Independence: it's what you know, not who you know

Monday, August 26, 2019

It’s what you know, not who you know

On 1 July 2019, we released the Personal Insolvency Compliance Program (PICP) for the 2019-20 financial year. Each year we publish the PICP to:

  • Set out our general approach to regulation and engagement, and
  • Highlight particular areas of strategic focus for the year ahead.

In this year’s PICP we set out four strategic focus areas:

  • Debt agreement law reform
  • Independence and untrustworthy advisors
  • Remuneration
  • Culture

These areas were identified following an evaluation of information and data available to AFSA, as well as through consultation with the profession.

This article goes into more depth on one of the four strategic focus areas in this year’s compliance program - the importance of actual and perceived independence for all personal insolvency practitioners. A lack of independence, whether real or perceived, and the associated influence of untrustworthy advisors, can have a particularly detrimental impact on the community’s confidence in Australia’s personal insolvency system.

In regards to independence, we aim to ensure that registered practitioners are:

  • Obtaining their professional work through arm’s-length sources
  • Meeting performance standards, and
  • Acting in accordance with ARITA and PIPA codes of professional practice.

AFSA has guidance to help practitioners understand their responsibilities relating to independence.

Inspector-General Practice Direction 1Independence of personal insolvency practitioners, outlines the Inspector-General’s expectations relating to independence, and the perception of independence. Inspector-General Practice Direction 1 is built on principles that are detailed in legislation such as the Bankruptcy Act, Insolvency Practice Rules (Bankruptcy), case law and professional codes of practice.

We understand that insolvency practitioners are at times placed in difficult positions. Their day-to-day activities may give rise to an actual, or perceived, conflict of interest. We encourage practitioners to make use of the various pieces of guidance, including case law, to assist in dealing with such dilemmas.

In Re Partridge (unreported FCA Lockhart J 22 September 1982), the Hon Justice John S Lockhart AO QC, stated that:

“A trustee must be scrupulously careful to ensure that he never allows himself to be placed in a position of conflict or potential conflict. A registered trustee must not only be impartial; he must be seen to be impartial”.

Nearly four decades later Justice Lockhart’s commentary remains relevant. It is critical to the point of independence, notably that insolvency professionals should be, and must also be seen to be, impartial and independent.

Situations that may call a practitioner’s independence and impartiality into question include:

Referrals

AFSA data shows that many insolvency practitioners source their work from other accounting or legal professionals. And at times, these referral sources also represent or act for the client in an advisory capacity. It is in these circumstances that the role of the referral source may not necessarily result in an actual conflict of interest, but it can create a perception of a threat to the insolvency practitioner’s independence.

It is imperative the trustee remains objective and independent if a referral source endeavours to influence a practitioner’s decisions

Open and honest communication and full disclosure with creditors – one of the key stakeholders in the personal insolvency - can go a long way toward alleviating concerns.

Engaging commercial services

In the past we have discovered instances of insolvency practitioners engaging commercial service providers that may have a vested interest in the matter.

Common examples include where the service provider is

  • A creditor of the bankrupt estate, or
  • An advisor of the debtor.

Our guidance is clear on this particular issue - we do not consider it appropriate. Any such arrangements should be avoided by practitioners.  

Practitioner independence is paramount in maintaining the community’s trust in the personal insolvency system. Real or perceived conflicts of interest can call a practitioner’s independence into question.

We encourage all insolvency practitioners to thoroughly scrutinise referrals of matters which may create a threat, or a perceived threat, to the trustee’s independence in acting impartially. Similarly, we encourage practitioners to avoid engaging service-providers that may have a vested interest in the matter.

Practitioners should seek further guidance from appropriate sources, including ARITA, PIPA and Inspector-General Practice Direction 1.

Paul Shaw

National Manager, Regulation and Enforcement

Australian Financial Security Authority