By Matt.Ross

17 Nov 2010

The Insolvency Service minimises the harm caused by bankruptcy and company failures. But its chief executive Stephen Speed tells Matt Ross that, thanks to the credit crunch, the service now has its own financial problems.

The hurricane that hit the world’s financial markets two years ago may be slowly abating, but the tsunami it created in the world’s public finances roars onwards: many governments – including Britain’s – have reached the crest of the wave, but only a few have so far begun to tumble down the other side.

Within this massive tidal wave, unexpected whirlpools and eddies threaten to drag down some of the smaller or more vulnerable ships of state. It’s not just “the ferocity and the speed” of the credit crunch and resulting recession that make it so dangerous, says Stephen Speed (pictured above), but also its unprecedented structure and the unpredictable nature of its consequences.

As Speed points out, the history of recessions is rarely a reliable guide to today’s economic problems. “Broadly, no two recessions look the same,” he says. “I’ve never met an economist who’s able to predict how these things work in a way which is useful to our business planning.” But this particular recession is – at the risk of tautology – unusually unique. “This recession was more different than any I’ve seen,” he says.

For Speed, this is awkward: as inspector general and chief executive of the Insolvency Service, his ability to forecast the numbers of corporate insolvencies and personal bankruptcies is crucial to managing his 3,000-strong workforce. “Reading the papers in the autumn, winter of 2008, you could have been forgiven for thinking that the business sector was about to disappear down the plughole. There was a widespread body of opinion arguing that we’d have massive corporate failure rates – and we didn’t,” he says. “What was actually happening was that a few well-known high street brands got themselves into serious cashflow problems coming up to Christmas: Woolworth’s was a classic example. Like unemployment, corporate insolvencies never took off, and they’re now declining. That has been one of the dogs that didn’t bark.”

A shortage of cashflow shortages
Meanwhile, personal bankruptcies – having grown dramatically between about 2004 and 2009 – levelled off a year ago, and are now falling fast. The reasons behind the current fall, says Speed, are obscure; but he rejects the idea that the earlier growth was caused by the 2003 Enterprise Act, which reformed the bankruptcy process. “The changes were not made in Scotland, and there bankruptcies behaved the same way as they did in England and Wales,” he points out. “I think it’s simply a function of low-cost credit, freely available, pushed heavily. We see cases every day of people with multiple credit cards who should probably never have had access to that amount of credit.” A 2007 period of falling bankruptcies, Speed adds, coincided with the banks “making a determined attempt to choke off the number of new credit cards in circulation”.

Speed finds the unexpectedly low level of corporate failures easier to explain. “The first reason is that the banks have very little incentive to foreclose on businesses, because the value of [businesses’] underlying assets have diminished very substantially during the credit crunch and recession, and aren’t really showing any signs of coming back up,” he notes. Speed doesn’t quite say it, but the result is that were the banks to call in their debts and wind these companies up, they wouldn’t get their money back – and the process would reveal the embarrassing weakness of many loans listed as assets on their balance sheets.

Second, HMRC’s forbearance in chasing tax debts is sparing many companies the axe. Some such debtors, Speed points out, “don’t have any cash, but might have cash in a year’s time. In that case, it doesn’t make sense [for HMRC to] to foreclose a business immediately.”

Third, many of the creditors of shaky businesses have adopted a similar approach. Speed cites the “landmark case” of the February 2008 ‘Company Voluntary Arrangement’ made between troubled retailer JJB Sports and its landlords. The landlords offered a “significant degree of debt forgiveness”, he says, taking a “haircut” but allowing JJB to survive as a viable company – and retaining its business as a tenant.

Finally, rock-bottom interest rates have enabled struggling debtors to meet loan repayments. “If interest rates were to rise quickly, the cost of servicing debts would put a lot of companies and individuals into trouble,” Speed points out. Hence, if a rapid recovery in demand leads to inflation and the Bank of England raises interest rates, insolvencies are likely to grow. In fact, a rapid increase in property values would have the same effect: “If asset prices were to rise quickly, those with debt secured on an asset will want to go in and get that sold in order to get their money back,” says Speed.

The result is that, for those businesses at risk of insolvency, a rapid economic recovery could be worse than a very slow one. “You want a soft landing,” Speed comments. “Certainly for the interests of the creditors who we work with, you probably want a fairly steady return to normality rather than a quick one.”

