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It goes without saying that Insolvency Practitioners must behave honestly and with integrity in all their professional dealings. IPs must handle money and assets in a way which justifies the trust placed in them. An IP caught overcharging or misusing assets should, rightfully, expect a severe sanction after an investigation by their regulator. But the extent to which a regulator’s jurisdiction extends beyond an IP’s professional role, and into his or her private life, may come as a surprise. Some professionals don’t realise that the way they behave on a Saturday night may be just as relevant to their ability to continue in their chosen profession as the way they behave on a Monday morning.
As you will know, Insolvency Practitioners must be authorised and regulated by a Recognised Public Body (RPB), such as the Insolvency Practitioners Association (IPA) or the Institute of Chartered Accountants in England and Wales (ICAEW). The IPA and the ICAEW each have an Ethics Code which sets out the fundamental principles of ethics for their members. Alongside principles such as professional competence and due care, lies the overarching principle of integrity. The wording in relation to the requirement to act with integrity is identical in both Codes, requiring members to “be straightforward and honest in all professional and business relationships”.
Reading this wording, you could be forgiven for concluding that the need to act honestly and with integrity relates only to an IP’s professional life. The Codes seem to limit the need to be straightforward and honest by relating this to professional and business relationships. Similarly, the examples given in the Codes are clearly work-based examples.
However, when one considers the principle of “Professional behaviour”, the reach of the regulator’s jurisdiction seems to expand into a member’s personal life. The IPA and ICAEW ethical codes are similar in stating that “An insolvency practitioner shall comply with the principle of professional behaviour, which requires an insolvency practitioner to comply with relevant laws and regulations and avoid any conduct that the insolvency practitioner knows or should know might discredit the profession. An insolvency practitioner shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the insolvency profession, and as a result would be incompatible with the fundamental principles”.
The test for a breach of this principle is objective. The Code goes onto to state that “Conduct that might discredit the insolvency profession includes conduct that a reasonable and informed third party would be likely to conclude adversely affects the good reputation of the profession”.
Very few of us would set out to act in a way which is incompatible with the professional responsibilities placed upon us. In our roles as regulatory defence solicitors we do, however, come across a number of situations where professionals have acted out of character, or have been placed under pressure to act in a way that, without such pressure, they would not have contemplated. We are also now living in unprecedented times. The current level of financial difficulty and uncertainty, coupled with the sense of isolation and distance from colleagues and clients, may lead some to act in ways that, in ‘normal’ times, they would not countenance. Let’s consider what sort of behaviour might fall foul of an IP’s regulatory obligations, in a professional and personal setting, and how an IP should respond should an event be picked up by the regulator’s radar and investigated.
Take for example, Mr Simons, an IP who supervises various IVAs. Mr Simons is the Director of a company which has properly and diligently set up and managed IVAs for years. However, 2020 has been the hardest year Mr Simons has ever known. He separated from his partner and is undergoing a costly and acrimonious divorce. His assistants, who were ordinarily responsible for the day to day administration of the IVAs, have both left, one to a competitor and another due to family reasons. He has been unable to secure competent replacements. He has been struggling, personally and professionally, and was relying upon the sale of his house to provide some much needed cash.
Mr Simons received some new instructions in relation to IVAs. Instead of operating separate accounts for each estate (which his assistants would usually help him with), he used existing bank accounts of the company, with the intention of sorting this out when he had more time and support. A few days later, Mr Simons received an invoice from his divorce solicitor, along with a letter regarding arrears in his daughter’s nursery fees. In a panic, Mr Simons made a director’s loan from his company account to his personal account, which he used to pay off the sums owed. He comforted himself by reminding himself of the equity within his home: when his home sold, which he expected would be imminently, he would be able to make back the sums borrowed, put in place individual accounts for each IVA, pay back the money owed and business could return to normal. He rationalised that by the time the estate money was needed, it would be where it belonged, but in the meantime he would have kept himself solvent and his company afloat. After all, surely, that was in his clients’ interests?
The situation spiralled: he was missing debt payments and a report was made to his regulator. An investigation ensued and he received allegations that he had acted in a way which was dishonest, and lacked integrity.
Of course, this is a fictitious account, but you can see how even generally honest people can do dishonest things when faced with extreme stress and pressure.
It is easy to think of examples of failings in an IP’s professional life which demonstrate a lack of integrity, and a consequent breach of the Code. What sort of behaviours in an IP’s personal life might attract the attention of the regulator?
Let’s look at a real life, but anonymised, example. In 2014, an FCA Approved Person (whom we shall refer to as ‘JB’), who then worked at an asset management company, was barred by the FCA for being dishonest and lacking integrity in engaging in rail fare evasion.
