Insolvency profession says fee changes will see fewer rescues

THE INSOLVENCY PROFESSION believes that government proposals to change fee structures in corporate collapses will lead to fewer business rescues. 

More than three quarters (77%) of practitioners said that enforcing the use of fixed-fees would lead to practitioners taking fewer cases, according to insolvency trade body R3. More than half (64%) also said it would reduce the number of business rescues, with 40% citing it would hurt returns to creditors.

The government is proposing to prohibit insolvency practitioners charging their fees on a per-hour basis. Instead, insolvency practitioners (IPs) will only be able to charge a fixed-fee or take a percentage of the assets they realise.

The Insolvency Service launched a consultation on fee capping in February, with the consultation due to end today.

The service’s plans have met with criticism from R3, the ICAEW and practitioners.

More than 70% said the changes would mean the Official Receiver would take on more cases, according to an R3 poll of its members.

Graham Rumney, chief executive of R3, said: “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.”

However, the Insolvency Service hit back: “R3 is missing the point. Independent reviews confirmed that fees charged to unsecured creditors for insolvency procedures represented poor value for money and the consultation seeks to rebalance this, in part by simplifying the fee charging structure to make it more understandable,” said an Insolvency Service spokesman.

But warnings are also coming through from industry. KPMG head of advisory and restructuring partner Richard Fleming said that the government was looking at the wrong problem, and instead should consider focusing on ‘over-compliance’ as driving up costs.

“We are concerned that some of the possible changes are trying to tackle the wrong problem. There seems to be an over-riding presumption, for example, that costs are too high but around 90% of these costs are made up by compliance with law,” he said.

One of the ambitions behind the idea to cap fees is to drive efficiency, said Anne Willcocks, head of external communications and policy at the Insolvency Service.

According to Professor Elaine Kempson, who carried out a review of practitioner fees last year, there was no “single easy fix” in this situation to reduce fees in certain insolvencies.

The service believes that a cap could instigate a chain reaction similar to that of the Individual Voluntary Arrangement protocol, which capped IP fees in this process. Following its introduction the market slowly moved towards more efficient and faster turnaround methods – and subsequently IVA factories came into prominence.

“In IVAs, the IPs could see efficiencies and drive these through,” Willcocks said. She adds that one of the concerns raised by Kempson’s report was that IPs are not as efficient because there “are not enough incentives towards efficiency”.

However, it is argued that practitioners and factories were walking away from IVAs that were viable but not cost-effective – leaving the creditor and debtor at a loose end.

“Factories will look at cases on an economic ground,” said ICAEW’s head of policy Vernon Soare when the consultation was launched. “If it is not going to provide a profit, then they won’t take it on from a commercial perspective,” he adds.

Rumney also points out that another downfall of the change would hit smaller firms and force them out of the industry.

“The proposals will make it uneconomical for smaller firms to handle smaller cases. It is possible that many would drop out of the market,” he said.

“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.”

The latest consultation is based on two reports, one by the Office of Fair Trading and one by Professor Elaine Kempson. Both have been heavily criticised for failing to truly understand the profession and how fees are calculated.