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  • 1. INSOLVENCY RESEARCH CONFERENCE 10 November 2009
  • 2. Programme <ul><li>The good, the bad, and the ugly: A survival guide to M&A in distressed times – Maria Carapeto </li></ul><ul><li>SIP 16 update and the creditors’ perspective? – Mike Chapman and Dr Sandra Frisby </li></ul><ul><li>Making creditor protection effective – Alan Katz and Michael Mumford </li></ul><ul><li>An independent review of the fee-charging debt management industry – Sharon Collard </li></ul><ul><li>Debt Relief Orders – Nick Howard </li></ul><ul><li>Individual insolvency, centres of main interest and bankruptcy tourism – Chief Registrar Baister </li></ul><ul><li>Discharge in bankruptcy: An examination of personal insolvency relief – John Tribe </li></ul><ul><li>Personal over-indebtedness régime design – Michael Green </li></ul>
  • 3. THE GOOD, THE BAD, AND THE UGLY: A SURVIVAL GUIDE TO M&A IN DISTRESSED TIMES Maria Carapeto, Scott Moeller, Anna Faelten Mergers and Acquisitions Research Centre (MARC) Cass Business School, City University, London
  • 4. Motivation <ul><li>“ Bankruptcy-related mergers and acquisitions have hit their highest level globally since August 2004, and are set to keep rising as more companies are forced into distressed sales... ” </li></ul><ul><li>Bankruptcy-Related M&A Has ‘Only Just Began’ (Financial Times 13th April 2009, p.13). </li></ul><ul><li>Is now a good time for a company to purchase a distressed target? </li></ul><ul><li>Is now a good time for a struggling company to seek a stronger partner? </li></ul>1 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 5. Literature Review <ul><li>Jensen (1991): M&A are an effective means for resolving financial distress, either inside or outside bankruptcy </li></ul><ul><li>Clark and Ofek (1994): Acquisitions of distressed companies </li></ul><ul><li>Hotchkiss and Mooradian (1998): Comparison between acquisitions in bankruptcy and acquisitions of healthy companies </li></ul><ul><li>Bergstrom et al. (2005): Comparison between acquisitions and bankruptcies as exit strategies </li></ul>2 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 6. Contributions <ul><li>This paper fills the void in the literature by exclusively investigating acquisitions of healthy and distressed companies, including those involved in bankruptcy proceedings </li></ul><ul><li>Short-term performance: Event Study </li></ul><ul><li>Long-term performance: Ratio Analysis </li></ul><ul><li>Economic cycle </li></ul>3 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 7. Data and Methodology (1) <ul><li>Initial sample: 240,132 acquisitions of majority interests between 1 January 1984 and 31 December 2008 </li></ul><ul><li>Data sources: Thomson ONE Banker and Thomson Datastream </li></ul><ul><li>Excludes: Leveraged Buyouts, Spinoffs, Recapitalizations, Self-Tenders, Exchange Offers, Repurchases, Privatizations; Financial Institutions (banks, savings banks, unit trusts, mutual funds, pension funds) </li></ul>4 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 8. Data and Methodology (2) <ul><li>Final sample: 12,339 acquisitions of majority interests between 1 January 1984 and 31 December 2008 </li></ul><ul><li>Healthy targets: 9,433 (76.4%) </li></ul><ul><li>Distressed targets: 2,652 (21.5%) </li></ul><ul><li>Bankrupt targets: 254 (2.1%) </li></ul><ul><li>‘Distressed’ = ICR < 1 &  lowest quartile of the industry ICR in the year before </li></ul>5 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 9. Merger Activity Worldwide 6 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 10. Merger Activity in the UK 7 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 11. Distressed Merger Activity Worldwide 8 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 12. Industry Cyclicality ‘ First-in, first-out rule’ ‘ Peak-to-Trough’ analysis Read: Peak to Through Blue: Through to Peak Green: In between 9 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 13. Healthy vs. Distressed vs. Bankrupt Firms (1) <ul><li>Distressed acquisitions tend to involve smaller (and more distressed) firms, both acquirer and target, which typically belong to the same industry </li></ul><ul><li>(Flow–based insolvency) </li></ul><ul><ul><li>This is an indication that investors of distressed firms want to play it safe and acquire ‘core’ assets </li></ul></ul><ul><ul><li>Acquirers of distressed firms are often in pretty bad shape themselves and typically so is the industry, therefore the need to consolidate </li></ul></ul><ul><li>Bankrupt targets suffer from insolvency </li></ul><ul><li>(Stock –based insolvency) </li></ul>10 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 14. Healthy vs. Distressed vs. Bankrupt Firms (2) <ul><li>Bankruptcy reorganization procedures tend to favour large companies, hence smaller and more distressed targets have no other option than to be rescued through an acquisition or to be liquidated </li></ul><ul><li>Bankruptcy acquisitions are typically very fast processes compared to the other cases, particularly in downturns, in light of the timing issues inherent to a bankruptcy process </li></ul><ul><li>Healthy targets are generally larger and benefit from higher premiums, especially when markets are falling </li></ul>11 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 15. Short-Term Performance Buying a distressed target is a win-win situation’ 12 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times Periods Overall gaining period Overall falling period Total N CAAR T-Test N CAAR T-Test N CAAR T-Test Panel A: Acquirer abnormal returns (-2,+1) Healthy 3,812 1.49% 1.515 944 0.16% 0.497 4,756 1.23% 1.533 Distressed 832 2.00% 4.929 338 31.36% 2.492 1,170 10.42% 2.860 Bankrupt 59 3.94% 4.121 32 4.28% 2.278 91 4.07% 4.516 Total 4,703 1.61% 1.997 1,314 8.56% 2.620 6,017 3.12% 3.205 Panel B: Target abnormal returns (-2,+1) Healthy 2,861 15.03% 8.927 961 18.12% 52.799 3,822 15.80% 12.487 Distressed 617 16.14% 4.913 285 24.91% 1.793 902 18.91% 3.873 Bankrupt 67 -4.29% -0.609 61 68.58% 0.358 128 30.44% 0.335 Total 3,545 14.85% 10.197 1,307 21.95% 2.325 4,852 16.77% 6.121
  • 16. Long-Term Performance (1) <ul><li>Acquisitions of distressed targets destroy shareholder value in the long-term </li></ul><ul><li>Both ROE and EBITDA/Sales for the acquirer pre-acquisition compared with combined post-acquisition greatly deteriorate with time </li></ul><ul><li>Acquirers of distressed and bankrupt targets underperform acquirers of healthy targets </li></ul>13 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 17. Long-Term Performance (2) <ul><li>Possible explanations: </li></ul><ul><li>Planning suffers as time to completion is quicker </li></ul><ul><li>Integration is more costly/complicated than anticipated </li></ul><ul><li>Distressed targets are strapped of profitable assets </li></ul><ul><li>Investment necessary post-acquisition will possibly be larger than anticipated </li></ul>14 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 18. Long-Term Performance (3) <ul><li>Acquisitions of distressed targets create value for the economy as whole </li></ul><ul><li>Combined performance before and after show evidence of value creation as both ROE and EBITDA/Sales improve </li></ul>15 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 19. Long-Term Performance (4) <ul><li>Possible explanations: </li></ul><ul><li>Target was doing very poorly before the acquisition so combined performance prior to the deal was low </li></ul><ul><li>The acquirer can probably negotiate terms on many ‘failed’ parts of the business as well as receive some debt forgiveness </li></ul><ul><li>The acquirer is also in a very strong position to make quick and ruthless changes to the operations of the target, undoubtedly including significant cost-cutting strategies </li></ul>16 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 20. Conclusions <ul><li>Event Study: Winners are acquirers involved in acquisitions of distressed & bankrupt targets and also healthy & distressed targets </li></ul><ul><li>Long-Term Performance: Comparison of combined pre-bid and post-bid performance suggests synergy realization in acquisitions involving distressed & bankrupt targets </li></ul><ul><li>Pressure is on due diligence, acquisition planning, and integration </li></ul>17 M Carapeto, S Moeller, A Faelten – A survival guide to M&A in distressed times
  • 21. SIP 16 UPDATE Mike Chapman Insolvency Service
  • 22. SIP16 – present position <ul><li>Report on the first six month’s operation of SIP 16 was published in July 2009 </li></ul><ul><li>65% of SIP16 statements were compliant </li></ul><ul><li>Compliance, on a monthly basis since the report, has been up to 70% </li></ul>Mike Chapman – SIP 16 Update 1
  • 23. Why are statements not compliant? <ul><li>From our monitoring of statements, the following areas are the most common pitfalls: </li></ul><ul><li>Bullet point disclosure </li></ul><ul><li>Timing </li></ul><ul><li>Extent of prior involvement </li></ul><ul><li>Marketing </li></ul><ul><li>Valuations </li></ul><ul><li>Details of assets and of the transaction </li></ul><ul><li>Consideration </li></ul><ul><li>Identity of the purchaser and any connection </li></ul>2 Mike Chapman – SIP 16 Update
  • 24. Way forward <ul><li>The Service, in consultation with the RPBs, has issued guidance to IPs via Dear IP </li></ul><ul><li>We will work with the RPBs to strengthen the SIP </li></ul>3 Mike Chapman – SIP 16 Update
