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Insolvency practitioners to be prevented from charging by the hour under new proposals

Out-Law News | 19 Feb 2014 | 9:55 am | 3 min. read

Administrators and other insolvency practitioners (IPs) could be prevented from charging an hourly rate for their services and could instead have to base their fees on a percentage of property dealt with under plans put forward for consultation by the Government.

The proposal forms part of a package of measures intended to strengthen the Insolvency Service's regulatory oversight of the profession, which includes new powers to impose and publicise fines and sanctions. They follow a review by Bristol University academic Elaine Kempson, which concluded that unsecured creditors did not have enough control over the fees charged by IPs.

"We need to make sure that creditors are getting a fair deal and not losing out through excessive charges by practitioners," said Business Minister Jenny Willott. "That is why an effective framework, which everyone has confidence in, is essential to a strong and efficient insolvency industry. These new powers for the Insolvency Service will make sure that they have the right tools to tackle rogue operators and enforce these new rules."

Currently, the majority of IPs are authorised and self-regulated by a number of professional bodies, operating mainly in the accountancy and legal professions and overseen by the Insolvency Service. Each of these bodies, known as recognised professional bodies (RPBs), has its own set of rules and regulations to ensure that the IPs they authorise are 'fit and proper' persons with the necessary experience, qualifications and insurance in place.

IPs act as office-holders during a number of different insolvency regimes for individuals and businesses. These include administration, administrative receivership, liquidation, bankruptcy and voluntary arrangements. IPs working in the corporate field deal with around £5 billion in assets annually, distributing around £4bn to creditors and retaining around £1bn in fees, according to Government figures.

In 2010, consumer protection regulator the Office of Fair Trading (OFT) carried out a study of the market for corporate IPs (104-page / 1.4MB PDF). It found that in just over a third of insolvency cases where unsecured creditors receive a payout, IP fees were estimated to be 9% higher in like-for-like cases than in cases where secured creditors were able to 'control' the fees. Professor Kempson's review was published last year, and follows a number of industry-led changes to the regulatory regime including the introduction of a common complaints gateway and sanction.

The consultation proposes ending the option for an IP to propose remuneration calculated with reference to an hourly rate, except in cases where a creditors' committee has been appointed to supervise the work, or secured creditors are not expected to be paid in full and so retain an interest in work being done quickly. In all other cases IPs would be expected to charge either a percentage of realisations or a fixed fee. Both of these options are available at the moment, but IPs charge an hourly rate in the majority of circumstances according to the document.

The Government is also proposing to include ensuring that fees charged by IPs "properly reflect the nature and complexity of the work done in any given case" as part of the regulatory objectives. This would also give regulators responsibility for dealing with complaints in relation to excessive fees. It has also proposed introducing a "backstop power" that would allow for the introduction of a single industry regulator "if the changes detailed in this consultation fail to achieve adequate change in the regulatory system".

Giles Frampton, vice president of industry body R3, said that although the proposals for improving regulatory oversight of fees and providing more information to creditors were welcome, changing the way in which fees were set would have "unintended and unwanted consequences".

"The Government's own report says that the market for insolvency practitioner fees works well when creditors engage with the process, as usually happens with secured creditors," he said. "That being the case, the Government's focus should be on boosting unsecured creditor engagement, and it should avoid experimenting with the basic fee-setting mechanisms."

"In practice, IPs and creditors would find enforced fixed-fee caps or setting fees as a proportion of realisations unfair - indeed, the latter was abandoned as a standard practice decades ago. Arbitrary measures such as these are not always compatible with the unpredictable nature of insolvency work, and would routinely leave both creditors and IPs out of pocket," he said.

The measures contained in the consultation would extend to Scotland, England and Wales, apart from the remuneration proposals which would apply in England and Wales only. The consultation closes on 28th March.