The corporate insolvency industry needs “far-reaching reform” to protect the interests of creditors and the wider economy, according to The Office of Fair Trading.
Following an eight-month study the OFT said an industry-funded independent complaints handling body should be created with the powers to review IP fees and actions, impose fines and return overcharged fees to creditors. It said this body would increase trust in the system and “deter insolvency practitioners from sharp practices.”
David Stallibrass, director of the OFT’s market study said, ”The major cause for concern is the vacuum of oversight over the insolvency practitioner once the secured creditor’s interest has ceased and the lack of regulatory regime to correct this.”
The watchdog also calls for the Insolvency Service to be repositioned as the dedicated oversight regulator of the seven existing insolvency professional bodies. The OFT also added the government agency’s role as a direct regulator of IPs should be withdrawn.
The OFT said that the problem of having so many professional bodies was “the inconsistencies and inefficiencies in handling complaints”. Whether the Insolvency Service will take the role of a disciplinary tribunal, or an appeal first-tier body like the Financial Ombudsman Service, is yet to be decided, the organisation said.
Clive Maxwell, OFT senior director of services, said: “‘Smooth entry and exit of firms is an important feature of a competitive economy, and while we have found that the corporate insolvency market works well in supporting this outcome in the majority of cases, unsecured creditors are insufficiently represented and protected.”
Maxwell said there should be objectives for the new regulatory regimes against which its performance can be measured and the “inefficient way” in which the regulatory regime currently makes its decisions should be streamlined.
Stallibrass added that the role of the Insolvency Service should be “that where market forces are not able to constrain bad practice the fear of regulatory penalties should.
“The most effective approach to remedy the problems facing the industry is to hand the Insolvency Service the power to punish.” He said punishment could come in the forms of fines and naming and shaming of regulatory bodies who fail to protect the vulnerable.
The insolvency trade body, R3, said it recognises the need for regulatory reform but is pleased the OFT stopped short of calling for a total overhaul of the industry.
The OFT’s study into the corporate insolvency market revealed that while the market often works well, it may not work in the best interests of all creditors in over a third of administrations and creditors’ voluntary liquidations (CVLs), procedures which together account for 75 per cent of income earned by IPs.
Maxwell added: “Our recommendations, if enacted, would benefit both the wider economy and good insolvency practitioners, without imposing burdens on the taxpayer.’
The research showed that banks, who appoint insolvency practitioners, have a strong incentive to control fees and direct the activities of IPs in the 63 per cent of cases where there are insufficient funds for secured creditors to recover all their debts.
However, the OFT found that in cases where secured creditors are paid in full, around 37 per cent of all cases, HMRC and unsecured creditors are unable to exert much influence over the appointed insolvency practitioner.
Edward Davey, Minister for the Department of Business, Skills and Enterprise said: “This important report confirms the criticism that insolvency practitioner fees can sometimes be unfairly high, hitting unsecured creditors such as small businesses and employees.
The OFT also uncovered that insolvency practitioners charge up to nine per cent more when their client is an unsecured creditor compared to a secured creditor.
Steven Law, president of R3, said: “It’s a market reality that IPs charge more when working with unsecured creditors, as it takes up more time than dealing with one secured creditor and could amount to thousands of disparate organisations. Setting up and running creditors meetings also costs money. Secured creditors are routinely able to negotiate discounts as a result of their more regular dealings with insolvent businesses and practitioners.”
The OFT said that its research suggests there are further problems such as overly long liquidation proceedings and insufficient oversight of the use of pre-packaged administrations.