  • 25. Further guidance Explanation and justification “ It is important that [creditors] are provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, so that they can be satisfied that the administrator has acted with due regard for their interests.” 4 Mike Chapman – SIP 16 Update
  • 26. Timing <ul><li>In all but the most exceptional cases, SIP 16 information should be disclosed within 14 days of completion of the sale </li></ul>5 Mike Chapman – SIP 16 Update
  • 27. Source and extent of involvement <ul><li>The name of the introducer and their relationship to the company should be disclosed, together with the date of the IP’s engagement </li></ul>6 Mike Chapman – SIP 16 Update
  • 28. Marketing activities <ul><li>Where marketing is undertaken, either by the company or by the IP prior to the administration, details should be disclosed </li></ul><ul><li>A summary of offers received, and why the offer accepted was considered the best </li></ul>7 Mike Chapman – SIP 16 Update
  • 29. Valuations <ul><li>The amount attributed to each category of asset should be disclosed </li></ul><ul><li>The basis of the valuation should be provided as well as the name of the valuer </li></ul>8 Mike Chapman – SIP 16 Update
  • 30. Details of the assets involved <ul><li>The assets included and excluded from the sale should be clearly stated </li></ul>9 Mike Chapman – SIP 16 Update
  • 31. Consideration for the transaction <ul><li>Consideration should be broken down by asset class </li></ul><ul><li>For group companies, the apportionment of consideration against each company should be shown </li></ul><ul><li>Deferred consideration - structure of payments, and any security should be disclosed </li></ul>10 Mike Chapman – SIP 16 Update
  • 32. Next Steps Next monitoring report to be published March 2010. Any changes to the SIP that JIC propose will be subject to consultation. 11 Mike Chapman – SIP 16 Update
  • 33. SIP 16: THE CREDITORS’ PERSPECTIVE? Dr Sandra Frisby University of Nottingham
  • 34. The most common pre-pack gripes <ul><li>Phoenix pre-packs </li></ul><ul><li>The ‘done deal’ </li></ul><ul><li>Fattening up the business for sale </li></ul><ul><li>Ignoring the interests of trade creditors </li></ul>Sandra Frisby - SIP 16: The creditors’ perspective? 1
  • 35. The Phoenix Problem <ul><li>The ‘Phoepack’? </li></ul><ul><li>Suspicions of collusion </li></ul><ul><li>SIP 16, paragraph 5: the right emphasis </li></ul><ul><li>SIP 16, paragraph 9: connections and guarantees disclosed </li></ul><ul><li>General justification </li></ul>Sandra Frisby - SIP 16: The creditors’ perspective? 2
  • 36. The ‘Done Deal’ Problem <ul><li>Inescapable element of a pre-pack, but not exclusive to pre-packs </li></ul><ul><li>Therefore comprehensive justification critical </li></ul><ul><li>Coupled with paragraph 7 ‘thought process’ </li></ul><ul><li>For the future: CVA with moratorium pre-pack? </li></ul>Sandra Frisby - SIP 16: The creditors’ perspective? 3
  • 37. Cranking up the pre-pre-pack orders <ul><li>Director misconduct (and not confined to pre-packs), but for practitioners to counter </li></ul><ul><li>Paragraph 6 of SIP 16: a timely reminder </li></ul><ul><li>Considering directors’ contributions </li></ul><ul><li>The follow-through: acting as liquidator and pursuing directors (ss.213 and 214 Insolvency Act) </li></ul><ul><li>Reporting obligations </li></ul>Sandra Frisby - SIP 16: The creditors’ perspective? 4
  • 38. We are dispensable… <ul><li>Paragraph 7 again: projecting post-appointment obligations onto the pre-appointment period </li></ul><ul><li>The disclosure regime: SIP 16 does not produce money, but may explain why it is not forthcoming </li></ul><ul><li>And might assist in informing decisions as to whether to trade with Newco </li></ul><ul><li>Dealing with retention of title issues: should it really be left to Newco? </li></ul>Sandra Frisby - SIP 16: The creditors’ perspective? 5
  • 39. Let’s hear it for SIP 16? <ul><li>Not a pre-pack panacea, BUT…. </li></ul><ul><li>Probably the most comprehensive disclosure regime in insolvency </li></ul><ul><li>The emphasis is right: justification and information to the fore </li></ul><ul><li>And allows for more effective regulation </li></ul>Sandra Frisby - SIP 16: The creditors’ perspective? 6
  • 40. INSOLVENCY RESEARCH CONFERENCE 10 November 2009
  • 41. MAKING CREDITOR PROTECTION EFFECTIVE Michael Mumford and Alan Katz International Centre for Research in Accounting Lancaster University Management School
  • 42. MAKING CREDITOR PROTECTION EFFECTIVE <ul><li>Unlike our previous projects, this is a review of basic precepts starting from first principles </li></ul><ul><li>Our draft was submitted to CBP in May 2008 </li></ul><ul><li>We make 24 recommendations </li></ul><ul><ul><li>ACCOUNTING DISCLOSURES (mainly Michael) </li></ul></ul><ul><ul><li>CHANGES IN LEGAL AND REGULATORY PRACTICE (mainly Alan) </li></ul></ul>1 Michael Mumford and Alan Katz ICRA Lancaster University Management School
  • 43. MAKING CREDITOR PROTECTION EFFECTIVE <ul><li>Motivation for our project (In March 2005) </li></ul><ul><ul><li>Long time since 1986 IA </li></ul></ul><ul><ul><li>New 2002 Enterprise Act </li></ul></ul><ul><ul><li>Adoption of IFRSs in place of (UK) FRSs </li></ul></ul><ul><ul><li>Prospect of company law reform in UK </li></ul></ul><ul><li>We expected to take until Oct 2006 but we were delayed by 2006 Companies Act, publication of Andrew Keay Company Directors’ Responsibilities to Creditors (2007), and KPMG’s study on capital maintenance under second company law directive </li></ul>2 Michael Mumford and Alan Katz ICRA Lancaster University Management School
  • 44. MAKING CREDITOR PROTECTION EFFECTIVE <ul><li>Accounting-based regulations were being criticised </li></ul><ul><ul><li>Rickford Report (2004) </li></ul></ul><ul><ul><li>FEE Survey and Discussion Paper on Alternatives to Capital Maintenance Regimes (2007) </li></ul></ul><ul><li>BUT (UK) Company Law Review Committee was cool towards Rickford </li></ul><ul><li>ALSO European Commission Directorate General for Internal Market and Services (in response to KPMG) rejected calls to amend the 2 nd Directive </li></ul>3 Michael Mumford and Alan Katz ICRA Lancaster University Management School
  • 45. MAKING CREDITOR PROTECTION EFFECTIVE <ul><li>EC Dir Gen for Internal Market and Services (2008) notes (5-page summary shows our references): </li></ul><ul><ul><li>The Current minimum legal capital requirements and rules of capital maintenance do not constitute a major obstacle to dividend distribution </li></ul></ul><ul><ul><li>Member States (and companies) can set higher capital maintenance rules if they wish </li></ul></ul><ul><ul><li>Balance sheet test (based on HC a/c under 4 th Accounting Directive) can also be supplemented </li></ul></ul><ul><ul><li>2 nd Co Law Directive “does not seem to cause significant operational problems for companies” </li></ul></ul>4 Michael Mumford and Alan Katz ICRA Lancaster University Management School
  • 46. MAKING CREDITOR PROTECTION EFFECTIVE <ul><li>While EC is reluctant to change the 2 nd Directive on Company Law, evidence still accumulates of the need to do so: </li></ul><ul><ul><li>Meeks and Meeks (2009 p23) “The probability that a firm will fair affects to an economically significant extent the valuations assigned to its assets and liabilities. At the same time, of course, the valuation of assets and liabilities determines how close the firm is to insolvency – in other words, its probability of failure!” </li></ul></ul><ul><ul><li>EC’s response ignores costs of preserving a large body of ineffective law on capital maintenance </li></ul></ul>5 Michael Mumford and Alan Katz ICRA Lancaster University Management School
  • 47. MAKING CREDITOR PROTECTION EFFECTIVE <ul><li>Capital maintenance rules are apparently being observed throughout Europe (and many places elsewhere) – but this says nothing about their value </li></ul><ul><li>We see the use of a cash flow solvency test (CFST) as necessary and sufficient, without a potentially confusing balance sheet test, to define insolvency. We do not pretend that a CFST is easy to frame or implement – but it the relevant test </li></ul><ul><li>The Rickford Report comes to the same view, but it addresses only 2 nd Directive and public companies – we regard private companies as the main problem </li></ul>6 Michael Mumford and Alan Katz ICRA Lancaster University Management School
  • 48. MAKING CREDITOR PROTECTION EFFECTIVE <ul><li>Recommendations 1 - 5: </li></ul><ul><li>Concept of “General purpose accounts” is inadequate </li></ul><ul><li>More companies should publish full accounts </li></ul><ul><li>More companies need a full audit </li></ul><ul><li>Public companies need a solvency statement from their directors when they a propose distribution </li></ul><ul><li>Companies that may file abbreviated accounts at present should be allowed to file a solvency statement instead </li></ul>7 Michael Mumford and Alan Katz ICRA Lancaster University Management School
  • 49. MAKING CREDITOR PROTECTION EFFECTIVE <ul><li>Recommendations 6 – 10 </li></ul><ul><li>Cash flow forecasts must be the basis for solvency statements – subject to how much to publish; how much detail to embody; +ve assurance for 1 st year ahead and –ve assurance for further future; attestation; frequency of board review; function of the exercise as a discipline on the board </li></ul><ul><li>Recognition of directors’ duties to review solvency </li></ul><ul><li>Directors’ duties to entity </li></ul><ul><li>Objective v subjective tests need revised burdens and standards of proof in IA actions </li></ul><ul><li>Establish the principle in West Mercia (et alia) </li></ul>Michael Mumford and Alan Katz ICRA Lancaster University Management School 8
