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Jenny Willott on insolvency fees 24 February 2014

Writing exclusively for Insolvency News, Business Minister Jenny Willott explains why she believes the proposals to change the way insolvency practitioner fees are charged are necessary

A good insolvency regime is essential for economic growth, allowing both businesses and people to invest and thrive. Sometimes businesses do go wrong or run into trouble, but creditors should be confident that the regime protects them.

Insolvency means that some people will not get back what they are owed. What is important is that creditors have confidence that they will recover the maximum amount possible in the circumstances. It is therefore vital to have a regime that provides fairness and value for money for all those concerned.

Let me start by saying that in general, most insolvency practitioners (IPs) do a good job for a fair price and in sometimes very difficult circumstances. We would not consistently get ranked in the global top 10, ahead of the US, France and Germany, by the World Bank if this were not so. However, I do believe that more can be done to strengthen this regime.

The Insolvency Service has published proposals to make the insolvency regime fairer and more effective. We want fees charged for insolvency procedures to reflect the work done, and we want a more accountable and transparent profession.

Last year, my predecessor Jo Swinson asked Prof Emeritus Elaine Kempson of Bristol University to look at the charging structure of IP fees to address consumer concern and increase confidence in the industry. Her report showed that where unsecured creditors are responsible for paying fees, the controls do not work as they should, which results in fees being generally higher as IPs enjoy a relatively unchecked market in this area.

These proposals aim to align how fees are charged with the interests of creditors as a whole. Currently, IPs can charge fees at either an hourly rate, a fixed amount or as a percentage of assets, although in most cases fees are charged at an hourly rate. With no indication of the total cost of the case upfront, this can often be seen as a blank cheque. The rules on fees are overly complex and confusing for many creditors.

What we are proposing is to restrict when an IP can set his or her fees at an hourly rate to situations where there is close creditor supervision, for example where there is a creditors’ committee established or where secured creditors are in control of fees.

These proposals also introduce a set of regulatory objectives to strengthen the insolvency regime. In 2010, the Office of Fair Trading published a market study into corporate insolvency, which showed a need to strengthen the regulatory framework.

The new objectives will protect the public and promote fair treatment for those affected by an IP’s acts or omissions, and encourage an independent and competitive profession. The new measures will also require regulators to promote value for money from fees charged. Regulators – including the Insolvency Service as the industry oversight regulator – will be expected to operate within these objectives.

The Insolvency Service will also get enhanced powers as oversight regulator to be able to deal more effectively with poor performance or misconduct of those who work in the industry. The agency will have new powers to sanction regulators who fail to operate within the objectives and directly investigate and bring actions against IPs where it is in the public interest to do so.

The proposals also give Government the power to introduce a single regulator for the insolvency profession if the changes to the regulatory framework fail to deliver the expected improvements. However, this measure would not be introduced without further consultation.

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.

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