Insolvency Costs Project

“Counting the Social Costs of Creditor Misconduct”

  1. The misconduct of banks and other creditors when dealing with small businesses can have grievous consequences, in some cases causing enterprises that may have long term viability to collapse due to short term, somewhat technical, “events of default” or ill-advised financial products that should never have been sold to them. At the CCP Research Foundation’s Conduct Costs Project a great deal of work has been done on the banks’ own “conduct costs”, but the costs of bank misconduct extend beyond fines and balance sheets. Insolvency due to bank misconduct is undoubtedly costly to individual businesses. However, what are the broader social costs?

    The latest CCP Research Foundation Associated Research Project, focusing initially on the sale of IRHPs to SMEs, will analyse the wider financial implications of insolvency where there is a demonstrable causal connection between a clear mis-selling of an IRHP and the business’ insolvency. The Project will, in due course, also look into law reform questions raised by the associated issues, in particular, whether or not current regulation and law addresses satisfactorily the need for proper redress and “business rescue” where the cause of business failure is not the business itself but bank misconduct.

    The loss of otherwise viable businesses due to mis-selling of financial products is a phenomenon that has been highlighted in the media, but there has, as yet, been no thorough investigation into the cumulative cost of these losses.

    The primary goal of this study is to produce a comprehensive and forensic calculation of the costs of insolvency due to creditor misconduct.

    Pilot Study

    For the initial pilot study, we will choose 12 businesses from a range of industries, sizes and covering relationships with various banks in which the insolvency of the business was arguably caused by the mis-sale of an IRHP.  The purpose of the pilot study is to not only quantify these costs, but also to test the methodology so that a wider project can be undertaken which will also look at other creditor misconduct/bank-driven causes of insolvency as listed above.

    Stage 1 Questionnaire

    The first stage of the pilot study is to survey the population of businesses who have gone into insolvency and that bank misconduct was a dominant/proximate cause (such as withdrawal of overdrafts, bank restructuring charges, defaults due to covenant breaches, mis-sale of IRHPs and embedded swaps, etc). This will be achieved through the use of an online questionnaire. The responses to this questionnaire will then be subjected to a strict selection criteria and methodology in order to identify suitable cases for second stage computations within the scope of the initial IRHP-focused pilot study.

    Therefore, it is critical at this stage that any businesses that consider their insolvency to be bank-driven (not just those who purchased an IRHP) contribute to this study.

    The first stage questionnaire is online (available here) and should take approximately 5 minutes to complete.

    The deadline for submission of this questionnaire is midnight on 12 July 2015.

    For further information and queries, please contact the Project Principal, Heather Buchanan (see below).

    The Project Team

    Project Principal: Heather Buchanan
    Business owner with extensive experience in project management. Insolvency Team Leader in the Campaign Group, Ordinary People in Business Ltd and Member of SME Alliance

    Professional Team Members

    Brian Johnson, Insolvency Practitioner
    Partner, HW Fisher and Co

    Edward Saidu, Solicitor
    Insolvency and Corporate Recovery Solicitor, berg

    Phil Southall, Forensic Accountant
    Director, FAR Consulting

    All members of the project are contributing their time and expertise on a Pro Bono basis.

    Further work

    In due course, and subject to the findings of the pilot study, the project will go on to consider whether regulation and law adequately address “rescue culture” concerns where a business is, in effect, brought down by creditor misconduct. This will extend beyond mis-selling questions to those of bank restructuring departments and other issues such as LTV covenants that cause insolvency.

    For further information and enquiries, contact:
    Heather Buchanan,
    Project Principal, Insolvency Costs Project
    T: +44(0) 1896 820 420

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