  • 50. MAKING CREDITOR PROTECTION EFFECTIVE <ul><li>Recommendations 11 – 15 </li></ul><ul><li>Administration as standard gateway on insolvency </li></ul><ul><li>Link CDDA actions more closely with IA actions </li></ul><ul><li>IA Disqualification Unit (DU) to monitor “undertakings” </li></ul><ul><li>More pro-active role for the Insolvency Service </li></ul><ul><li>Financial support from IS would be helpful to fund IA actions, to recognise the public benefit aspect </li></ul>Michael Mumford and Alan Katz ICRA Lancaster University Management School 9
  • 51. MAKING CREDITOR PROTECTION EFFECTIVE <ul><li>Recommendations 16-20 </li></ul><ul><li>Welcome moves to make “wrongful trading” illegal across the European Union </li></ul><ul><li>Ease commercial funding of actions and insurance cover (including D&O insurance) </li></ul><ul><li>Amend priorities over benefits and costs to give further protection to unsecured creditors </li></ul><ul><li>Review and extend the use of the Prescribed Part </li></ul><ul><li>Extend recovery of office holders’ costs, from court awards, from the Prescribed Part (where it exists) and from the IS where public interest activities are involved </li></ul>10 Michael Mumford and Alan Katz ICRA Lancaster University Management School
  • 52. MAKING CREDITOR PROTECTION EFFECTIVE <ul><li>Recommendations 21 – 24 </li></ul><ul><li>We question whether fraudulent and wrongful trading actions need to await formal insolvency proceedings, and we suggest consistency could be improved as between the main procedures (liquidation and administration) as to available recovery actions </li></ul><ul><li>It is worth investigating whether it necessary that the above actions can only be brought by office holders </li></ul><ul><li>Creditors committee can be made more effective, by increasing participation </li></ul><ul><li>Pre-packaged sales need to be made more transparent (SIP 16 and Re Kayley Vending came after our paper was submitted). </li></ul>Michael Mumford and Alan Katz ICRA Lancaster University Management School 11
  • 53. THE FEE-CHARGING DEBT MANAGEMENT INDUSTRY IN 2009 Sharon Collard Personal Finance Research Centre University of Bristol
  • 54. Big questions <ul><li>How many FCDMCs are there? </li></ul><ul><li>How many people have a DMP from a FCDMC? </li></ul><ul><li>How durable are DMPs? </li></ul><ul><li>What do creditors think about FCDMCs? </li></ul><ul><li>What are the experiences and outcomes for customers of FCDMCs? </li></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 1
  • 55. Research methods <ul><li>Desk research </li></ul><ul><li>Depth telephone interviews with 10 representatives from the credit industry </li></ul><ul><li>Telephone survey with 50 FCDMCs </li></ul><ul><li>Face-to-face depth interviews with 30 customers of FCDMCs </li></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 2
  • 56. How many FCDMCs are there? <ul><li>1999: list of 40 to work from </li></ul><ul><li>Now: 1,396 licences issued or renewed under new CCL regime (16%) are in debt adjusting/debt counselling category </li></ul><ul><ul><li>68,000 licences in this category (58%) in total </li></ul></ul><ul><li>150 FCDMCs identified in this review </li></ul><ul><ul><li>Most (130 or so) direct providers </li></ul></ul><ul><ul><li>Rest are introducers </li></ul></ul><ul><ul><li>But excludes those with no web presence </li></ul></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 3
  • 57. How many people use FCDMCs? <ul><li>600,000 according to YouGov survey </li></ul><ul><ul><li>But no distinction between fee and free </li></ul></ul><ul><li>375,000 according to industry figures </li></ul><ul><li>Most companies in phone survey had fewer than 1,000 customers on a DMP </li></ul><ul><ul><li>A few said they had more than 10,000 </li></ul></ul><ul><li>From phone survey, average number of customers per company is roughly 2,450 </li></ul><ul><li>This gives crude estimate of c. 320,000 based on known DMP providers (130) </li></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 4
  • 58. How durable are DMPs? Projected average duration (phone survey) Sharon Collard - The Fee-Charging Debt Management Industry in 2009 5
  • 59. Actual average length of DMP (phone survey) 6 Sharon Collard - The Fee-Charging Debt Management Industry in 2009
  • 60. What do creditors think of FCDMCs? <ul><li>3 rd party approaches assessed in same way </li></ul><ul><li>Uncommon for freeze on interest to be standard practice among those interviewed </li></ul><ul><li>Mixed views and experiences </li></ul><ul><ul><li>Generally positive experiences of working with larger, longer-established firms </li></ul></ul><ul><ul><li>Serious concerns about smaller, newer entrants </li></ul></ul><ul><ul><li>General concern about charges </li></ul></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 7
  • 61. Positive experiences with some… <ul><li>Open and transparent </li></ul><ul><li>Efficient systems, processes and operations </li></ul><ul><li>Open to discussions about sharing MI and streamlining </li></ul><ul><li>Employ people in equivalent roles to credit industry </li></ul><ul><li>Proactive in chasing up late or missed payments </li></ul><ul><ul><li>By phone rather than letter </li></ul></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 8
  • 62. … and compared well with some parts of the not-for-profit sector <ul><li>Creditor-funded DMP providers </li></ul><ul><ul><li>Good relationships </li></ul></ul><ul><ul><li>High and consistent standard of financial statements </li></ul></ul><ul><li>Less easy to engage with smaller nfp agencies </li></ul><ul><ul><li>Advisers may have limited working hours </li></ul></ul><ul><ul><li>‘Them and us’ mentality among some advisers </li></ul></ul><ul><ul><li>Difficult to promote standard practices </li></ul></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 9
  • 63. But at the other end of the fee-charging spectrum… <ul><li>Lack of transparency in activities and charges </li></ul><ul><li>Advice not always in best interests of debtor </li></ul><ul><li>Low standard of financial statements </li></ul><ul><ul><li>Incorrect use of trigger figures </li></ul></ul><ul><ul><li>Misrepresentation of income and expenditure </li></ul></ul><ul><ul><li>Any proof of income and expenditure? </li></ul></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 10
  • 64. Plus general concerns about charges <ul><li>High set-up charges </li></ul><ul><ul><li>Extend length of DMP </li></ul></ul><ul><li>Set-up charges taken over several months </li></ul><ul><ul><li>Delays in lenders receiving payment </li></ul></ul><ul><ul><li>Customers continue to be pursued </li></ul></ul><ul><li>Do some debtors use credit to pay set-up fees? </li></ul><ul><li>Recent increases in management charges applied to new and existing customers </li></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 11
  • 65. Customer experiences <ul><li>Positive first impressions </li></ul><ul><ul><li>So uncommon to contact any other company </li></ul></ul><ul><ul><li>Deal with debt problems and creditors </li></ul></ul><ul><ul><li>Single, affordable debt repayment </li></ul></ul><ul><li>Monthly fees 5-18% of repayment </li></ul><ul><ul><li>Most aware from outset about fees </li></ul></ul><ul><ul><li>Some felt they were only told about charges late on </li></ul></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 12
  • 66. Customer outcomes <ul><ul><li>Sample was designed to include satisfied and dissatisfied customers </li></ul></ul><ul><ul><li>Three outcomes: </li></ul></ul><ul><ul><li>Currently repaying debts through a DMP </li></ul></ul><ul><ul><li>Cancelled DMP, mainly because of poor service </li></ul></ul><ul><ul><li>Repaid all (or almost all) debts through DMP </li></ul></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 13
  • 67. Currently repaying debts via DMP <ul><ul><li>On DMP for between 9 months and 6 years </li></ul></ul><ul><ul><li>Most felt financial situation had improved </li></ul></ul><ul><ul><li>Most keeping up with DMP repayments and other commitments – but sometimes a struggle </li></ul></ul><ul><ul><ul><li>A few had missed DMP payments and/or fallen behind with other bills </li></ul></ul></ul><ul><ul><ul><li>Mainly due to drop in income or high housing costs </li></ul></ul></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 14
  • 68. Currently repaying debts via DMP <ul><li>Jed is a single man in his late 20s, with a child who lives with his ex-partner. For the past 10 months, he has been paying £170 per month through a DMP. The company takes a fee of 15% each month (about £26). </li></ul><ul><li>Jed has kept up with his repayments, and is confident that he can be debt-free in six years, as advised by the debt management company. His financial situation has improved considerably because of the lower repayment he is making. He has even started to save a small amount each month. </li></ul><ul><li>I can just about live now, with the money I’ve got now I can pay my mum [housekeeping] and I can look after my son and take him to the cinema and pay for my car insurance. </li></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 15
  • 69. Cancelled or terminated DMP <ul><li>Generally terminated agreement after less than 12 months </li></ul><ul><ul><li>But had made at least three payments </li></ul></ul><ul><li>Main reason was dissatisfaction with service </li></ul><ul><ul><li>Creditors said they had not been paid or payments were late </li></ul></ul><ul><ul><li>Very little information from FCDMC </li></ul></ul><ul><li>Felt financial situation was worse </li></ul><ul><li>Most had set up/were setting up alternative payment arrangements with creditors </li></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 16
