More transparency for fees charged in insolvency
Insolvency practitioners will be required to provide upfront estimates of the cost of working on insolvency cases, ending the uncertainty of unlimited hourly charges, Business Minister Jo Swinson announced today.
New rules laid in Parliament today require insolvency practitioners to provide a summary of estimated costs, the work to be undertaken and, where an hourly rate is proposed, an estimate of the expected time. These estimates will act as a cap on fees as, once agreed, they can only be changed by agreement between the insolvency practitioners and those that are owed money.
The rules follow an independent review and consultation into how insolvency practitioners charge their fees following concerns that the current system allowed excessive fees to be charged.
Business Minister Jo Swinson said:
Insolvency practitioners do important and specialist work realising the assets of failed companies for distribution to suppliers and others owed money. Initial fee estimates, which can only be changed by agreement, will strengthen the position of those owed money to ensure that fees are fair and reasonable.
Increased transparency is a sensible and practical way to strengthen the hands of those owed money in an insolvency and will give insolvency practitioners the opportunity to demonstrate how their services provide value for money.
Under the current system in England and Wales, insolvency practitioner fees are usually charged on an hourly rate without an indication of the work that will be done or the length of time it is expected to take. The plans are supported by both representative groups of creditors and insolvency practitioners who can see the benefits of increased transparency.
Giles Frampton, president of R3, the insolvency trade body:
We are very pleased with the government’s practical proposals for updating the insolvency fees-setting process. An up-front estimate should work for both creditors and the insolvency profession, and will help improve trust and transparency in our insolvency regime. The profession first supported an up-front estimate system in 2011 and we are pleased to see it set to become reality.
The 2013 Kempson Review found that creditor engagement is crucial for effective fee-setting. We anticipate that the estimate system will provide information to encourage this engagement, as will a new website for creditors being launched today by R3 with support from key creditor groups. The website, www.creditorinsolvencyguide.co.uk, will tell small unsecured creditors what they need to know about their role in the insolvency process.
Philip King, Chief Executive of the Chartered Institute of Credit Management (CICM), said:
“The CICM has been vocal in wanting to see up-front estimates for work undertaken so the element of surprise is removed further down the road in the insolvency procedure. The introduction of new rules is therefore to be strongly welcomed as are any well-considered actions that help to bring greater confidence to creditors and transparency in the fees that are charged.”
The rules will come into force in October 2015.
Notes to Editors
These changes apply to England and Wales only. The same issue (lack of fee control by unsecured creditors) does not exist in Scotland where the court reporter system is a check on remuneration.
Insolvency practitioners act as office-holders in insolvency procedures which include administration, administrative receivership, liquidation, bankruptcy and voluntary arrangements. The current average charge out rate for the profession is £375 per hour.
These changes affect administration, creditors’ voluntary liquidation, compulsory liquidation (unless the Official Receiver acts as liquidator) and bankruptcy (unless the Official Receiver acts as trustee in bankruptcy).The authorisation and regulation of the insolvency profession is mainly through a system of self-regulation by accredited bodies, operating largely in the accountancy and legal professions, overseen by the Insolvency Service.
The Office of Fair Trading’s 2010 market study into corporate insolvency and Professor Elaine Kempson’s 2013 review of insolvency practitioner fees identified that, where fees are controlled by unsecured creditors collectively, the current control mechanisms do not work as intended.
In 2014, following publication of Professor Kempson’s report, Business Minister Jenny Willott launched a consultation on proposals aimed at tackling issues identified in these two reports. Responses to the consultation indicated that creditors wanted meaningful information at the beginning of the process to increase transparency, and to address shortcomings in the current regime.