In a recent market study, published yesterday (24 June), it found that the market "may not work in the best interests of all creditors" in over a third of administrations and liquidations – processes that account for around 75% of insolvency practitioners' (IPs) earnings.
The report states: "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."
Changes include an industry-funded independent complaints-handling body with the power to review IP fees and actions, impose fines, and return overcharged fees to creditors, together with reform of the regulatory system that would reposition the Insolvency Service as the dedicated oversight regulator of the recognised professional bodies.
The OFT also called for new targets, against which the performance of the regulatory regime can be measured, in order to streamline the currently inefficient way in which the regulatory regime makes decisions.
Senior director of services Clive Maxwell 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."
In the report, the OFT states that IPs charge around 9% more when there are sufficient funds to pay all secured creditor claims, meaning that their fees come at the expense of unsecured creditors.
It added that there may be further problems, such as overly long liquidation proceedings and insufficient oversight of the use of pre-packaged administrations.
Although the OFT has received numerous complaints regarding pre-packs, it has not been possible to quantify how widespread or damaging such practices may be, it said.
The report was welcomed by Edward Davey, minister for the Department for Business, Innovation and Skills. He said: "This report confirms the criticism that IP fees can sometimes be unfairly high, hitting unsecured creditors such as small businesses and employees. I will look closely at its recommendations and work with the professional bodies involved to ensure such creditors get a fairer deal in the future."
Trade body R3 also welcomed the report, but claimed that, aside from regulatory reforms, the OFT was awarding the industry a "clean bill of health".
President Steven Law added: "We are pleased that the OFT has decided that no radical overhaul of the profession is needed and focus instead on regulation which, as it stands, can be difficult to navigate.
"We have been working closely with the OFT since the study began in November 2009 and their conclusions confirm our strong belief in our profession and clear up some misconceptions that were out there."
According to the report, each year, IPs in the UK realise about £5bn worth of assets and earn approximately £1bn in fees from corporate insolvency procedures.
