Government insolvency fees proposals will hurt creditors and small firms – R3
Government plans to change the way insolvency practitioner fees are calculated in some cases will hurt creditors and force smaller insolvency firms out of the market, says R3, the insolvency trade body.
R3 is also concerned that government plans to provide the Insolvency Service with extra regulatory powers is a risk given the current resourcing and structure of the agency.
The government is proposing to prohibit insolvency practitioners charging their fees on a per-hour basis when there are no engaged secured creditors or creditor committees involved with a case. Instead, insolvency practitioners will only be able to charge a fixed-fee or take a percentage of the assets they realise.
The government’s consultation on its plans closes on Friday 28 March.
Graham Rumney, chief executive of R3, says: “The proposals will make it uneconomical for smaller firms to handle smaller cases. It is possible that many would drop out of the market. Creditors will suffer because these cases will end up with the government’s Official Receivers, who do not have the same qualifications, experience and expertise as insolvency practitioners.”
“It is odd that while government as a whole is trying to cut back on spending, one part appears to be trying to take a large amount of work from the private sector – where it is already carried out effectively.”
Graham Rumney adds: “The government’s proposals are a departure from evidence-based policy making. The government has commissioned two in-depth reviews into insolvency fees since 2010, neither of which recommended what is now being proposed.”
“Indeed, the two government reviews found that the existing fee-setting process worked well when creditors were engaged in an insolvency process. The government should focus on boosting creditor engagement rather than experimenting with fee-setting mechanisms. The profession is already taking steps to address this, but we need support from government too.”
“Relying purely on fixed-fees and fees as a percentage of realisations is a completely arbitrary way of setting fees. Creditors will end up over-paying just as often as insolvency practitioners end up under-paid; charging fees as a percentage of realisations fell out of favour in the 1980s for this very reason.”
77% of R3’s members say that enforcing the use of fixed-fees would lead to insolvency practitioners taking fewer cases; 70% say it would mean Official Receivers taking on more cases; 64% say the government’s proposals reduce the number of business rescues; and 40% say they would hurt returns to creditors (only 11% thought returns would improve).
Insolvency Service Concerns
The government’s proposals also include plans for the Insolvency Service, in its capacity as an ‘oversight regulator’, to have more powers over the profession’s individual regulators.
Graham Rumney says: “We welcome steps that would improve the efficiency and transparency of the insolvency profession’s regulation. A more clearly defined role for an ‘oversight regulator’ is certainly a positive.”
“However, we are unconvinced that the Insolvency Service is ready to assume any expanded role as the ‘oversight regulator’. Taking on more powers would need extra investment in staff and resources, while its performance on its existing regulatory duties – including monitoring regulators and investigating and prosecuting culpable directors – and its practical understanding of the insolvency profession all need improvement.”
“The Insolvency Service can get to where we need it to be, but extra resource is required.”