In June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a In June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a Review of the Trustee Licensing Regulatory Framework. First a little bit of background: the OSB is a division of the Federal Government who has been charged with the administration of all estates and matters to which the Bankruptcy and Insolvency Act. Their main role is “to maintain investor and lender confidence in the Canadian marketplace by protecting the integrity of the bankruptcy and insolvency system.” As a result they play a crucial role in many areas, including the review of Trustees’ and debtors’ actions in all aspects of bankruptcy, reviewing the performances of official receivers and senior bankruptcy analysts, and the issuing or renewal of Trustee licenses.
While most of this review is pretty bland, there is one item being considered that could have some dramatic ramifications on the Canadian Insolvency industry as we know it. That is the issue of whether non-trustees should be able to serve as administrators of consumer proposals. For those of you who are not aware, a consumer proposal is mechanism within the Bankruptcy and Insolvency Act that provides a legally binding way for debtors to negotiate a settlement with their creditors and avoid a bankruptcy. It is a win-win as the debtor is permitted a mechanism where they can avoid a bankruptcy and the creditors in turn receive a greater recovery than that would under bankruptcy. Currently all consumer proposal administrators in Canada are licensed bankruptcy trustees.
The question that has been raised is whether or not the OSB should appoint or designate administrators of consumer proposals who are not licensed trustees.
As you can imagine, being a licensed trustee here in Edmonton, Alberta, I have some strong opinions on this issue. To be clear I don’t think it is a good idea and I see this as a very dangerous path.
One vital requirement of administering a consumer proposal is that it requires a thorough assessment of each individual debtor, and to be able to conduct a proper assessment you must be well versed in all aspects of the Bankruptcy & Insolvency Act, the Income Tax Act and other relevant provincial legislation. This is no small task and one that takes a significant amount of training to be able to do appropriately, training that is largely what the Trustee licensing process is designed to do.
There are other reasons that I am nervous about this potential change in policy, but what I want to specifically address were 3 issues identified in the OSB’s consultation paper. Although, I did find it interesting that unlike the other changes being considered there was no real background or justification in this paper as to why the administration of consumer proposals was becoming an issue. The only section that addressed this potential change referenced an argument made by In February 2008 by the Ontario Association of Credit Counselling Services (OACCS) when they appeared before the Standing Senate Committee on Banking Trade and Commerce.
The three of the main reasons advanced by the OACCS to be appointed as administrators were:
By expanding the ability to administer consumer proposals outside the trustee community it would allow for the availability of a credible alternative to Canadians for unbiased advice and consumer choice related to consumer proposals;
2. Diminishing Revenues
It would help to create an additional revenue stream, a revenue stream that was adversely impacted by the OSB’s issuance of a position paper issued by the OSB entitled “Referral Agreements between Trustees and a Third Party.” For reference, this position paper was put forward as there were many of largest of the credit counseling who were regularly preparing files for consumer proposals and acting as agents for certain trustees in a manner that contravened the intent of the Bankruptcy and Insolvency Act.
3. Serve to correct the current monopolistic approach taken by the OSB that that limits access to the consumer proposal option for those in need. Here are my comments:
Regarding their first point, that of availability of a credible alternative for unbiased advice. I see three components of this issue: knowledge, access and any potential biases. The first question I have is are people aware of what a consumer proposal is? Is the knowledge out there among the various stakeholders? Well clearly the trustee community and most reputable credit counselors are familiar with the general concepts behind a consumer proposal. There is nothing that prevents a credit counselor from discussing the existence of this option with a consumer debtor, just as there is nothing preventing me from discussing the presence of debt management plans or the like with people who walk in my office. Now do these discussions happen? Are the credit counselors accurately informing those they meet with? While I live in Alberta and can’t speak to what happens in Ontario or other areas of the province, I know where I practice, they are. The trustees and credit counselors here in Alberta have a good working relationship, and it is not uncommon for us to refer clients back and forth depending on their needs. So from my stand point, knowledge isn’t the issue.