JB was stopped by a Revenue Protection Officer at the exit gates of a London station and was found not to have a valid ticket for the entire journey. It transpired that JB had regularly boarded a London-bound train at a rural station with no barriers, without a ticket, and then tapped out at the London station using his Oyster card, thereby only paying the maximum Oyster fare of £7.20 rather than the correct train fare of £21.50. He had evaded £43,000 in rail fares over a number of years.
This behaviour fell squarely within JB’s personal life. Although he was travelling to work, it did not impact upon his clients, colleagues or business. However, the FCA concluded that he had demonstrated a lack of honesty and integrity, and, as such, he had failed to meet the FCA’s Fit and Proper test for Approved Persons. His Approved Person status was removed, thus significantly impacting his ability to gain employment.
If JB was, instead, a regulated IP, could the regulator take action? The answer to that seems to be a definite ‘yes’. AP’s actions could certainly be argued to have impaired the “integrity, objectivity or good reputation of the insolvency profession”, and therefore breached the fundamental principle of professional behaviour. All regulators are concerned with protecting the public, maintaining the reputation of the profession, upholding proper standards of conduct within the profession and the correction and deterrence of misconduct. The most serious conduct is that which is deliberate, knowing and/or dishonest. This is particularly the case for professionals entrusted with people’s money: regulators take a tough line on any financial impropriety, even that which is completely unconnected with the individual’s professional life.
Mr Simons and JB, based on the scenarios described, would both face disciplinary action for dishonesty and a lack of integrity (in JB’s case, this may be presented as a breach of the professional behaviour requirement, but a lack of integrity/ dishonesty would underpin any argument). At first blush, it might look like the cases are cut and dried, and there is little scope for argument that a lack of integrity might not apply, and that their actions didn’t go as far as to amount to dishonesty in law.
The Common Sanctions Guidance used by all RPBs for IPs states that the indicative non-financial sanction for misappropriation of funds into the IP’s own account is exclusion and licence withdrawal. The Common Sanctions Guidance states that the indicative sanction for a failure to comply with the fundamental principle of integrity is either exclusion and consideration of licence withdrawal or a severe reprimand. Further, such a fundamental breach of the principle of professional behaviour, in JB’s example, would likely be disposed of with a sanction towards the more serious end of the spectrum. Dishonesty usually leads to an exclusion of membership in disciplinary proceedings. Their actions could therefore be career-ending.
Upon receipt of a letter of investigation from their regulator, Mr Simon and JB should seek legal advice. The approach to defending each of the allegations might be different, based upon the specific facts and circumstances.
Mr Simon’s mental state should be the focus of any line of defence. Although it might not excuse the events which took place, details of the significant pressure he was under will be relevant to the regulator’s disciplinary panel when determining what disposal would be appropriate. If it is considered that his mental state went beyond stress and fell within a medical diagnosis, a medical expert could be instructed to opine on how his impaired mental health might have impacted upon his actions, which fell completely outside his normal diligent and honest standards.
Mr Simons should obtain testimonials from colleagues and clients to affirm his general character and trustworthiness. He should also reflect on the incident, attend relevant courses and training on professional ethics and provide a reflective account, apologising for his actions and explaining what he would do if faced with the same circumstances in the future. If he is able to convince the Committee that this was an isolated act in a moment of very unusual stress and pressure, that he is very remorseful, and that it is very unlikely to be repeated, he may escape the most severe sanction.
The situation of JB may be different. His conduct took place over a number of years and was not, on the face of it, influenced by any external forces prompting him to deviate from the expected standards of honesty and integrity. Cases such as this are more difficult to defend. However, we have had success in dishonesty cases in advancing a very strong mitigation case, providing the disciplinary panel with hundreds of testimonials emphasising that the individual concerned was not inherently dishonest, and leading live evidence to that effect.
The principles in this article may be sobering: as a professional, your behaviour in all walks of life could be subject to scrutiny by your regulatory body. Although case law states that "(t)he duty of integrity does not require professional people to be paragons of virtue (Solicitors Regulation Authority v Wingate and another, Malins v Solicitors Regulation Authority,  EWCA Civ 366, Para 102) , professionals are held to a higher standard than non-professionals. However, forewarned is forearmed: knowing the potential implications of certain behaviour should serve as a check, even in these difficult times. If you do find yourself at the sharp end of your regulator’s reach, you should seek professional advice immediately and at all times cooperate fully with your regulator’s investigation: taking these steps may help you to avoid a career-limiting sanction.
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