The British insolvency system will get a new independent complaints body, a revamped regulatory system, increased transparency and an increased status for unsecured creditors under sweeping reforms recommended today.
The Office of Fair Trading (OFT) prepared a wide-ranging market study after extensive consultations starting last year, in response to complaints that the system favours banks over unsecured creditors, allows insolvency practitioners (IPs) to charge excessive fees and allows them to abuse ‘pre-packaged administrations’.
The report can be found at:
http://www.globalturnaround.com/resources.php
The OFT said 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.
“Secured creditors such as banks, who in effect appoint IPs, 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.
“In the other 37 per cent of cases, secured creditors are paid in full, and their interest in IP fees and actions ceases. In these cases, the OFT found that the remaining, unsecured creditors - such as HMRC, small businesses and customers - are often unable to exert influence on the IP whose actions are then mainly constrained only by regulation and ethics
The OFT said that it found evidence that “IPs charge around nine per cent more, like-for-like, when it is the unsecured creditor who pays, rather than the secured creditor.
“While the OFT has received numerous complaints, it has not been possible to quantify how widespread or damaging such practices may be. To address the concerns, increase trust in the system, and deter insolvency practitioners from sharp practices, the OFT recommends fundamental changes to the regulatory system, which is currently unable to effectively protect the interests of small creditors. These include:
- an industry-funded independent complaints handling body with broad powers to review IP fees and actions, impose fines, and return overcharged fees to creditors
- reform of the regulatory system by repositioning the Insolvency Service (IS) as the dedicated oversight regulator of the Recognised Professional Bodies (RPBs) and withdrawing its role as a direct regulator of IPs
- providing objectives for the regulatory regime against which its performance can be measured
- streamlining the currently inefficient way in which the regulatory regime makes decisions.
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