The second component of this discussion is access. Is access an issue? Are consumers having difficulty meeting with a licensed trustee to discuss the filing of a consumer proposal ? Currently, I would say no, access is a non-issue. I have never run into someone who was unable to arrange a time discuss the filing of a consumer proposal with a licensed trustee or even suggested anything similar. Now, over the long term, I can see this as a potential argument. Just like society in general, we are all facing a mass baby boom retirement. This mass retirement has the potential to bring a host of economic and social difficulties that we will all be forced to deal with. The key is that this is a societal challenge, not simply a challenge that the trustee community is going to have to address. Arguably, this same phenomenon will impact accounts, lawyers, doctors, teachers and, I would assume, credit counselors. The result is that the average professional, including trustee’s and credit counselors, are going to have to take a close look at how we manage our practice’s, take greater advantage of the areas we are able to delegate and investigate ways that technology may be able to help us realize efficiencies that weren’t available historically. But this is not unique to our demographic. So I agree there is a challenge, but watering down the requirements to administer will potentially result in making it more difficult to find a qualified credit counselor, assuming there are fewer of them to manage the existing pool of debtors and the credit counselor is in turn have less time to do so, as they would now have to worry about all the issues associated with administering consumer proposals and managing the related trust accounts.
The third point was that of a potential bias. Clearly there is a potential bias among the trustee community: we can administer proposals so it can very easily be suggested that the advice we give may be colored as a result of what services we can offer. Unfortunately, this potential bias is very difficult to overcome. However, one of the best ways to deal with this potential bias is to ensure that there is a lengthy and rigorous training requirement with an emphasis on professionalism and ethics. In addition, it is important that all efforts are made throughout this training requirement to look into the character of the potential candidate, whether this be through reference checks, an interview requirement, or, even better, a mandated experience requirement that involves being directly mentored by a licensed professional who is committed to the integrity of the profession. This does two things, first it helps to ensure that the potential candidates will be of the highest quality. Second, because people have sacrificed a large amount of time and energy in obtaining the certification the threat of losing that certification has significant weight. Interestingly enough, this is exactly model that trustee licensing process follows and while I am not going to argue that this process is perfect, it goes a long way to ensuring that the people administering proposals are capable, committed and willing to uphold the same principles and values that insolvency system is based.
In reality, this potential bias is going to exist regardless of who is administering proposals. If the ability to administer a consumer proposal is extended to include people outside the trustee community, these new designates are immediately going to be inherently at risk of holding that very same bias. Furthermore, this new group of designates has not been put through as rigorous of a training process and may not have as much respect for the insolvency system. The threat of losing their license may not have as much weight. As a result, I see a very slippery slope that may result in a much less consistent administration of proposals.
2. Diminishing Revenues
I was surprised this was used as an argument. Let me give you a little background so you can appreciate where I am coming from. As a licensed trustee what we do is directed by the legislation, directives issued by the Office of the Superintendent of Bankruptcy and how the courts have interpreted the both of these. If we look at the rules laid out by the above sources, we see there has been very clear direction given about referral agreements between Trustees and third parties. It is very clear that only Trustees are licensed to administer Consumer Proposals, and that this function cannot be delegated or outsourced.
There are four distinct sections of the Bankruptcy & Insolvency Act that are identified by the Office of the Superintendent of Bankruptcy.
Rule 49. Trustees shall not, directly or indirectly, pay to a third party a commission, compensation or other benefit in order to obtain a professional engagement or accept, directly or indirectly from a third party, a commission, compensation or other benefit for referring work relating to a professional engagement.
Rule 44. Trustees who are acting with respect to any professional engagement shall avoid any influence, interest or relationship that impairs, or appears in the opinion of an informed person to impair, their professional judgment.
Rule 47. Trustees shall not engage in any business or occupation that would compromise their ability to perform any professional engagement or that would jeopardize their integrity, independence or competence.