At the moment, then, insolvency rates remain unexpectedly low – and this has kept employment levels from tumbling. It sounds like a success story. However, for the IS, declining insolvencies have created a sharp financial headache.

When good news is bad news
An executive agency of the Department for Business, Innovation and Skills (BIS), the IS generates about 70 per cent of its income by charging fees to administer personal bankruptcies; but they’ve fallen by a quarter over the year, says Speed, “taking a scythe through” the IS’s income: “We’re looking at around a fifth of our income vanishing in 12 months.” While other government organisations face cuts of this order over the next three years, the IS is trying to work out how to deal with them immediately – and while contributing to the 33 per cent cut in administration budgets imposed by George Osborne over the spending review period.

In the review, the Treasury changed the accounting rules so that executive agencies’ and non-departmental bodies’ administration costs – previously listed in their parent departments’ programme budgets – now fall under departments’ administration budgets. This “makes sense, because it gives us all a common language”, says Speed; in future, it will be much easier to compare the operating costs of different bodies. What’s more, he adds, “This makes sure that we can’t hide – from the shared services agenda, for example – and I think that’s right.”

It doesn’t make his job any easier, of course – but it wasn’t a surprise: the control regimes imposed on civil service spending since the election by the Cabinet Office had already clearly signalled the coalition’s intentions. “We’ve had freedoms taken away quite abruptly in relation to estates; HR; IT; marketing and promotion,” says Speed. “I for one have received the message loud and clear about what the government is trying to do. So we have to look for opportunities in our estates, our people, our ICT, to reduce costs – and what the IS has been trying to do is develop a vision for the next five years that will get us to a leaner, more sustainable, lower-cost but better-quality future.”

Over that period, could the IS cut its costs by trying to reduce the numbers of more expensive forms of insolvency? Speed is cautious. “You need to know where your boundaries are,” he replies. “If I could put it in a rather grim way, the Insolvency Service acts as a morgue. What you’re talking about is the intensive care room, and I don’t think it’s our job to manage that.” He does want to improve the advice that people receive on insolvency, he says, and his minister Ed Davey has asked the IS to lead a review of personal insolvency.Yet reducing the number of insolvencies that reach the IS wouldn’t actually improve its finances: Speed is proud of the work the IS has done to make one of the alternatives – Individual Voluntary Arrangements – faster, easier and cheaper, but the result has been to further undermine his income by reducing the number of bankruptcy fees the IS receives. “It hasn’t done us any good,” he says with a wry smile, “But in the long run we’re not there to make a profit; we’re there to carry out public policy and provide a public service.”

So with its income declining rapidly, the IS must focus on cutting costs – and fast. One obvious way to do so is by diverting telephone inquiries to a dedicated call centre, rather than allowing people to phone case-management workers directly. When IS staff began working on weekends to handle statutory redundancy packages for the Woolworths workforce, recalls Speed, they completed six times more claims on Saturdays than during the week – simply because they weren’t being distracted by the calls of concerned clients. “We didn’t switch the phones off, but nobody knew we were there,” he says. “We learned a fascinating lesson”.

As Speed confesses, on these issues “we’re slightly behind what other agencies have been able to achieve” – but he’s ambitious on process reform, and eager to introduce “a secure internet portal which will allow [stakeholders] to log into our systems and help themselves.” There’s clearly vast potential for such a ‘channel shift’, moving from what he says is “a very well-regarded, but quite paper- and labour-intensive set of services” to a more automated system with a web-based customer interface. “Our customers will enjoy it more, and we’ll be able to do it a lot cheaper,” he argues.

Having tested out the concept by introducing ‘Debt Relief Orders’ – a fast, cheap form of bankruptcy, managed through voluntary sector partners and using an automated, online system (see feature, p13) – Speed is eager to get going on a wider channel shift. But he’s struggling to get the capital required to build the new system (see news, p2), and suggests that the coalition should set out how its tough control regimes will give way to a new regime governing essential investments.

And how will the freeze thaw?
Asked how he’s finding the task of persuading the Treasury and Cabinet Office to sanction investment in his channel shift project, Speed replies: “We’re finding it difficult – and we expected to find it difficult, because there is an IT freeze on, and a bureaucracy that’s been put in place for a purpose.” But it’s not clear, he suggests, exactly how senior officials can secure capital investment under this government: “I think what I and probably quite a lot of other chief executives are interested in is: what does the new normality look like? And I don’t think we’ve done that work yet.”

