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Fee reform: Don’t Panic 18 February 2014

The changes to the UK insolvency regime proposed yesterday are certainly radical, promising perhaps the biggest change to the industry since the Insolvency Act of 1986.

Yet while emphasising the scale of the changes isn’t hyperbolic, it seems that getting too anxious about their substance might be.

In a nutshell, the proposals set out by MP Jenny Willott for consultation over the next six weeks have two elements: changes to the IP fee-charging structure, and an increase in the regulatory oversight powers of the Insolvency Service over the UK’s eight Recognised Professional Bodies (RPBs), which license the country’s community of insolvency practitioners.

The fee element does not come as a surprise. Following the OFT’s review into the market in 2010, a second review conducted by Professor Elaine Kempson confirmed conclusions that unsecured creditors had insufficient “control” over office-holders’ remuneration, but made it clear the problem was not one of IPs deliberately inflating fees, but of inefficiencies being allowed to persist in the way those fees were generated.

Indeed, the consultation stresses Kempson’s finding that “the great majority of IPs are honest and generally do a good job, sometimes under very difficult circumstances”

What is perhaps a surprise is the firm nature of the proposed solution. While the impact assessment document for the consultation accepts that a voluntary code to change the basis of remuneration is an option, it bluntly favours a strict regulatory approach, stating:

“Given that there has been opportunity for the profession to take action voluntarily already, we do not think that this option would have sufficient impact and therefore the level of efficiency expected from this proposal is likely to be much lower than in [taking a regulatory option].”

Fee changes

What’s now on the table, despite the consultation’s acknowledgement there is no “single solution” to the “weak position” of unsecured creditors, is a limitation on (or even a removal of) time- and rate-based charging, and a corresponding uptake of upfront fixed fees and fees based on a percentage of realisations. There are also proposals to give the Insolvency Service much greater agency in providing oversight over fee-charging practice – but more of that later.

On the fee front, full details can be found in paragraph 95 of the consultation document.

It is fair to say that these measures will do more to enhance the reputational capital of the insolvency profession than the pockets of creditors. The number previously reported by the OFT as the damage to unsecured creditor returns as a result of current market practice was circa £15m – this out of around £5bn worth of assets realised by IPs each year, and £1bn charged in fees.

While later research by Prof. Kempson suggests this may be an understatement of the actual impact (the consultation is clear that “significant harm” is being done unsecured creditors), it is still not perhaps as damaging as the erosion of trust in the insolvency profession caused by cynicism from those creditors.

However, could the curtailment of IP fees in this way act as a disincentive to young people thinking of entering the insolvency profession? Director of external affairs Anne Wilcox, speaking to me yesterday from BIS, thinks otherwise: “I’d expect young people to want to go into a profession with a high reputation and standing – if anything, these measures will encourage, rather than the reverse”.

Regulatory changes

It is this issue of conduct and trust in the profession that underscores the consultation as a whole, and which informs its second major element – the granting of additional regulatory powers and responsibilities to the Insolvency Service.

The consultation does not mince its words in saying that the Service has had too weak an oversight function over the UK’s RPBs, with little ability to directly regulate IPs:

“Currently, the only sanction available to the oversight regulator is to de-recognise a regulator, meaning that it could no longer authorise IPs. Given the costs and disruption this would cause, such a step would only be appropriate in extreme cases (and this power has never been used). The only reasonable course of action currently open to the oversight regulator is to seek to influence the behaviour and conduct of the regulators through persuasion, discussion and monitoring of the commitments RPBs have made in an agreement with the Secretary of State (through a Memorandum of Understanding).”

In response, Willott has called for the Service to be given a greater range of possible sanctions to bring to bear on RPBs, as well as the ability “to ask the court to sanction an IP directly, when it is appropriate to do so.”

These recommendations are in line with the muscular rhetoric surrounding last year’s Transparency and Trust discussion paper, and subsequent calls for the Service to be given more agency in its treatment of “rogue” company directors: they speak for a more powerful and engaged single regulator for the sector.

However, they also raise the same concerns about resourcing that the directorial redress debate brought into play. Will it be a stretch for the Service – already made leaner through a decrease in traditional income and participation in “red tape” – to take on the burden of the extra powers with its existing structure?

Again, Wilcox makes a convincing argument otherwise. The cost of implementation to the service, she points out, is projected at around £0.2m per annum, with a further £1.6m per annum taken on by the eight RPBs. In many ways, she says, the changes would be a “realignment” rather than a cost uptake, as the service would pass some processes down to RPBs as part of the deal.

At present then, the proposals offered by Willott represent a significant change to the status quo, but – if the logic of the consultation follows through into practice – a profession seen as much cleaner and more valuable by the public at large and the SME business community.

The proposals are, nevertheless, proposals. Yesterday’s release brought into the light a great number of different options: some will no doubt trouble IPs, some will receive their support – but none are yet set in stone. Insolvency Today looks forward to the six weeks of discussion that will follow, and is keen to receive and publish the views of stakeholders from all corners of the industry.

On 3rd April, Insolvency Today will host its Insolvency & Restructuring conference at London’s QE2 conference centre, where the issues introduced above will be discussed at length by experts from the IP, creditor and regulatory spheres.

By Fred Crawley

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