A reminder on Insolvency Practitioner exclusion from Financial Conduct Authority regulation

Other articles (Insolvency Practitioner, May 2020):

• Michelle Thorp, CEO
• Carrie James, Immediate Past President
• Interested in a secondment at the IPA?
• A reminder on the Statements of Insolvency Practice consultation
• An overview of the 5th Money Laundering Directive
• Five minutes with… Anna Dickinson, Senior Regulation Officer at the IPA
• Staff changes at the IPA

We recently discussed the Financial Conduct Authority (FCA) exemption for Insolvency Practitioners with the FCA and Insolvency Service. Whilst the potential for changing the exclusion is being discussed and considered in light for the Covid-19 crisis, it is important that Practitioners note that until further notification or changes are agreed, the terms still apply. We have received several recent enquires relating to this matter, so we thought it may be helpful to publish a reminder of the original guidance and highlight that Practitioners should not act outside of the exemption. This is particularly important in respect of Practitioners wishing to use their exemption to put their name to a website for lead generation purposes.

Practitioners should be aware of the exact wording of PERG 2.9.26 & 27, which refer to any appointment that the Practitioner is reasonably expected to be appointed. The exemption covers anyone working within the Practitioner’s firm, but does not apply if there is no reasonable contemplation or prospect of the Practitioner’s appointment.  

‘These exclusions apply to a person acting as an insolvency practitioner. The term “insolvency practitioner” is to be read with section 388 of the Insolvency Act 1986 or, as the case may be, article 3 of the Insolvency (Northern Ireland) Order 1989. The exclusions relating to debt adjusting, debt counselling and providing credit information services also apply to any activity carried on by a person acting in reasonable contemplation of that person’s appointment as an insolvency practitioner.’

‘A person acting as an insolvency practitioner or in reasonable contemplation of that person’s appointment as an insolvency practitioner include anything done by the person’s firm in connection with that person so acting. For these purposes, the reference to “the person’s firm” means the person’s employer, the partnership in which he is a partner or the limited liability partnership of which he is a member, as the case may be.’

Practitioners are reminded to be mindful of the content of any advertising that leads to an appointment. Practitioners should review all advertising to ensure it meets the amended requirement set out in the new Ethics Code for Members, which became effective from 1 May 2020. All forms of advertising including websites and social media should be fair and avoid unsubstantiated claims such as reference to Government backed or approved schemes and perceptions to high level of debt write off or general rights to employment claims.

For clarity, the prior guidance is repeated here:

Following much lobbying by the profession, Insolvency Practitioners are now largely excluded from requiring direct FCA authorisation when acting in an insolvency appointment or in reasonable contemplation of such an appointment.

The exclusion of insolvency office holders is largely unambiguous. There have, however, been queries raised by members in the past about the operation of the pre-appointment exclusion, namely exactly what “reasonable contemplation” means in practice. This is a matter for Insolvency Practitioners to use their professional judgement in the circumstances of the case, as the exclusion only applies when so acting. We do not believe Insolvency Practitioners should generally experience particular difficulty in exercising their professional judgement in this regard.

An Insolvency Practitioner remains obliged by the Ethics Code and Statement of Insolvency Practice 3 to provide debtors with balanced information about their options in order that they can reach an informed decision about their preferred option. The “In Debt Guide” explains these options. An Insolvency Practitioner may legitimately conclude during the course of an interview that a formal insolvency is not the appropriate solution for that individual and signpost them appropriately.

However, if Practitioners wish to provide specific advice with a view to a client entering a Debt Management Plan or Debt Arrangement Scheme, they will now need to be directly authorised by the FCA.

For further information, the following historical article from Dear IP provides a comprehensive view of this topic.

69) Changes to the consumer credit regime from 1 April 2014

The consumer credit regime regulatory landscape is changing from 1 April when the Financial Conduct Authority (FCA) takes over the responsibility for this area from the Office of Fair Trading (OFT). This will result in a number of significant changes for insolvency practitioners.

The Government recently amended the legislative framework applicable to the credit activities carried out by insolvency practitioners (the link to the applicable statutory instrument 2014/366 is http://www.legislation.gov.uk/uksi/2014/366/contents/made). Insolvency practitioners have now been excluded (rather than being subject to exemption) from regulation by the Financial Conduct Authority in two specific circumstances:-

• Where an individual is ‘acting as an insolvency practitioner’ for the purposes of Section 388 of the Insolvency Act 1986, the exclusion covers the non-credit activities for which insolvency practitioners were previously exempt, in addition to when providing debt counselling, debt adjusting, debt administration, debt collecting and credit information services;
• Where an individual is ‘acting in reasonable contemplation’ of an appointment as an insolvency practitioner. Under such circumstances the exclusion only covers the carrying on of debt counselling, debt adjusting and credit information services.

An individual will not be acting in reasonable contemplation of an appointment as an insolvency practitioner whenever providing initial debt advice – only where there is a reasonable anticipation of such an appointment. It will therefore be incumbent upon an insolvency practitioner to use his or her professional judgement when considering the particular circumstances of each case to determine whether the exclusion will apply.

By way of example, if in the course of providing initial advice an insolvency practitioner advises why it is considered a Debt Arrangement Scheme or debt management plan may not be the most appropriate option then this would not necessarily be outside of the Government’s exclusion if this advice is given in reasonable contemplation of an appointment as an insolvency practitioner.

Also, where after considering the debtor’s circumstances it transpires that an insolvency appointment is not appropriate this would not necessarily render the provision of the initial advice outside the scope of the exclusion. This is provided that the initial advice was given in reasonable contemplation of a formal insolvency appointment and that the practitioner did not continue to advise the debtor on entering into a particular debt solution, outside of the scope of the exclusion (e.g. a debt management plan), once it became apparent that such an appointment would not be made. In such circumstances, it is acceptable for an insolvency practitioner to signpost debtors to appropriate alternative sources of advice, such as the Money Advice Service.

Debt Arrangement Schemes and debt management plans

Carrying on specific debt counselling, debt adjusting, debt collection or credit information services in relation to the provision of Debt Arrangement Schemes (a Scottish debt solution) or debt management plans is not acting as an insolvency practitioner for the purposes of Section 388 of the Insolvency Act 1986 – and consequently not within the scope of the Government’s exclusion for insolvency practitioners.

An insolvency practitioner carrying on such activity in relation to a debt management plan or Debt Arrangement Scheme is also considered unlikely to meet the criteria to be able to benefit from an exemption under Part 20 FSMA (the Designated Professional Bodies Regime). This is because the manner of the provision of the insolvency practitioner’s service in the course of carrying on these activities is unlikely to be incidental to the provision of his or her professional services as an insolvency practitioner.

The carrying on of, for example, debt counselling or debt adjusting in the course of advising on/administering debt management plans or Debt Arrangement Schemes, is unlikely to constitute carrying on only regulated activities which arise out of, or are complementary to, the provision by an insolvency practitioner of the professional services as an insolvency practitioner to that client. The provision of professional services by an insolvency practitioner will necessarily involve the carrying on of debt counselling/debt adjusting – and for the purposes of Part 20 FSMA, ‘professional services’ are services which do not constitute the carrying on of a regulated activity.’

For those Insolvency Practitioners that may provide regulated debt advice that does not fall within the scope of the Government’s exclusion, they should consider whether they need to register with the FCA  https://www.fca.org.uk/firms/authorisation.