In the meantime, Speed will pursue shared services projects with other arm’s-length bodies, and try to rationalise his property. Shared services have potential, he says, but “it gets difficult when you look at the reasons why we do things in particular ways, which are often statutory. So I think it’s good stuff; the devil will be in the detail.” Meanwhile, while the IS currently runs a national network of offices, “in the longer term we probably can’t afford to be in 35 offices around the country”. Speed is talking to ACAS, another BIS agency with a national network, to look at downsizing and co-locating. The Association of Chief Executives (ACE) is, he adds, proving invaluable as arm’s-length bodies seek suitable partners with which to share back office functions, offices and advice on what works.

To date, the IS’s core staff and operations have been protected from the impact of the recession by its large group of temporary and agency stuff, recruited during the years of expansion to act as a “buffer”; a way, says Speed, to “hedge the risk of running a volume-driven business”. Once 22 per cent of the workforce, this group has now been whittled down to almost nothing. “When the [case] numbers go down, that’s how we flex our cost base,” says Speed. “What’s taken us all by surprise is that 22 per cent has turned out not to be enough. I think we all thought that would get us through. We’ve pretty much reached the end of the line with that resource and now we’re having to contemplate something even more unpleasant: how do we reduce the number of permanent staff?”

As an executive agency without substantial financial reserves, the IS has had to ask BIS for the cash to fund redundancy settlements. “We came to the department and presented the arguments, presented the dilemma we were in if we couldn’t downsize, and produced a case for them funding our exits,” says Speed. But there’s another problem: until Cabinet Office minister Francis Maude’s Superannuation Bill becomes law – which won’t be before December – the only redundancy compensation scheme available is hopelessly expensive.

“We’ve made a business case [to BIS] on both the existing terms and what we think the new terms are going to be, so we’ve got a range of figures rather than a single number,” Speed explains. “We’ll be given by the department a number somewhere in that range, and it’ll then be up to us to do the best we can with that once we have clarity about the offer we can make.”

As Speed says, “There are some big risks in this.” For one, any BIS offer will only be valid for 2010-11; next year, redundancy money will be still harder to obtain. So the packages will have to be offered, agreed, accepted and paid out between December and March – a tight schedule. What’s more, the IS will also be dependent on the Department of Work and Pensions, which is responsible for both valuing the IS redundancy scheme and – in its role as the national regulator of redundancy – approving the package on offer. “I imagine they’ll have a pretty big queue at the door as soon as the situation crystalises, because we’ll all want answers at the same time once that law becomes law,” says Speed. If the law is not passed in December, of course, things get still more complicated.

From theory to practice for redundancy staff
Speed is well aware of how damaging this uncertainty is to staff morale, and he’s worked hard to “be as honest as we can about where we stand”. This has paid off, he says: “I think staff get it. They know where we are, where government is, and they understand it. There’s been a very high level of engagement; people appreciate being told what we’re up to.” And he’s determined to tell people as much as he knows: “I hope soon we’ll be able to put out a note saying: ‘We haven’t got a scheme yet, but we do now have the money, so you can start to think about what you want to do’,” he says.

At the end of the day, though, captain Speed is in the same boat as the rest of the civil service’s top managers – and it’s a boat tossed by hurricane-whipped seas. Unless the redundancy lifeboats arrive soon to carry away a substantial proportion of the crew, his ship will continue to settle ever lower in the stormy waters; but coastguard Maude is tied up in Parliament, trying to get his rescue vessels out of the dock.

It’s Speed’s job to keep shaky businesses and people afloat and, when they do sink, to pull the flotsam of their assets from the water for redistribution to their creditors back on land. Now he – like so many other ships – needs rescuing himself. And he is only too aware, as he scans the horizon for coastguard vessels and checks his watch ever more frequently, that the window for a rescue mission is closing fast.

CV highlights
1983    Joins National Physical Laboratory as a scientist, working on nanometre-level measurement and fabrication technologies
1991    Becomes private secretary to trade secretary Peter Lilley
2000    Made director of science and research policy and funding at the Office of Science and Technology
2003    Appointed director of broadband at the Department for Trade and Industry
2005    Internal promotion to deputy director general for the regions, managing the relationship with the regional development agencies

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