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1. Charles River Associates have been asked to provide a review of the Law Commission Report "Insolvency Law Reform: Promoting Trust and Confidence". We have been asked to focus on the recommendations that New Zealand:

1. Establish a regime for the regulation and licensing of insolvency practitioners;
2. Introduce a moratorium on creditors of insolvent companies that would allow the operation of a targeted business rehabilitation regime; and
3. Establish a new office of the Inspector General of Insolvency.

2. We are not convinced that the proposal to license insolvency practitioners will provide benefits that will outweigh the costs associated with it. In particular we have pointed out that the proposal will:

1. Introduce a barrier to entry that will raise the cost of employing insolvency practitioners, provide rents to the incumbent practitioners and increase the minimum level of quality in the market above the level the may be required for some simple insolvency cases.
2. Not solve the claimed problems associated with asymmetric information about the quality of insolvency practitioners or remove the possibility that there may be practitioners with a bias towards debtors or creditors.
3. Only provide for New Zealand practitioners to operate in Australia if we adopt a system equivalent to that in Australia.
4. Place on the court an onerous burden in overseeing insolvency practitioners who are officers of the court, even though it is not clear that the court has any special advantages in identifying high quality insolvency practitioners.

3. We have suggested that occupational regulation should normally only be introduced where it meets relatively strong tests for the demonstration of public benefits over detriments. In our opinion, more conceptual and empirical research on the magnitude of the problems identified by the Law Commission, the ability of licensing to ameliorate these problems, and the costs associated with any licensing regime are required before any licensing regime should be introduced.

4. In respect of the proposal to establish a new Office of the Inspector General of Insolvency, we have noted that the case rests largely on concerns about the current level of enforcement of insolvency law. We point out that:

1. The economics literature on enforcement suggests that increasing the penalties is an alternative to increasing expenditure on enforcement but the Law Commission provides no indication that it has considered this alternative approach to the enforcement problems that it has identified.
2. Efficient enforcement action by a public agency with a budget constraint will fall short of prosecuting every case on which a conviction is possible. Adverse publicity associated with state agency prosecution of parties subsequently found to be innocent and the budget constraint will lead them to focus on litigating cases with a high probability of conviction and/or with high precedent/deterrence value.
3. Enforcement decisions by a public agency may be efficient even though they do not conform to the expectations of the media, parties who have suffered harm, or other parties not fully informed about the facts of the case and the budget constraints faced by the agency.
4. Convictions of bankrupts for breaches of insolvency law in New Zealand are very high by international standards. With the responsibility for director disqualification now assigned to the Insolvency and Trustee Service, prosecution of these cases is now underway again.

If there is a widely-held view that enforcement of insolvency law is below the level necessary for the efficient operation of the markets, then in our view this should in the first instance be addressed by increased funding for and greater transparency in the reporting of expenditure on and priorities for enforcement by the Insolvency and Trustee Service. The appointment of an Inspector General should only be considered if this approach does not achieve the desired outcome.

5. We do not find convincing the rationale for a moratorium provided by the Law Commission, and we doubt that the target firms that they have identified actually require a moratorium to promote rehabilitation rather than liquidation when rehabilitation is efficient. Unless further work is undertaken to identify the precise market failure that any moratorium would be designed to address, there is a danger that the regime may not be appropriately designed to assist those segments of the market actually requiring it. Whatever the rationale for the introduction of the moratorium regime, and despite the existence of a statutory management regime, we consider it highly likely that a moratorium will increase the cost (defined to include all terms of the contract) of secured credit.

6. Overall, it is our view the Law Commission has yet to make a convincing case for the licensing of insolvency practitioners, alternative arrangements for the enforcement of insolvency law (including the creation of the office of the Inspector General of Insolvency) and a moratorium regime. The case for the interventions and law changes recommended by the Law Commission cannot be made without further research that is designed to:

1. More precisely identify the market failures justifying the intervention;
2. Provide a basis upon which the magnitude and significance of the problems identified can be assessed; and
3. Link more directly the recommendations made to the resolution of the market failures identified.

In each case, we suggest that this analysis should include a more detailed assessment of the potential costs associated with each of the changes recommended.