Rule 50. Trustees shall not obtain, solicit or conduct any engagement that would discredit their profession or jeopardize the integrity of the bankruptcy and insolvency process.
OACCS is saying that their revenue is being diminished as a results of no longer being able to participate in consumer proposals, but they have never had the power to do so. As I read these three rules, I must agree with the Office of the Superintendent that referral agreements entered into by trustees in bankruptcy and other parties are contrary to the BIA and its rules. In cases where such agreements existed, neither the trustees nor the credit counselors involved were acting in an acceptable manner, as was clarified in a position paper by the OSB. So whether or not the enforcement of these principles had a detrimental impact on the revenues of the credit counseling agents is immaterial – it should never have been done. Arguing that revenue is being lost because they can’t do what they never had the right to do in the first place is not a logical reason to extend the right to be involved to a group who already has a record of crossing the line of what is considered acceptable.
3. Monopolistic Approach
The third argument presented is that of a monopolistic approach that limits access to consumer proposals. Now I have already commented on the limited access argument, but the monopolistic approach I find somewhat intriguing. I must admit, I don’t see a monopoly. The definition of a monopoly is when one company has exclusive rights to offer s specific service, and from the statistics presented by the OSB in their position paper in 2008 there were 253 firms operating under a corporate license and 28 practicing without a corporate license – hardly a monopoly. This is like saying that doctors or lawyers have a monopoly, and again just doesn’t make sense. There are no restrictions on the number of trustees able to operate, the number of firms allowed per region – the emphasis is on being qualified.
As you can see, I don’t agree with the arguments supporting change to the administration of consumer proposals. To be involved in any insolvency related engagement, you need to be properly trained and properly qualified, and I am not in support of any sort of streamlining or watering-down of our industry. While I can appreciate that many files are straight forward, whether or not it is a bankruptcy, a consumer proposal or a receivership, the problem is that the potential exists for significant complication in every file, and these complications are not always obvious at the outset. Whether this is a significant change in financial circumstances, an undisclosed asset or allegations of fraudulent misrepresentation or the need to have a specific claim adjudicated on by the court, the possibilities for complexities are immense, and a firm grasp of the legislation and procedures is necessary to be involved in any level of these administrations.
Having said that, I am sympathetic to the plight of our credit counseling colleagues and the efforts they are making to expand their industry. Credit counselors play a crucial role and add value to our industry as a whole, as they serve a growing segment of the market place that needs their help.
The challenge is really how credit counselors can expand their revenue stream. While I have heard of a number of models (i.e. the expanding of the credit counseling component required in any consumer proposal or bankruptcy) and many of those alternative models have merit, I think that OACCS may want to look to what is being done in Alberta. In Alberta, as a province, we have chosen to opt into Part X of the BIA. For those unaware of what is contained in this section of the Act, it discusses the Orderly Payment of Debts Program (OPD).
The OPD program is much like a debt management plan, a familiar concept in the credit counseling community. But there is one big difference – the OPD program is court-sanctioned. The credit counselor makes an application through the court system for a consolation order, and with this consolidation order there is an automatic stay of proceedings that puts an immediate stop to any collection activity that creditors are currently taking. This is the same type of court protection that is in place with a consumer proposal or an bankruptcy. The advantage of this is that credit counselors in other provinces would be given one more tool in their arsenal, a tool that gives them a very significant ability to stop garnishment, creditor harassment and the like. More importantly I believe this serves the public good as it provides another option for the consumer.
This is an approach that has been successfully taken by the credit counselors who practice in Alberta, and not only has it proved to be a successful way for the credit counselors to expand their product offering and derive additional revenues, it is an option that is very beneficial to consumers. I am pleased that this is the approach that has been taken here in Alberta, and I regularly refer debtors to credit counselors who provide this service. I find it is a unique product offering that fits in between consolidation loans and consumer proposals and more importantly it is a way that we can address some of the issues identified by OACCS but at the same time serves the public good by benefitting all the stakeholders involved.