Founder: Turnaround Talk
For many years, the insurance industry was akin to the Wild West. There was even a group of brokers and financial advisers from the West Rand (Krugersdorp and Roodepoort) who were infamously labelled The West Rand Cowboys. Like the Clanton and the McLaury Gang (from the Gunfight at OK Corral), The West Rand Cowboys were a law unto themselves.
Then the Financial Services Board was established. With a firm hand and no-nonsense approach, the FSB has established itself as a strong regulator that is quick to call up errant industry participants (companies, brokers, advisers, and financial planners) and make them accountable for their actions.
When Chapter 6 of the Companies Act was established, thereby providing scope for the establishment of the business rescue profession, the Minister of Trade and Industry at the time – Rob Davies – assured the industry that a regulator would be formally appointed.
The Companies and Intellectual Properties Commission (CIPC) has taken on the role as the profession’s de facto regulator. While the industry supports the CIPCs efforts – and will continue to do so – the key decision makers within the DTI need to rethink the regulator situation if we are going to address the growing crisis of trust within the industry.
Lack of suitability
The issue of the trust gap was highlighted in the 2022 Deloitte Restructuring Survey.
The Survey points out that low success rates, experienced especially by lenders, contribute to the trust gap. The suitability of the BRP is also rated as one of the main reasons that business rescue fails, ranking closely behind a lack of post-commencement financing (PCF) as a cause of failure. While the adage of the past was “no PCF, no BR”, perhaps this needs to change to “reputable BRP, successful rescue”?
The Survey adds that, despite there being 393 registered BRPs on the Companies and Intellectual Properties Commission (CIPC) database as of 27 January 2022, 77% of respondents believe that there are fewer than 30 who are adequately skilled and qualified to perform their duties. This is also the view of 90% of the BRPs interviewed. What speaks directly to the trust gap is that ethics and integrity, together with consequences for poor performance, are cited as the main areas which, if addressed, should improve this skills and qualification gap. Interestingly, in 2021, ethics and integrity (22%) ranked behind level of experience (42%), whereas they are front and centre in 2022 with length of experience ranking third – supporting the view that this is the biggest issue that needs to be addressed.
Photo By: Canva
Fees
The survey points out that, in terms of BRP fees, survey respondents acknowledged that the process is complex and that a fee structure should reflect this. However, what is starting to emerge is that a greater proportion of respondents believe that fees should be linked to creditor recoveries. Not surprisingly none of the BRPs selected this option; instead, 90% favoured fees being reflective of complexity. The greater emphasis on linking fees to creditor recoveries again aligns with a lack of trust as many of the interviewed stakeholders cited misaligned objectives in business rescue as a reason for concern, which often plays out in the fees. The fee issue is in of itself a complex matter not covered in the survey.
A challenge to the DTI, CIPC and Industry Associations
To sum up some of the important points out the Survey:
- There is a seemingly significant suitability problem in the industry with a (reported) 30 professionals out of 393 who are able to adequately carry out a rescue;
- Experience is cited as the major reason for the trust gap (42%) with ethics coming in second at 22%, length of experience is also a significant concern;
- Fees is a complex issue and, while there are guidelines governing fees, there has not been a professional debate regarding this for some years.
Where does responsibility lie for closing the trust gap? Of course, as is always the case, the first point of call to address this gap lies with BRPs. But this does not mean that the DTI and industry associations are exempt.
The Survey adds that if consequences for poor performance and better oversight are required, this is surely the responsibility of the regulator and professional bodies. Arguably, the judiciary is playing its part, with 61% of respondents to the survey citing recent case law as a force for positive change. However, the industry cannot ignore the recent case law stating that the court does not possess the necessary powers to order BRPs to repay fees on account of misconduct as this is considered beyond the court’s purview.
This places the burden firmly back on the CIPC and professional bodies to drive high ethical standards and ensure disciplinary procedures are robust and managed fairly.
Photo By: Canva
So where does the challenge come in? The DTI needs to live up to its promise and provide an industry regulator and establish an Office of the Ombudsman that can settle cases outside the realm of the courts. We are all acutely aware of how overburdened our judiciary is. If the Minister is happy with the CIPC, then their appointment needs to be formalised. But this cannot take place until all candidates for the position are looked at. Transparency is key.
The regulator’s powers needs to be increased and they need to have a significant say in the qualifications that one needs to become a BRP or Turnaround Professional. This needs to be set up with relevant tertiary institutions and a course in ethics needs to form part of any professional qualification.
The South African Qualifications Authority (SAQA) has established a reputable Continuous Professional Development (CPD) system which governs certain professions as strictly as the regulators. If an insurance professional does not accumulate 18 CPD hours within a calendar year – and can prove to SAQA that they have done so – they lose their licence. Is this strictly implemented in the business rescue and turnaround profession?
Industry associations need to play an increased role in advancing the professional development of their members through webinars and round table discussions. Some associations are embracing this more than others.
Finally, the Office of the Ombudsman needs to be given the legal ambit to act as other industry Ombuds do. Further, the Ombud would need to be swift (within reason) and strict (also within reason) when dealing with errant BRPs. While every profession has a few bad apples, and these apples don’t spoil the whole barrel, industry stakeholders are quick to point to these bad apples and label them as a stain on the whole industry.
Industry loopholes
Many BRPs bemoan the fact that there are industry loopholes and that a lot of legislative development needs to take place if the industry wants to be seen as perfect. This cannot be done while there is no permanent regulator with an accompanying Ombud.
While the content of this article makes mention of the important role that industry associations play, and the vital role that the CIPC plays as the industry regulator, the real challenge is presented to the DTI. The FSB provides a good example of the positive influence that a strong regulator can have on the industry. The Ombud will accompany this by decreasing the burden on the judiciary which is facing significant backlogs and constraints at the moment.
At the end of the day, a crisis of trust cannot be addressed while industry loopholes are easily found and accessed.