  • 70. Cancelled or terminated DMP <ul><li>Jill and her husband are in their 40s, with two children. They recently cancelled their DMP after eight months when they discovered that some of their creditors had received payments late from the FCDMC, and others had not received any payments at all. In addition, they had just found out that their first two payments of £300 were retained by the debt management company and not distributed to their creditors. </li></ul><ul><ul><li>You’ve paid all them charges for nothing really, especially when they weren’t sending the money on time. </li></ul></ul><ul><li>Jill had written several letters to the company asking for information, but received no reply. She contacted their local CAB, who referred them to National Debtline. They had subsequently been referred to a free-to-client DMP provider and were about to start making payments of £450 per month. In the meantime, Jill had negotiated repayments directly with some of their creditors, and they were paying what they could to others that would not agree to a reduced repayment. They had always prioritised their mortgage payments and other household bills. </li></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 17
  • 71. Repaid consumer credit debts <ul><li>Repaid in full via DMP, ranged from 2-5 yrs </li></ul><ul><li>Repaid most via DMP, but paid remaining amounts themselves to avoid further fees </li></ul><ul><li>Repaid via DMP for some time (ranged from 2 months to 7 years) before reaching full and final settlement with creditors </li></ul><ul><ul><li>Redundancy payout, pension lump-sum, proceeds of house sale </li></ul></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 18
  • 72. Repaid consumer credit debts <ul><li>Lisa is in her early 40s, married with two children. She was on a DMP for six years, making a monthly payment of £325. Towards the end of this time, Lisa contacted the debt management company to find out what balances remained outstanding. As she only owed money to three of her original eight creditors, she terminated the DMP and arranged to pay off the outstanding amounts (totalling £600) herself. Now debt-free, she and her husband enjoyed a good standard of living, and. Lisa’s recent move from part-time to full-time work had further improved their financial situation. </li></ul><ul><ul><li>It's fantastic, yes, life’s sorted out now… I’ve got everything I need and financially I’m sorted. It's taken a hell of a long time to do it but I’m fine now. </li></ul></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 19
  • 73. Policy considerations <ul><li>Industry regulation and quality standards </li></ul><ul><li>Information about free-to-client services not always provided by creditors at sufficiently early stage </li></ul><ul><li>Low visibility of free-to-client DMP providers among people in debt and confusion about fee vs free </li></ul><ul><li>Idea of dealing with creditors can be unappealing to people in financial difficulty </li></ul>Sharon Collard - The Fee-Charging Debt Management Industry in 2009 20
  • 74. INSOLVENCY RESEARCH CONFERENCE 10 November 2009
  • 75. DEBT RELIEF ORDERS Nick Howard The Insolvency Service
  • 76. Nick Howard - DROs 1 Origins of the process <ul><li>DCA research 2004 – identified exclusion </li></ul><ul><li>InsS consultation & development 2005 </li></ul><ul><li>Tribunals Courts & Enforcement Act 2007 </li></ul><ul><li>Cost constraints - £90 - no cross-subsidy </li></ul><ul><li>14,000 to 21,000 cases per year (including @10% existing bankruptcies) </li></ul><ul><li>Partnership with debt advice sector </li></ul>
  • 77. Nick Howard - DROs 2 Developing the process <ul><li>Strict parameters: </li></ul><ul><ul><ul><li>£300 gross assets </li></ul></ul></ul><ul><ul><ul><li>£50 monthly disposable income </li></ul></ul></ul><ul><ul><ul><li>£15,000 total liabilities </li></ul></ul></ul><ul><ul><ul><li>Only one every six years </li></ul></ul></ul><ul><li>Process limited to those who cannot pay and will never pay – balancing creditors and debtors needs </li></ul><ul><li>On-line application and fee processing </li></ul><ul><li>Highly-automated IT systems at InsS </li></ul>
  • 78. Nick Howard - DROs 3 DROs in operation <ul><li>@1,330 Intermediaries authorised by 9 Competent Authorities </li></ul><ul><li>National Coverage </li></ul><ul><li>Plymouth office - @10 staff </li></ul><ul><li>Determination – approve/reject/object/revoke </li></ul><ul><li>Courts retain standard insolvency jurisdiction </li></ul><ul><li>Enforcement regime </li></ul>
  • 79. Nick Howard - DROs 4 DROs – approximate numbers <ul><li>Official Stats: 1,978 Q2 2009 (provisional figure) </li></ul><ul><li>Actual to 30/9/09: </li></ul><ul><ul><ul><li>Approved: 6,483 </li></ul></ul></ul><ul><ul><ul><li>Declined: 80 </li></ul></ul></ul><ul><ul><ul><li>Revoked: 24 </li></ul></ul></ul><ul><li>Running around 70 per day </li></ul>
  • 80. Nick Howard - DROs 5 DROs – Regional Figures <ul><li>Lon/SE (incl. Kent, Sussex, Essex, Middx) </li></ul><ul><li>S+W (South & West) </li></ul><ul><li>Midlands (incl. Gloucestershire, Anglia, Staffs, Lincoln) </li></ul><ul><li>North </li></ul><ul><li>Wales </li></ul>
  • 81. Nick Howard - DROs 6 DROs – issues arising <ul><li>Pensions – caught in £300 limit </li></ul><ul><li>Ongoing recovery from benefits – mirrors bankruptcy </li></ul><ul><li>Rent recovery – mirrors bankruptcy – Harlow- v-Hall applies </li></ul><ul><li>Some problems with moratorium effects – eg Social Fund Loans/Walking possession </li></ul><ul><li>Issues on debt and asset definitions (eg £1,000 vehicle limit) </li></ul><ul><li>First enforcement outcomes </li></ul>
  • 82. INDIVIDUAL INSOLVENCY, CENTRES OF MAIN INTEREST AND BANKRUPTCY TOURISM Chief Registrar Baister
  • 83. INSOLVENCY RESEARCH CONFERENCE 10 November 2009
  • 84. DISCHARGE IN BANKRUPTCY: AN EXAMINATION OF PERSONAL INSOLVENCY RELIEF John Tribe KPMG Lecturer in Restructuring , Kingston Law School, Kingston University, Surrey, UK
  • 85. John Tribe – Discharge in Bankruptcy (1) Discharge Debates – an introduction Two Schools of Thought: (1) That less onerous discharge provisions (‘liberal regimes thesis’ ) will and have encouraged irresponsible borrowing activities by debtors, thus causing a rise in the number of people seeking redress to the bankruptcy system. (2) Legislative changes have not caused additional redress to the bankruptcy procedure themselves, but that the changes in the legislation were accompanied by an increase in consumer credit availability generally and that this lead to a natural increase in debt related failure (‘credit generosity thesis’ ) and therefore redress to the bankruptcy laws. 1
  • 86. <ul><li>Table One: Personal Insolvency Statistics - 1999-2008 </li></ul><ul><li>(Source: Insolvency Service) </li></ul>2 John Tribe – Discharge in Bankruptcy 106,544 106,645 107,288 67,584 46,650 35,604 30,587 29,775 29,528 28,806 Totals 39,116 42,165 44,332 20,293 10,752 7,583 6,295 6,298 7,978 7,195 IVAs 67,428 64,480 62,956 47,291 35,898 28,021 24,292 23,477 21,550 21,611 Bankruptcy 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Year
  • 87. Table Two: Graphical Representation of Personal Insolvency Statistics: 1987-2008 (Source: Insolvency Service) John Tribe – Discharge in Bankruptcy 3
  • 88. Key Proposition being tested in the paper: <ul><li>The thesis that - less onerous discharge provisions encourage more responsible lending practices </li></ul><ul><li>This is due to enhanced creditor prudence brought about by the notion that if a debtor can escape their liabilities with ease, a creditor will not encumber them with such onerous liabilities. </li></ul><ul><li>The creditor will have the knowledge, and perhaps disincentive, that the debtor could escape liability for the debt easily. The creditor will therefore lend more cautiously to minimise the risk of loss. </li></ul>John Tribe – Discharge in Bankruptcy 4
  • 89. (2) In the Beginning - some key dates in discharge history <ul><li>1542 : Bankruptcy enters the statute book! </li></ul><ul><li>An Act Against Such Persons As Do Make Bankrupts 1542 (34 & 35 Hen VIII, c.4) </li></ul><ul><ul><li>no discharge available from the legal state of bankruptcy until 1705 when under the reign of Queen Anne a statute was enacted that brought the privilege of discharge into English law. </li></ul></ul><ul><ul><li>Why enter bankruptcy then? </li></ul></ul><ul><ul><li>Debtors: trader constraints </li></ul></ul><ul><ul><li>Creditors: After acquired assets continually available. </li></ul></ul>John Tribe – Discharge in Bankruptcy 5
  • 90. (2) In the Beginning - some key dates in discharge history, cont’d <ul><li>1705: Discharge enters the statute book! </li></ul><ul><li>An Act to Prevent Frauds Frequently Committed by Bankrupts 1705, (4 & 5 Anne, c.17). </li></ul><ul><li>“ that all and every person and persons so becoming bankrupt, as aforesaid, who shall, within the time limited by this act, surrender him, her, or themselves to the major part of the commissioners therein named, and in all things conform as in and by this act is directed…and shall be discharged from all debts by him, her, or them due and owing at the time that he, she or they did become bankrupt .” </li></ul><ul><li>The Certificate of Conformity </li></ul><ul><ul><li>discharged the bankrupt and any of their after-acquired property from any debts that had been provable in his or her bankruptcy </li></ul></ul>John Tribe – Discharge in Bankruptcy 6
