Government plans to change the way insolvency practitioner (IP) fees are calculated could hurt creditors and force smaller insolvency firms out of the market, warns insolvency trade body R3.

R3’s comments are part of its response to the recent government consultation on proposals to change the schedule for insolvency fees and provide the Insolvency Service with extra regulatory powers.

Under the proposals, IPs would no longer be able to charge fees on a per-hour basis when there are no engaged secured creditors or creditor committees involved with a case, and would have to charge a fixed-fee or take a percentage of the assets they realise.

Graham Romney, R3 chief executive of R3, said: ‘The proposals will make it uneconomical for smaller firms to handle smaller cases. It is possible that many would drop out of the market. Creditors will suffer because these cases will end up with the government’s Official Receivers, who do not have the same qualifications, experience and expertise as insolvency practitioners.’

Romney highlighted research indicating that 77% of R3’s members believe enforcing the use of fixed-fees would lead to insolvency practitioners taking fewer cases; 70% say it would mean Official Receivers taking on more cases; 64% say the government’s proposals reduce the number of business rescues; and 40% say they would hurt returns to creditors, while only 11% thought returns would improve.

 ‘Relying purely on fixed-fees and fees as a percentage of realisations are a completely arbitrary way of setting fees. Creditors will end up over-paying just as often as insolvency practitioners end up under-paid; charging fees as a percentage of realisations fell out of favour in the 1980s for this very reason,’ Romney said.

R3 is also concerned about government proposals for the Insolvency Service have an expanded role as an ‘oversight regulator’ with more powers over the profession’s individual regulators, saying it would require more investment in staff, resources and training to handle this.