Insolvency Service looks to overhaul regulations

Insolvency Service looks to overhaul regulations

Overhaul for insolvency? Service launches public consultation over far-reaching proposals for change

TINKERING WITH INSOLVENCY regulations is likely to see the ironic situation of practitioners complaining about the cost of a complaints body.

The Insolvency Service has launched a consultation on possible changes to the profession. This is in response to suggestions made by the Office of Fair Trading (OFT) following an investigation into corporate insolvency last year.

The OFT investigation looked at various aspects of the profession, including how practitioner fees are calculated and the role unsecured creditors have in insolvency processes.

Unsecured creditors are last in the line to be paid after a company collapses or finds itself unable to continue trading.

The Service’s consultation, launched on 10 February, will look at three main areas of change to the profession. It includes the introduction of an independent complaints body, and proposals to amend current regulatory framework and legislation.

Unified complaints approach

The introduction of an independent complaints body would sit alongside the licensing organisations.

Currently there are nine licensors in the profession known as Recognised Professional Bodies (RPBs). Complaints about an insolvency practitioner are sent to their respective RPB, which investigates and takes disciplinary action if necessary.

However, each RPB’s rules are slightly different from the other, meaning one practitioner may not be reprimanded for the same fault in the way another is.

The independent comp­laints body would treat all insolvency practitioners (IPs) the same, creating a unified approach. The new body would also look at how practitioner fees are calculated. The RPBs don’t currently investigate complaints regarding fees, and these issues are usually fought in court.

Initially the service proposes that the cost of funding the complaints body will come from the RPBs. The licensors would then, most likely, recover this expenditure from the IPs themselves through increasing membership and licensing fees. The cost of complaining would remain free.

The service estimates the price of having a complaint body would be about £1.4m annually to the insolvency profession. However, it also predicts the cost to creditors for having this new “benefit” to also be about £1.4m.

The government body also suggests the benefits of this new structure could save
the insolvency profession £46m over ten years, although no clear explanation of how this can be achieved is supplied.

Experts believe complaints come hand in hand with the job and are an inevitable by-product of the nature of the work practitioner’s undertake.

Administrations involve a high percentage of complaints that are not necessarily down to practitioner mistakes. Most unsecured creditors do not understand the insolvency process, particularly that they are likely to receive just pennies in the pound. 

On the plus side for creditors the changes to the regulatory system could also end up providing them with greater powers over decisions made in an insolvency process – for example giving them more say over the future of an insolvent business.

Increased efficiency

Creditors could also have more influence over the practitioner’s remuneration package. For IPs this could mean a change in the way insolvencies are conducted in the future and what they charge for their work.

Steven Law, insolvency trade body R3 president, said: “Unfortunately there is rarely enough money in the pot to pay all creditors in most cases, and those in a lower position will lose out.

“While this may frustrate unsecured creditors, this system ensures creditors will lend in future, which encourages entrepreneurship to the benefit of UK plc.

“Under the current system, unsecured creditors already have the ability to influence the insolvency actions and fees of the IP but rarely engage in the process.”

Although as Law points out, unsecured creditors already have powers to influence an insolvent business, the practitioner and the industry need to work with them on better engagement and education.

Also, unsecured creditors need to want a more active role in these types of proceedings for the suggested changes in the consultation to work. The hope of the Insolvency Service is that the suggested changes will increase efficiency and transparency in the profession.

The Insolvency Service consultation closes on 6 May.graph-insolvency-cross-border-blues

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