  • 91. (2) In the Beginning - some key dates in discharge history, cont’d <ul><li>1849 : Classes of conduct </li></ul><ul><li>Bankruptcy Act 1849, s.198. </li></ul><ul><li>certificates of conformity were divided into three separate classes that related to the culpability of the bankrupt. </li></ul><ul><li>Class (1): related to bankrupts who found themselves in an impecunious position due to misfortune or unavoidable losses. </li></ul><ul><li>Class (2) required a declaration that the bankruptcy was due to circumstances in which misfortune and unavoidable losses did not play a sole part , but were a contributing factor. </li></ul><ul><li>Class (3) required a declaration that the losses had occurred not from unavoidable loss or misfortune . </li></ul>John Tribe – Discharge in Bankruptcy 7
  • 92. (2) In the Beginning - some key dates in discharge history, cont’d <ul><li>1861 : Certificate abolition </li></ul><ul><li>Bankruptcy Act 1861, ss157, 161. </li></ul><ul><li>abolished the classification of certificates , and certificates of conformity themselves, replacing them with an order for discharge . </li></ul><ul><li>The court also retained its discretionary power to grant this new order for discharge. </li></ul>John Tribe – Discharge in Bankruptcy 8
  • 93. (2) In the Beginning - some key dates in discharge history, cont’d <ul><li>1883 : from creditor to court control </li></ul><ul><li>Bankruptcy Act 1883 </li></ul><ul><li>brought sweeping changes to the law of bankruptcy. </li></ul><ul><li>Throughout the rest of the 19 th century, and for some 93 years henceforth, a bankrupt had to apply to the court for their own discharge because the Act transferred the granting of discharge away from the control of creditors and passed it directly to the Bankruptcy Court . </li></ul><ul><li>So just as a court order was needed to place the individual debtor into the status of a bankrupt, so a court order was also needed to remove them from that status to their original status. </li></ul>John Tribe – Discharge in Bankruptcy 9
  • 94. (2) In the Beginning - some key dates in discharge history, cont’d <ul><li>1976 : The advent of automatic discharge </li></ul><ul><li>Insolvency Act 1976 (c.60), s.7. </li></ul><ul><li>introduced the concept of automatic discharge into English law for the first time. </li></ul><ul><li>“… the aura of menace and near-perpetual stigma which hitherto surrounded the institution of bankruptcy cannot but have diminished by the clarified prospect of a finite, and relatively short, interruption of the individual’s normal legal status.” (per Professor Fletcher, in: Fletcher, I.F. The Law of Insolvency . 3rd Edition. Sweet & Maxwell Ltd. London, 2002, at paragraph 11-004.) </li></ul><ul><li>The automatic discharge provisions were however limited to a strict set of conditions and only occurred after five years. </li></ul><ul><li>So between 1976 and 1986 - automatic discharge five years from commencement of bankruptcy </li></ul>John Tribe – Discharge in Bankruptcy 10
  • 95. (2) In the Beginning - some key dates in discharge history, cont’d <ul><li>1986 : 3 year period before automatic discharge </li></ul><ul><li>Insolvency Act 1986, s.279(1) as enacted - 3 years </li></ul><ul><li>“ the substitution of the concept of a fixed, and relatively short, duration of the condition of bankruptcy for those debtors who respect their legal obligations while they remain undischarged, has undoubtedly marked the beginning of a fundamental adjustment in prevailing social attitudes towards bankruptcy, and towards those who undergo it.” (per Fletcher at paragraph 11-004). </li></ul><ul><li>Writing in relation to the FIVE to THREE YEAR shift! </li></ul>John Tribe – Discharge in Bankruptcy 11
  • 96. (2) In the Beginning - some key dates in discharge history <ul><li>2004 : One year period before automatic discharge </li></ul><ul><li>Enterprise Act 2002, s.256 (amending s.279 IA86) - from 1st April 2004. </li></ul><ul><li>“ I do not think I am being unfair to Mr. Blair and his colleagues if I surmise that this is the only government in the world that could entitle bankruptcy legislation as an ‘Enterprise Act’” (per Jack Maurice in ‘ Hurrah for Insolvency’ Practical Audit and Accounting, 15 PAA 9, 103-104.) </li></ul><ul><li>HOT DEBATE! </li></ul><ul><li>Creditors V.s Debtors - an appropriate balance? </li></ul><ul><li>True users? (traders, entrepreneur focus) </li></ul><ul><li>Policy drivers </li></ul><ul><li>Full body of legislative reform (i.e. IPO, BROs) </li></ul>John Tribe – Discharge in Bankruptcy 12
  • 97. (3) Policy Focus - Discharge Debates <ul><li>“ There must be a population of debtors who seek to exploit bankruptcy as an easy means of ridding themselves of unwanted creditors. The social implications of any such step need to be widely debated” ( per : Justice. Insolvency Law: An Agenda for Reform . London, 1994, at page 20.) </li></ul><ul><li>Issues: </li></ul><ul><ul><li>Early and late discharge </li></ul></ul><ul><ul><li>True discharge </li></ul></ul><ul><ul><li>Applying for discharge </li></ul></ul><ul><ul><li>Effect of discharge </li></ul></ul><ul><ul><li>Refusal of discharge </li></ul></ul><ul><ul><li>Conditional or qualified discharge </li></ul></ul><ul><ul><li>Rationale for discharge </li></ul></ul>John Tribe – Discharge in Bankruptcy 13
  • 98. (4) Some comparative help? <ul><li>Scotland </li></ul><ul><li>America </li></ul><ul><ul><li>Federal level </li></ul></ul><ul><ul><li>State level </li></ul></ul><ul><li>Canada </li></ul><ul><li>Australia </li></ul>John Tribe – Discharge in Bankruptcy 14
  • 99. (5) Future Directions for Discharge? - Some Concluding Thoughts <ul><li>Onerous or easy? </li></ul><ul><li>Creditor influences </li></ul><ul><li>Debtor perception of discharge provisions </li></ul><ul><li>Thank you for listening/Questions </li></ul><ul><li>Full paper available on SSRN ( http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1191173 ) . </li></ul>John Tribe – Discharge in Bankruptcy 15
  • 100. PERSONAL OVER-INDEBTEDNESS RÉGIME DESIGN A basis for a predictive model and some empirical evidence from a small geography Michael Green
  • 101. Slide 1 Pi Mechanisms 2000 - 2009 INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] An Extensive and Sophisticated Array with Major Changes in Principles and Policy Directives <ul><li>IVA Reforms Phase I - Insolvency Act 2000 </li></ul><ul><li>Major Bankruptcy Reforms – Enterprise Act 2002 </li></ul><ul><li>IVA Reforms Phase II – Working Group/SIVA (2004/06) – Regulatory Reforms (2009) </li></ul><ul><li>Debt Relief Order – CTE Act 2007 Part V Ch. III </li></ul><ul><li>Enforcement Restriction Order – CTE Act 2007 Part V Ch. II (Debt Moratorium Order) </li></ul><ul><li>Abolition of County Court Administration Order </li></ul><ul><li>(replaced by a cheap, low debt value, IVA – CTE Act 2007 Part V Ch. I </li></ul><ul><li>Debt Repayment Plan – CTE Act 2007 Part V Ch. IV </li></ul><ul><li>Prospectively, non-Court administered debtors’ bankruptcy petitions </li></ul><ul><li>Notions of ‘responsible lending’ – CCA 2006 </li></ul><ul><li>The result :- a Principles based, holistic approach to the over-indebtedness régime for seriously distressed debtors in both the working and dependent economy, where the mechanisms are ‘needs based’ and designed to deal with specific situations. CTE Act Reforms likely to be implemented Spring 2010. </li></ul>1
  • 102. Slide 2 Current Outstanding Issues – Behavioural and Institutional Fact :- Nevertheless “Recent years have also seen evidence of regression at worst and stagnation at best” in some important aspects – particularly behaviour For example : <ul><li>Market Interference and Exclusion; attempts by some lenders to defeat/minimise the purposes of public policy </li></ul><ul><li>Reduction in Promotion of Access </li></ul><ul><li>Increasing concern over sector long-term economics and competition aspects </li></ul><ul><li>Early research highlighted serious market and regulatory failure – no progress made </li></ul><ul><li>Debtor has been scarcely considered in recent years – poor overall experience. Quality and appropriateness of advice for both open market and NFP sectors is not monitored or evaluated </li></ul><ul><li>The shift to include more individuals in the formal régime (IVAs) and away from the less effective and more uncertain informal régime (DMPs), particularly when repayment cannot be made in 5 years or less, has stopped and gone into reverse since Autumn 2006 and IVA market interference by lenders </li></ul><ul><li>The shift towards increased complexity of the régime, and the appropriateness of mechanisms, has marched with intermediaries achieving positions of endue influence that has, to date, gone unchecked or evaluated </li></ul><ul><li>The delicate balance between the interests and power of the State, the Debtor and the Creditor has been lost and has swung indisputably towards the creditors, collectively. The State needs to regain control and ensure its public policy intentions are met </li></ul><ul><li>Good quality data is still difficult to generate. Reception is ‘noisy’. Sectional self-interest and denial is a commonplace </li></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 2
