,000 Assets Realised Actual Prediction - Unsecured Prediction - Secured For an average sized insolvency from our sample, the unsecured creditor pays 9% more Source: 500 administrations started in 2006, stakeholder interviews and submissions. This is our preferred functional forms. Not all forms give the same result.

9 Why it doesn t work 1: unsecured incentives Most unsecured creditors have little financial interest Many don t expect to recover anything The costs of getting involved are often perceived to outweigh any benefit Depend on IP and larger unsecured creditors to look after their interests Especially in pre-packs 9 Source: On-line survey, in-depth interviews, and stakeholder interviews and submissions

10 Why it doesn t work 2: regulatory system complex, conflicted Lack of clarity of IS s role Lack of proportionate powers for IS IPC not always heeded Standards set by consensus Duplication of resources Lack of consistency Don t deal with rogues Ability of IPs to threaten arbitrage between RPBs Lack of RPB deep pockets Confusion for creditors and stakeholders 10

11 What is the resulting harm? Decreased pressure on fees Decreased oversight on actions Approximately 9% in administration Same market dynamics seen in CVL Complaints about duration in CVL Concerns over pre-packs Knock on effects Decreased recovery leads, at the margin, to decreased extension of credit Decreased trust in IP profession 11

12 Choices necessary evil, or something that can be fixed? Necessary evil Try to fix Make government oversight stronger with clear regulatory objectives Provide independent complaints body to provide trust in system Simplify rules, and process of making rules Insolvency Practitioners better trusted, should get more work Costs of regulation decreased as efficiency increases Secured creditors unaffected, unsecured creditors better off 12

13 OFT approach correcting market failure in a private model of provision Issue Current UK position OFT view Private or public provision Largely private No change Who appoints the IP Formally, directors Accept that secured creditor is effective appointer Independence of IP Enshrined in UK law Sometimes compromised re secured and unsecured creditors needs stronger enforcement and protection Standards to become an IP, and regulation of insolvency process Fees Accountability and oversight Extensive, set by counsel of 8 regulatory bodies Set by agreement with creditors. Complex system Appears extensive yet somewhat ineffective. Less regulation, but better. Extensive informal negotiations raises questions of impartiality. Perverse time incentives. that doesn t work. Needs simplification, and government teeth. 13