INO was having coffee with an insolvency practitioner (IP) the other day when the conversation turned to the Industry Funding Model (IFM).
Pulling a document from his briefcase the IP showed how the Australian Securities and Investments Commission (ASIC) had arrived at a sum of almost $20,000 it intends to claim from his modest single liquidator firm when it begins issuing invoices in January, 2019.
Confirming that the sum accorded with his own calculations for notifiable events multiplied by the $125 metric that ASIC has floated but not yet confirmed, our IP opined that the industry funding impost would create more problems than it solves.
For a start he said, it could lead to a sustained reduction in the number of registered liquidators if ASIC found that regulating a smaller population of liquidators didn’t come any cheaper.
Each remaining liquidator might be required to pay even more he said, either through an increase in the annual levy currently set at $2,500 or increases in either the fee metric or in the range of notifiable events incurring the metric.
That he reasoned could not only drive more liquidators out of the profession but discourage younger accountants from considering a career as a registered liquidator (RL), thereby starving the profession of fresh blood and undermining diversity initiatives.
The evidence for a shrinking liquidator population isn’t hard to find. ASIC’s own list shows that while there were more than 700 RLs in mid-2017, by the same time this year the numbers had fallen to around 660.
It’s likely that some of those who’ve departed in recent times held a passive registration and rarely took appointments if at all. Others may well have been contemplating retirement, and it was the imminent imposition of the levy that helped them make up their minds.
Our coffee-drinking IP is already resigned to having to find almost $20,000. Others INO spoke to are not so accepting, probably because they are on the hook for a lot more.
One practitioner said he was looking at a $50,000 hit and would be unable to employ a junior staff member because of it. He and several others also believe the levy targets smaller practitioners because they take on the bulk of the roughly 90 percent of administrations that produce no dividend.
Sole practitioner Jamieson Louttit said that if there are between 250 to 300 small firm liquidators in Australia and they are paying an average of $20,000 than even at the bottom end of the estimate (250) that would mean that ASIC will raise $5 million of the $8.5 million industry funding target from small practitioners.
“It is so disproportionately unfair that small firm Liquidators are bearing the majority of the IFM costs,” Louttit said, adding that he was convinced: “the calculation of the IFM was advocated to government by ARITA which is now controlled by large firm Liquidators and large firm lawyers, whose only interest in the Insolvency profession is to wipe out small firm Liquidators who do the majority of the unfunded liquidation each year”.
ARITA chief executive John Winter rejected this, saying larger firms with high volume insolvency divisions that relied on technological streamlining to turn a profit handled a significant proportion of unfunded work and will likely be hit hardest.
“The industry funding model will deplete the cost effectiveness for everyone,” Winter said.
“What it’s going to do is make people far less likely to take on an unfunded appointment. Rule of thumb was perhaps that one in five would yield a dividend and pay the appointee’s remuneration. That could blow out to one in seven under IFM,” Winter said. And other trends he said were pushing the number of assetless companies even higher.
“There’s a lot more jobs with no assets in them now because more companies are being pushed into the zombie zone,” Winter lamented, explaining that pre-insolvency advisors have had such success in convincing clients to asset strip that the model has gone viral.
And he said that anecdotally, ARITA members were already talking about belt tightening as they absorbed the cost estimates ASIC circulated to RLs in July.
“There’s a whole heap of liquidators who are barely breaking $100,000 a year and lots of people are talking about investing less in training and education and anything they see as discretionary expenses,” Winter said.
Less training? Less professional development? Sounds like industry funding is a great model if you want to shrink the regulated population you’re charging for the costs of its regulation. But what happens when the next recession hits?
Will insolvency firms have the capacity to rapidly upscale as the work floods in? Will there be the talent out there available prepared to be employed?
Winter is not optimistic. “The Government will have to reconsider this when it sees the damage that’s done,” he said.
In a response to our inquiries ASIC said yesterday that it will publish its regulatory costs for FY2017-18 as well as FY 2017-18 levies by sub-sector in November 2018 with invoices will be issued in January, 2019.