  • 103. Slide 3 (a) Key Issues for the Future <ul><li>WHAT? </li></ul><ul><li>Reverse the matters that have regressed or stagnated </li></ul><ul><li>HOW? </li></ul><ul><li>Shift the concentration from appropriate mechanisms to providing appropriate institutions principles and rules that can ensure an orderly market , with recognisable, accredited providers whose performance is properly and frequently monitored, and whose operation is consistent with the objectives of public policy and places no financial demands on the State </li></ul><ul><li>Ensure the proposals for the Debt Repayment Plan fit into the current holistic structure of mechanisms, avoid jurisdictional conflict and are consistent with, complementary to the new institutional structure above . Use them to help effect the redress. There are many good public policy and market reasons to support the DRP proposal, to include more individuals in the formal sector, and achieve both better debtor and creditor protection and discipline – see 10b </li></ul><ul><li>Look to develop a new element of the régime where delinquent secured and unsecured debt is concurrently dealt with outwith the bankruptcy mechanism as is now the case – a new concept. Bring the procedures for dealing with secured debt into the formal régime i.e. charging orders, repossessions and increase certainty and consistency of treatment </li></ul><ul><li>Take a long, hard look at the structure, funding and efficacy of the NFP sector dealing predominantly with the dependent economy. Look closely at discordance and debt in this sector – i.e. chaotic families, poor educational achievement, mental health – and costs to the State </li></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 3
  • 104. REMEMBER Internationally, the UK and its régime – with a mix of private and public providers and an increasingly sophisticated and ‘pin-pointed’ array of mechanisms is at the forefront of developments and in uncharted waters. There are no precedents. Similarly the increasingly important institutional elements have not yet been considered elsewhere. This represents a serious challenge of political will and effort for Government. Slide 3 (b) Key Issues for the Future (continued) INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 4
  • 105. Slide 4 (a) Why? – Reasons for Difficulty :- Behavioural <ul><li>Demands of practical priorities within INSS programme </li></ul><ul><li>Competing demands, generally </li></ul><ul><li>Lack of political will </li></ul><ul><li>Inadequate institutional performance </li></ul><ul><li>Jurisdictional conflict </li></ul><ul><li>Effects of metabargaining </li></ul><ul><li>Bigotry and refusal to accept empirical data/logical argument </li></ul><ul><li>Sectional and (self) interests </li></ul><ul><li>Reactionary ideologies </li></ul><ul><li>Indolence </li></ul><ul><li>Lack of resources – real or perceived </li></ul><ul><li>Poor intellectual application </li></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 5
  • 106. Slide 4 (b) Why? – Reasons for Difficulty :- A Conceptual and Analytical Shortfall <ul><li>Lack of an adequate conceptual framework and analytical structure for reviewing serious personal over-indebtedness specifically in the context of r égime design and régime change </li></ul><ul><li>- needs to be broader in scope than the limited consideration of process </li></ul><ul><li>and mechanisms </li></ul><ul><li>- should reflect the effects of the wider political and social economy </li></ul><ul><li>- deal with behavioural norms, expectations and performance </li></ul><ul><li>• No basis or model for prediction nor an analytical structure that can support such an approach. A common feature of other disciplines i.e. the physical sciences; engineering, medicine </li></ul><ul><li>Suggest this is a proper topic for academic enquiry and future propositions </li></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 6
  • 107. Slide 5 Personal Over-indebtedness – A Conventional Research Perspective and Current Status Some common Areas of Application and Discussion* Insolvency Regulation, Rules and Conventions <ul><li>Macro Economic </li></ul><ul><li>Contribution to Systemic Risk </li></ul><ul><li>Constraints to Growth </li></ul><ul><li>Taxation </li></ul><ul><li>Social Welfare </li></ul><ul><li>State costs </li></ul><ul><li>Health and education </li></ul><ul><li>Financial education </li></ul><ul><li>Social identification </li></ul>Regulation of actors behaviour <ul><li>Contribution of Lenders </li></ul><ul><li>Predatory lending </li></ul><ul><li>Extortionate credit </li></ul><ul><li>Excess profitability </li></ul><ul><li>Financial exclusion practices </li></ul><ul><li>Poverty </li></ul><ul><li>Generation </li></ul><ul><li>Consequences </li></ul><ul><li>Treatment </li></ul><ul><li>Government </li></ul><ul><li>Created policy </li></ul><ul><li>Political power and dislocation </li></ul>* Compiled with Prof. Iain Ramsay (2006) INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 7
  • 108. Slide 6 But :- There is Currently a Major Research Deficiency Namely INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 8 <ul><li>There is no overriding methodology that defines the essential </li></ul><ul><li>constituent parts that make up the formal and informal régime </li></ul><ul><li>that exists in a Nation State, and which provides the umbrella </li></ul><ul><li>under which all the sub-divisions in Slide 5 exist. Includes principles, </li></ul><ul><li>practices and public policy. </li></ul><ul><li>In particular there is no comprehensive analytical framework that </li></ul><ul><li>allows this to take place; nor to deal effectively with matters of </li></ul><ul><li>prediction as far as régimes are concerned. </li></ul>
  • 109. Slide 7 (a) R égime Design - Definitions <ul><li>The central question to be addressed is :- </li></ul><ul><li>WHAT HAPPENS IF THE GLASS BREAKS? </li></ul><ul><li>that is to say </li></ul><ul><li>“ In those situations where there is collective failure of an individual’s credit-bargains and particularly in a multi-creditor situation, what, in terms of public policy should the political, philosophical and practical response be?” </li></ul><ul><li>and </li></ul><ul><li>‘ How should this response reflect the needs and demands of the broader social and political economy?’ </li></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 9
  • 110. <ul><li>The R égime </li></ul><ul><li>“ This is defined broadly as that construct and array - of philosophical and political </li></ul><ul><li>drivers and objectives; informal and formal mechanisms; the behaviour of </li></ul><ul><li>individuals, institutions and market operations; regulations and legislation - whose </li></ul><ul><li>combined manifestations and consequential attitudes and behaviour provide the </li></ul><ul><li>framework within which serious personal over-indebtedness is addressed. This </li></ul><ul><li>umbrella covers both the most senior policy making decisions and the practical </li></ul><ul><li>demands of daily administration.” </li></ul>Slide 7 (b) Régime Design - Definitions INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 10
  • 111. Slide 7 (c) R égime Design - Definitions ‘Activators’ in a Personal Over-indebtedness R égime (UK) <ul><li>Government </li></ul><ul><li>• Politicians </li></ul><ul><li>• Principle Departments and Agencies </li></ul><ul><li>INSS </li></ul><ul><li>Department of Justice </li></ul><ul><li>Department for Work & Pensions </li></ul><ul><li>BISS (Credit & Competition) </li></ul><ul><li>Bank of England </li></ul>Providers & Advisors • Regulated Insolvency Practitioners and Firms • Fee earners – DMPs & financial advisors • Charitable/voluntary organisations • Creditor-subsidized organisations Distressed Debtors Thinkers, Commentators and Media • Journalists • Authors • Academia/Researchers • Website/Blog generators Principal Regulators • Insolvency Profession; Accountants; Lawyers • FSA • DEMSA • Debt Resolution Forum • IPC • OFT <ul><li>Lenders & Intermediaries </li></ul><ul><li>• Asset based secured debt </li></ul><ul><li>• Unsecured debt </li></ul><ul><ul><li>– Mainstream </li></ul></ul><ul><ul><li>– Sub-Prime/Alternative </li></ul></ul><ul><li>• Distressed Debt Purchasers </li></ul><ul><li>• Debt Collectors </li></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 11
  • 112. <ul><li>Domestic Economy : </li></ul><ul><li>Issue of systemic risk - £231 billion (Oct 2009 BoE) of unsecured personal credit. Potential delinquency not known – possibly £30-£70 billion. </li></ul><ul><li>A major problem not yet commented on. No reliable research despite household debt being one of the BoE’s 6 key indicators of systemic risk. </li></ul><ul><li>Major consequences at micro and macro policy level – individual distress; exclusion from spending economy; bank write-offs and weakened balance sheets; social welfare and housing policy; repossession and housing market repercussions ; impact on public expenditure budgets – i.e. costs of consequential externalities. </li></ul>Slide 8 (a) Does it Matter? INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 12
  • 113. Slide 8 (b) Does it Matter? (continued) <ul><li>International Considerations </li></ul><ul><li>What happens to emerging economies or developed economies </li></ul><ul><li>with no effective régime </li></ul><ul><li>What is the model? The issue of ‘transferability ’ – historical </li></ul><ul><li>precedent not persuasive – needs to be dealt with. </li></ul><ul><li>Policy Consistency </li></ul><ul><li>Within a régime there needs to be a useable methodology for </li></ul><ul><li>ensuring that jurisdictional conflict does not produce dysfunctional </li></ul><ul><li>results – only avoided by way of a well understood language and </li></ul><ul><li>framework for decision making. Similarly for groupings of nations </li></ul><ul><li>i.e. EU. </li></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 13
