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AIB Shines A Light On Scottish Trust Deeds Fees

28th May 2013

The Scottish Government has long expressed concern about the outcomes achieved for creditors by protected trust deeds. The feeling has been that, in too many instances, creditors have received an insufficient return on the debts owed to them. As a result of this the Accountant in Bankruptcy (AIB) has driven forward a process that will result in some significant changes to Scottish trust deeds later this year that will apply to all firms operating in the market.

The AIB has now published a dataset comparing trust deed providers on a number of metrics related to fees and creditor outcomes. The information provided is useful as it enables consideration of a number of important questions. The dataset incorporates 31 insolvency practitioner firms that each submitted more than one hundred Form 4s (updated estimates of the return that creditors will receive provided during a trust deed) during the AIB’s 2011-12 financial year.

Are the expected returns for creditors from trust deeds likely to be achieved?

At the start of a trust deed an estimate is given to the creditors as to what they might expect to receive at the end of the process. Annually thereafter an updated estimate is produced by the trustee.

It wouldn’t be unusual for the creditor return numbers to decline marginally over time. Some cases will be affected by client changes in circumstances that render them unable to conform to the original agreement. Other cases will be affected by non-compliance on the part of the debtor. It might be expected that these scenarios would apply to different insolvency practitioner firms broadly equally.

However, creditor returns could also be affected if a protected trust deeds provider has found reason for their fees for managing the case to be increased. Increased fees will take money from “the pot” which otherwise would have made its way to the creditors later.

The AIB data seems to indicate a huge variance between different firms as to how much of the estimated dividend creditors subsequently are estimated likely to receive.

Of the 31 insolvency practitioner firms measured:

  • 12 firms estimate a reduction of the dividend of 10% or less.

  • 6 firms estimate a reduction of more than 10% but less than 20%.

  • 7 firms estimate a reduction of 20% to 30%.

  • 6 firms estimate a reduction of more than 30% (with the highest figure being 38%).

Are creditors likely to receive a dividend close to that which was originally estimated? It would seem that comes down very much to which insolvency practitioner firm is handling the trust deed.

How often will creditors receive nothing at all from a trust deed?

There are circumstances in which no dividend is paid to creditors from trust deeds. There could be a perfectly innocent reason for this. It’s possible for example that the case failed due to a change of circumstances or debtor non-compliance. It’s also possible that extra work legitimately has to be done on a case which wasn’t envisaged at the start of a trust deed. Once again however, it might be expected that these factors might apply to a similar percentage of cases that each firm manages.

Another explanation for a zero dividend is that a firm finds reason to increase their fees above the original estimates on a fairly high number of occasions. This may draw money from the pool of funds leaving nothing available to be paid to creditors.

Of the 31 firms measured their estimates for zero dividends were:

  • For 10 firms a zero dividend may be paid on 10% or less of their cases.

  • For 12 firms a zero dividend may be paid on more than 10% but less than 20% of cases.

  • For 8 firms a zero dividend may be paid on more than 20% but less than 30% of cases.

  • A single firm estimates that 34% of their cases will not pay a dividend to the creditors.

As before, whether or not a creditor is likely to not receive a dividend seems to be heavily influenced by the insolvency practitioner firm involved.

Do certain firms regularly increase their fees substantially?

As explained previously, there are circumstances in which fees may quite legitimately need to be increased as extra previously unforeseen work has to be undertaken. It might however be reasonable to expect firms to be similarly exposed to such instances.

The AIB measure used in this respect is how often a particular firm increases their fees by more than 25% in excess of the original figures provided.

Of the 31 firms that were reported on:

  • 16 firms increased the fees (by 25% or more) on 5% or less of their cases.

  • 6 firms increased their fees like this more than 5% but less than 15% of the time.

  • 4 firms increased their fees in this way on more than 15% but less than 25% of occasions.

  • 3 firms increased their fees like this on more than 30% but less than 40% of cases.

  • 2 firms increased their fees (by 25% or more) on more than 40% of their cases.

We can clearly see that a majority of firms quite infrequently increase their fees above their original estimate.

We can also see that a minority of firms are very much in the habit of finding ways to increase their fees (at the expense of creditors) on a very substantial minority of the trust deeds that they are responsible for. 

What conclusions can we draw and what questions remain unanswered?

  • It is clear that some trust deed providers are much more inclined than others to produce a diminished return for creditors. We can see that some trustees much more frequently end up paying nothing at all to creditors compared to their peers. It’s also apparent that some have acquired a habit of finding reasons to increase their fees during trust deeds at the expense of creditors.

  • The beginning of the AIB announcement of these statistics includes the phrase, “The trend of rising costs associated with delivering PTDs alongside disappointing dividend returns to creditors are issues we believe must be addressed”. Once the figures are analysed is it reasonable to point to a general trend amongst the industry as described by the AIB? Wouldn’t it be more accurate to say that a minority of firms seem to have been getting away with practices that are contrary to the interests of creditors?

  • If this is the case, are general reforms to the protected trust deeds process really required? Could the interests of creditors be better served by focussing attention on insolvency practitioners that some observers will consider are “milking the system” at the expense of creditors? Might there be a reasonable expectation that the appropriate regulatory bodies and the AIB itself could have acted on this issue where appropriate some time ago?  

  • It might be the case that the Scottish Government and the AIB have now assigned sufficient priority to this issue that they will now pursue a dual approach. Introducing protected trust deeds reforms and concurrently focussing on concern about abuses of fees at certain firms may well be the modus operandi going forward.  

  • Will creditors react to this data? Will the voting representatives of the major creditors factor this data into their acceptance (or rejection) of the protection of trust deeds from certain firms in the future? It is possible that they have already compiled similar data for the benefit of their clients in the past.

  • Will certain trust deeds providers amend their processes and practices in light of the data that the Accountant in Bankruptcy has produced? This seems quite likely now that a greater degree of transparency exists. A minority of firms (those that apparently have not come out of this report very positively) may quickly take steps to reassure their regulators, and the creditors that they work with, that their fee charging practices are fair and appropriate.

As so often is the case with new sets of data, it’s easier to identify further questions than it is to draw significant conclusions. As the AIB has stated that they will continue to provide firm-by-firm fee information in the future we are likely to learn more on this subject over time.

The AIB report and dataset is available here.

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