OFT attacks insolvencies

The Office of Fair Trading (OFT) wants far-reaching reforms of the corporate insolvency regulatory regime to cut “sharp practices” by insolvency practitioners.

The OFT's assessment identifies overly long liquidation proceedings and insufficient oversight of the use of pre-packaged administrations. It says it has not been possible to quantify how widespread or damaging such practices may be.

The OFT says it wants “to address the concerns, increase trust in the system, and deter IPs from sharp practices”. It recommends:

• 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.

The OFT also suggests changes to the regulations to increase transparency and enhance the ability of unsecured creditors to oversee IP fees and actions.

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.

“Our recommendations, if enacted, would benefit both the wider economy and good insolvency practitioners, without imposing burdens on the taxpayer.'

The OFT has offered to assist the Department for Business, Innovation and Skills, and the Insolvency Service in taking forward its recommendations.

Background

The OFT said each year, Insolvency Practitioners (IPs) in the UK realise about £5bn worth of assets and earn approximately £1bn in fees from corporate insolvency procedures.

An OFT market study published today found 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% of income earned by IPs.

The OFT found that 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% of cases where there are insufficient funds for secured creditors to recover all their debts.

In the other 37% 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 found evidence that IPs charge around 9% more, like-for-like, when it is the unsecured creditor who pays, rather than the secured creditor.