  • 114. <ul><li>Practical Consistency </li></ul><ul><li>The matter of high levels of Pi is not going to go away in developed economies, certainly in the medium term. It will also be a feature of emerging economies (Europe particularly). Hence it needs to be dealt with effectively. </li></ul><ul><li>The demand is for an approach that is compatible with the features of each Nation State – political; philosophical; culture; markets; credit system; legal structures and processes – and is both intellectually rigorous and generates useable and effective outcomes. </li></ul>Slide 8 (c) Does it Matter? ( continued ) INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 14
  • 115. <ul><li>The Notion of Over-indebtedness – </li></ul><ul><li>A workable definition for both policy and administrative purposes </li></ul><ul><li>Useable in terms of general analysis – markets; providers; competition; volumes; risk; process; equity; regulation et al </li></ul><ul><li>Capable of measurement </li></ul><ul><li>Progress :- Significant : brief review follows </li></ul><ul><li>A Prescriptive Model for the R égime – What should it contain in terms of its constituent parts if it is to be used for :- </li></ul><ul><li>Analysing the appropriateness of the status quo </li></ul><ul><li>Highlighting deficiencies and strengths </li></ul><ul><li>As a model for emerging economies/improvements to existing régimes </li></ul><ul><li>Progress : Negligible : primary topic of Presentation </li></ul><ul><li>Both elements need to be intellectually sound </li></ul>Slide 9 (a) Two Complementary Prerequisites for the Removal of the Deficiency INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 15
  • 116. Slide 10 The Notion of Over-indebtedness The Original Work on IVAs, Over-indebtedness and the Formal Insolvency R égime (2001/2002) demonstrated :- <ul><li>Major Difficulties : </li></ul><ul><li>A scarcity of data and the necessity for new fieldwork (no change today) </li></ul><ul><li>No accepted or useable definition of over-indebtedness </li></ul><ul><li>No satisfactory methodology existed for measuring over-indebtedness :- the conventional approaches using either macro economic data or using debtor based surveys produced misleading answers </li></ul><ul><li>No methodology available for dealing with process, determinants or philosophical considerations relating to r égime design </li></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 16
  • 117. Slide 11 (a) Over-indebtedness – a New and Conceptual Approach ‘ a changing status representing a specific observable and measurable degree of economic deterioration. This is both a behavioural and economic condition and one which exists within a specific political and market framework at that point in time.’ A Definition of Its Nature INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 17
  • 118. Slide 11 (b) Characteristics of Over-indebtedness <ul><li>a consumption function in relation to each individual/household </li></ul><ul><li>a complex multi-party behavioural function – debtor, creditor(s), State </li></ul><ul><li>a decision-making function </li></ul><ul><li>it is to do with the absolute matter of liquidity </li></ul><ul><li>encompasses the elements of time, risk and uncertainty </li></ul><ul><li>described and prescribed at any specific point in time by law and issues of enforcement </li></ul><ul><li>ultimately constrained and influenced by the political process and public policy objectives </li></ul><ul><li>a condition in a state of change to some degree for each individual </li></ul><ul><li>emotional issues will play a significant rôle in the decision making process </li></ul><ul><li>effected by shifts within the economy and actions of actors within the conflict resolution market </li></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 18
  • 119. The Debt Curve Profile – Progression from Financial Stability to Bankruptcy Slide 12 Over-indebtedness – The Basic Model INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 19
  • 120. Slide 13 (a) Theoretical Underpinning – The Basic Model <ul><li>Physical Sciences </li></ul><ul><li>Concept of Entropy – 2 nd Law of Thermodynamics – this natural force is towards destruction and decay. The concept being applied to the economic affairs of individuals and institutions. Failure will ensue unless specifically managed to ensure the contrary. </li></ul><ul><li>Modern Financial Theory (Post 1963) : </li></ul><ul><li>Ezra Solomon, Robcek, Modigliani et al. Particularly the concentration on cash, present and future value, returns, capital structures, optimisation, relationship of debt and equity, financial markets and institutional behaviour, time/risk, uncertainty. </li></ul><ul><li>3. Market Theory </li></ul><ul><li>Particularly the issues of supply-side provider behaviour, competition, pricing, entry – constraints and monopolies, regulation, failure and efficiency, presence of governmental institutions and direction, product suitability, consumer redress, institutional dispute resolution. </li></ul><ul><li>4. Behavioural Economics </li></ul><ul><li>Particularly in the areas of engagement and decision making. Empirical work in medical studies ré ‘distressed situations </li></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 20
  • 121. Slide 14 (a) Debt Curve : The Individual INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 21
  • 122. Slide 14 (b) Debt Curve : Regulation and Régime Appropriateness INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 22
  • 123. Slide 14 (c) Debt Curve : Macro-Economic Policy INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 23
  • 124. Slide 14 (b) Debt Curve : The Conflict Resolution Market INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 24
  • 125. Slide 15 Examination of Issues in a Parallel Series of Contexts General Notation as in Slides 14-117 CX1 = The Individual CX2 = Regulation and Régime Efficacy CX3 = Macro-Economic Policy CX4 = Lending and Conflict Resolution Markets INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 25
  • 126. Slide 16 Indebted Risk Curve and Insolvency <ul><ul><li>P 1 = Acceptable level of borrowings </li></ul></ul><ul><ul><li>P 2 = Trigger point where borrowings are almost beyond control </li></ul></ul><ul><ul><li>EE1 = Minimum payments only can be made to all creditors </li></ul></ul><ul><ul><li>EE2 = Minimum payments cannot be made to all creditors </li></ul></ul><ul><ul><li>EG1->2 = Permanently (±) insolvency - a low income/poverty issue - economic exclusion zone </li></ul></ul><ul><ul><li>A = Financial stability </li></ul></ul><ul><ul><li>A1 = Improving asset base and liquidity </li></ul></ul><ul><ul><li>B = Bankruptcy </li></ul></ul><ul><ul><li>C = Asset disposal post bankruptcy </li></ul></ul><ul><ul><li>D = Beginning of the process of decline </li></ul></ul><ul><ul><li>(X) = Solvent </li></ul></ul><ul><ul><li>(Y) = (±) Insolvent </li></ul></ul><ul><ul><li>Z 1 = Insolvent unless significant assets are available </li></ul></ul><ul><ul><li>Z 2 = ‘Iceberg Bankrupts’ </li></ul></ul><ul><ul><li>W = Formally insolvent </li></ul></ul><ul><ul><li>D -> B :- Excluding EG1 ->EG2 = The Working Economy - Conflict Resolution provided by supply-side market Providers </li></ul></ul><ul><ul><li>EG1 -> EG2 = The Dependent Economy - individuals economically supported principally by the State. Conflict Resolution provided by voluntary/not for profit organisation </li></ul></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 26
  • 127. Slide 17 A General Profile of Unsecured Indebtedness - The Pattern of Progression and the Placement of Processes and Institutional Involvement within the Conflict-Resolution Market INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 27
  • 128. Slide 18 (a) The Debt Curve Profile :- The Dependent Economy INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 28
  • 129. Slide 18 (b) The Debt Curve Profile :- The Working Economy INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 29
  • 130. Slide 18 (c) The Conflict Resolution Market : Probable Institutional Analysis by Class of Provider and Principal Activity Post 2009/10 Reforms Location 17,18(a) & 18(b) INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 30
  • 131. 31 Slide 19 (a) A Predictive Approach to Régime Design and Change [A] There are two important questions :- Q.1 ‘Is it possible, in any national context to look at an existing or proposed personal over-indebtedness régime and assess whether it can be counted – or is likely to be - a ‘success’ or ‘failure’? and Q.2. ‘Is it possible to predict what combination of elements would lead, if properly executed, to a régime being determined a success or, at least, enhance the probabilities of such an outcome; or if absent increase the chances of failure?’ INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address]
  • 132. Slide 19 (a) A Predictive Approach to Régime Design and Change 32 INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] [B] A proposed route for dealing with Q.1. and Q.2. :- By constructing two equations that address each question in turn, namely :- Equation I – The Objective Function :- that specifies the key criteria that determine success or failure and which can be evaluated individually and measured and summed in aggregate. and Equation II – The Predictive Determinants :- that specify those elements that will constitute the key elements of the régime and determine success or failure.
  • 133. Slide 20 (a) Equation I = The Objective Function INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] Purpose :- Maximise the Value of R where :- R = ∑ [ N 1-2 + M + PPR 1-5 + HP 1-2 + Ic + Ip + Apm ] and R signifies degree of success or failure of the régime. An assessment of quality and scope 33
  • 134. Slide 20 (b) Constituent Elements of the Objective Function N N1 :- recognition of the Conceptual Nature of Over-indebtedness and its core characteristics N2 :- recognition of the holistic nature of the Debt Curve Profile and of its progression from A -> B and its usefulness at B and including it s relevance in dealing with catastrophe (financial recessions) M The capacity and capability for the Measurement of Over-indebtedness PPR The definition of , and consistency with , the furtherance of the public policy requirements of the time in terms of :- PPR1 :- economic – macro and micro PPR2 :- social welfare PPR3 :- political objectives PPR4 :- philosophical underpinning PPR5 :- public policy directives in relation to the régime HP The development of historical principles HP1 :- strong recognition of the historical development of the underlying principles of the régime HP2 :- strong recognition and suitable mechanisms for the continual review / maintenance / correction of HP1 and PPR1-5 INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 34
  • 135. Slide 20 (c) Constituent Elements of the Objective Function (continued) Ic High level Acceptance and Concurrence of Relevant Institutions (‘Activators’) with PPR 1-5 and Output of Ip Ip A Formal Capacity for looking forward and reflecting future needs. A capacity within the Institutional Dynamics and the policy/political decision making structure that prevents osmosis Apm Efficiency and Appropriateness of informal and formal administrative processes and mechanisms Each element can be evaluated and scored, once criteria have been established and defined for each notional entity. Cumulatively they can be measured and represented over time i.e. as in Slide 20 (d). INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 35
  • 136. LOW (Failure) HIGH (Success) tn to Combined value of R for equation I Slide 20 (d) Constituent Elements of the Objective Function (continued) TIME INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 36
  • 137. Slide 21 (a) Equation II - The Predictive Determinants Purpose :- Maximise the Value of D where D = ∑ [ P + µ + J ] P 1 + P 2 + P 3 µ 1 + µ 2 + µ 3 + µ 4 + µ 5 J 1 + J 2 + J 3 + J 4 + J 5 The Political Dimension Key Elements of Institutional and Operational Understanding Prerequisites Where the elements P, µ, J are those which underpin the value of R in Equation I. An assessment of efficiency and operational scope and application INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 37
  • 138. Slide 21 (b) The Predictive Determinants (continued) P The Political Dimension *P 1 :- Institutional :- structures and decision making P 2 :- Economic policy :- macro-economic and fiscal policy *P 3 :- The philosophical and ideological basis for political decision making µ Key Elements of Understanding µ 1 :- Recognition and Acceptance of the difference between the ‘ working economy’ and the ‘dependent economy’; their populations and profiles and the implications for régime design **µ 2 :- Data Provision and Interpretation *µ 3 :- Review and Development of Underlying Principles of the Régime and Public Policy Criteria and Directives µ 4 :- The Contribution and Positioning of the Media µ 5 :- The Debtor Experience * To be discussed ** Poor progress this decade INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 38
  • 139. Slide 21 (c) The Predictive Determinants (continued) J Institutional and Operational Prerequisites J 1 :- Presence, Attitude & Performance of ‘Activators’ J 2 :- Specific and Appropriate Mechanisms and Processes and Consistency with Public Policy Principles, Objectives and Directives **J 3 :- Appropriateness and Effectiveness of Regulatory Systems – purposes , structure and control **J 4 :- Congruence of macro-economic policy and operation of retail credit markets J 5 :- Appropriateness and Operation of Conflict-Resolution Market – competition; structures; product quality and appropriateness; financing and investment; training ; match with public policy objectives *To be discussed ** Poor progress this decade INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 39
  • 140. Slide 22 (a) Specific Elements:- P 1 & P 3 <ul><li>P1 :- Institutional </li></ul><ul><li>Structural - position within government; jurisdictional cross-over and </li></ul><ul><li>conflict; basis for metabargaining (within , and without </li></ul><ul><li>government) and route of influence (external) </li></ul><ul><li>Pace of Change - relevant to external demands; extent of research and evidence </li></ul><ul><li>in policy making decisions; speed and effectiveness in </li></ul><ul><li>implementation; dilution; constraints and procedural </li></ul><ul><li>interference </li></ul><ul><li>Decision Making - formal and informal structures and influence; length of chain; </li></ul><ul><li>access to power (i.e. Cabinet/Chancellor/PM); pace; </li></ul><ul><li>interference </li></ul><ul><li>Understanding & Support </li></ul><ul><li>At departmental level – accumulated knowledge; continuity of organisational memory; technical expertise; New Bill management expertise; staff; longevity and continuity; external exposure and acceptance </li></ul><ul><li>At political level – extent of direction of policy; ‘hands on’ or ‘hands-off’; degree of indifference </li></ul>INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 40
  • 141. Slide 22 (b) Specific Elements:- P 1 & P 3 (continued) P3 :- Philosophical Political Ideology - in relation to over-indebtedness :- support; indifference; constraint to development or effectiveness Drivers and locus within the political hierarchy; presence of unity of Authority - perspective and process; conflict or not; seniority; effects on decision making structure (political) and departmental/agency operations; dealing with special interest groups Policy impact on specific areas of :- • Macro economic policy • Social welfare policy • Housing • Balance of equity within society i.e. notion of a ‘safety net’ in an economy where financial market operations are relatively unconstrained (a policy objective) INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 41
  • 142. INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] Slide 23 (a) Specific Elements :- µ 3 :- The Progression of Public Policy 42 [A] Principles underlying the UK Insolvency Régime within existing legislation 1542/3 to 2002 • It is a matter for the State (1542/1571) and the public (1883) • Can pay, will pay (1542/1571) • The maintenance of an efficient system of commercial morality and behaviour (1542/1571) • Protection of creditors’ monies and minimization of losses (1542/1571) • All inclusive approach to a debtor’s assets, liabilities and income (1542/1571) • Collectivity of creditors’ interests ( i.e. pari passu ) (1571 for ‘traders’ only) ; 1883 • Rehabilitation of debtor (1705/1883) and discharge (1976/1986) • Consistency with the principles of the corporate régime (1986) • Minimise the costs of personal indebtedness to the taxpayer i.e. the creditor pays, not the state (continuous) • Central control and the powers for investigation (1542/1571/1831/1883) • Formal Court Structure (1831/1883); now less prevalent - 2002 onwards
  • 143. INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] Slide 23 (b) Specific Elements :- µ 3 :- The Progression of Public Policy (continued) 43 [ B] The Enterprise Act 2002 and fundamental shifts in philosophy • Insolvency Law was to become an inherent part of macro-economic and social welfare policy • The ancient concept, that financial failure and moral failure were umbilically connected in respect of all unpaid debts other than those generated in the course of trade, could no longer be a primary driver of the régime or a central tenet of any new structure • Moral hazard should be dealt with separately and by specific sanctions • Can pay, Will Pay is an essential determinant. The IVA process should take over from bankruptcy as the centre stage mechanism. Bankruptcy is for hopeless medium-term economics; ‘can pay, won’t pay’ and criminal and fraudulent activities i.e. BROs
  • 144. INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 44 Slide 23 (c) Specific Elements :- µ 3 :- The Progression of Public Policy (continued) [C] New Public Policy Directives Post Enterprise Act A new series of directives became applicable , namely :- (a) the IVA process, for those in work, should be preferred to bankruptcy where the costs to the State were minimised and creditors’ returns/yields were higher. Hence in such cases the IVA should be the process initiator of the choice of routing within the formal/ informal régime and hence seen as the ‘gateway criteria’ (b) bankruptcy should be seen as a last resort and principally directed against those who ‘ can pay but will not’ or have been guilty of some offence or in those cases where the medium-term economics for recovery are hopeless (c) the régime should move from a judicial to an administrative basis unless there was empirical and persuasive evidence that this was inoperable (d) specifically where market providers within the conflict-resolution market could administer the mechanisms this should be the route rather than publically-funded entities or the Court (e) the range of mechanisms within the régime should be extended to reflect more appropriately the practical demands of the over-indebted, the credit market and participators in today’s and likely future circumstances
  • 145. (f) these mechanisms should be specifically directed to remove those current mismatches between ‘needs’ and ‘availability’ that were defined by the analysis of the Debt Curve Profile. That is to say the régime would become primarily ‘needs based’ and capable of revision to adapt to, and reflect changing circumstances (g) that the State should be protected from incurring additional costs - other than in the arena of EG1 -> EG2 (The Dependent Economy) where poverty and low income is the general basis of causality and context - and that debtors and creditors should foot the bill i.e. there should be no costs of ‘externalities’ within the Working Economy (h) that the established principles and existing political drivers should be adhered to (Slide 23 (a)). In particular that of creditors’ standing pari passu should be extended to include the abolition of Crown preference (i) it must explicitly recognise the implications of the changing retail credit market (j) for those in the dependent economy EG1 -> EG2 the issues were fundamentally those of low income/poverty and hence of a different nature and should be dealt with correspondingly (k) it should be recognised that there are opportunities within the criminal and civil law for debtors to be dealt with by creditors when fraud, deceit, et al , are suspected. Such powers are very rarely used INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 45 Slide 23 (d) Specific Elements :- µ 3 :- The Progression of Public Policy (continued)
  • 146. INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 46 Slide 23 (e) Specific Elements :- µ 3 :- The Progression of Public Policy (continued) (l) it must recognise the issue of ‘moral hazard’ and specify sanctions to deal with – and minimalise as far as is possible - serious, blatant and reckless manifestations of any such behaviour by either lenders or borrowers (m) the régime must be capable of dealing with both ‘consumer’ and ‘business’ debtors who are seriously over-indebted and simultaneously recognise the demands of Government Policy in encouraging an ‘Entrepreneurial Culture’ (n) that the concept that there should be parity within the Law for all – i.e. a distressed debtor had the same powers and knowledge as an institutional lender – was insupportable in practice and intellectually unsustainable It is these new public policy principles and directives, in combination with those existing principles stated in Slide 23 (a) which directed the framework for structure of the formal régime and the subsequent mechanisms of the régime that defined its structure.
  • 147. INSS Research Conference – 11/09 Predictive Model for Régime Design [email_address] 47 Slide 24 Finally It should be remembered that the seriously over-indebted, however they arrived at that state of grace, are a disenfranchised group within society. To date, within the UK, all reform, protection and movements towards the advancement of the twin objectives of ‘recovery and rehabilitation, have been led by the political classes and the Civil Service. I would suggest that it is time to spread this responsibility to other activators and for them to contribute to this effort. I hope the content of this Presentation can be instrumental in helping this effort by setting out a useable basic framework within which this can take place more effectively and specifying in a coherent and measurable fashion those areas for future attention and their priorities. ❧ [email_address] Tel. 07941 275 823
  • 148. INSOLVENCY RESEARCH CONFERENCE 10 November 2009

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