Business and Trade Committee
Oral evidence: The collapse of Wilko, HC 316
Tuesday 28 November 2023
Ordered by the House of Commons to be published on 28 November 2023.
Members present: Liam Byrne (Chair); Douglas Chapman; Jonathan Gullis; Antony Higginbotham; Jane Hunt; Ian Lavery; Andy McDonald; Mark Pawsey; Sir Stephen Timms.
Work and Pensions Committee member present: Nigel Mills.
Questions 130-161
Witnesses
III: Kevin Hollinrake MP, Minister for Enterprise, Markets and Small Business, Department for Business and Trade; Greg Falconer, Deputy Director, Consumer Sectors, Department for Business and Trade; Angela Crossley, Director of Strategy Policy and Analysis, Insolvency Service.
Examination of witnesses
Witnesses: Kevin Hollinrake, Greg Falconer and Angela Crossley.
Q130 Chair: Welcome to this third and final session of the Business and Trade Select Committee today. I am really grateful to you, Minister, and your colleagues, for joining us today to try to draw out some of the lessons from what has been a terrible story that has unfolded here this morning. Minister, perhaps I could put this point gently to you first. What was it about high office that made you change your mind about the need for insolvency reform and audit reform legislation?
Kevin Hollinrake: It was some of the practicalities around that. We are still very ambitious to reform insolvency and we are making changes to the insolvency process already, including potentially, when we have legislative time available in Parliament, making firms responsible for making them accountable to regulators. In terms of audit reform, we are taking forward reforms to audit.
As you will be aware, the FRC, which is taking a much more robust view of audit these days, is doing a much better job and is under good stewardship from Jan du Plessis and Richard Moriarty, following the very good work from Sir Jon Thompson. We have seen a much more effective regime around corporate reform. We are still ambitious in terms of ARGA, the Audit, Reporting and Governance Authority. That is something that we wanted to take forward, but clearly parliamentary time does not always afford those opportunities.
Q131 Chair: The story that we heard today is that we had watchdogs that do not bark, an insolvency process that turns pensioners into second-class citizens and directors who appear to have ignored advice to save their business. As a result, we now have the taxpayer on the hook for over £40 million of redundancy payments. We have a £50 million deficit in the pension fund and creditors who will see maybe 4p on the pound in terms of the money they recover. You said that you were ambitious to continue the reform. You appear to be so ambitious that you left out legislation from the King’s Speech.
Kevin Hollinrake: Not all of those things are within my gift, Chair. You said “watchdogs that do not bark”. As I just pointed out, in the last year the FRC levied £40 million in fines on auditors for not doing their job correctly, including KPMG on Carillion, of course. There are significant changes in terms of the regime that I experienced in my days as a Back-Bencher and the regime now. It is much stronger and there is further work going on, for example in terms of taking forward things such as stronger internal controls in companies.
Of course, we are also concerned about the impact on business. We want to see a free market where the UK is an attractive place to do business and we do not want to put unnecessary burdens on business. There are always those considerations that I take into account as well when we look at changing regulations and legislation.
Q132 Chair: In your firebrand days as a Back Bencher, you described the insolvency sector as a Wild West. Is that still your view?
Kevin Hollinrake: As I say we are making reforms to insolvency. We have already put in place some of those reforms, certainly in terms of things such as the pre-pack changes we have made and our moratoriums we made during the Covid crisis, bringing firms into scope of regulation and an improved code of ethics. There are things that we are doing.
Am I as ambitious as I was? I am absolutely as ambitious as I was. We have committed to put in place those reforms at this point in time and certainly keeping the need for an independent, single regulator under review. That is where we are. At the moment that regulation is done through the recognised professional bodies. There have been commitments to improve the stewardship of those recognised professional bodies. As I say, I am certainly as ambitious as I have always been in this space.
Ian Lavery: What a morning we have had, I can assure you.
Kevin Hollinrake: Yes, I listened to it. It was interesting.
Q133 Ian Lavery: It was quite frightening, to be honest with you. I am wondering what the Government are going to do to address the issues that face the retail sector in this country. I know that you met with Helen Dickinson, the chief executive of the British Retail Consortium and a member of the Retail Sector Council. I believe that you are co-chair of that. That was to discuss the future of the high street. I wonder whether you can also say what the outcome was of that meeting.
Kevin Hollinrake: I meet with Helen very regularly. As you say, we are both on the council together. She does fine work in terms of representing the retail sector. There are many other good retailers on that council too. It is chaired by Richard Pennycook, who is a very well‑regarded person with lots of retail experience.
We have produced a report, Retail – The Great Enabler, which talks about job prospects, sustainability, high streets and all the things we are all concerned about. One thing I would say about the retail sector is that its principal problems are the change in the nature of consumer habits and where they spend money. We all spend more money online. I think that 27% of our monies are spent online now. It was less than 10% 10 years ago. This is part of the challenge that they are facing.
The world of retail is changing, hence the fact that the Government stepped in time and time again and looked at support for the retail sector, with £13.6 billion in rates support and another £4.3 billion announced in the Autumn Statement. There are many things we are doing in terms of things like High Street Funds and Towns Funds to try to make sure that retailers stand a good chance of weathering these difficulties they are facing in terms of the retail environment, but there are challenges.
On the bright side, you have seen good results this year from M&S, B&M and other retailers, so it is not a sorry tale of the terminal decline of the high street. Nevertheless, for some retailers particularly, there will always be retailers like Wilko where mistakes happen, as well as suffering some of the difficulties we see on the high street.
Q134 Ian Lavery: Wilko did not say this morning, Minister, that one of the reasons for the failure was anything at all to do with what you have just mentioned. What was suggested was that it was as a result of weak leadership, a high turnover of directorship and management, the fact that they ignored, on many occasions, advice given to them regarding how they could change their business, and also a lack of accountability. That was the main reason. It was not anything to do with what you have just mentioned. It was quite extraordinary. You seriously need to have a look at how this can be avoided in the future. That is a comment rather than a question.
Kevin Hollinrake: I would like to respond to it, if I may. It clearly is a very sad day. Wilko had an almost 100-year history on the high street, with 12,000 employees. I have sat in my own business making people redundant. They were people I have taken on myself. I knew their families. I knew their friends. I know what a devastating experience it can be for those 12,000 people, so I am very sympathetic to their problems, but what you say there makes my point, which is that, whatever the health or otherwise of the high street and the changes on the high street, businesses will make mistakes. It is quite clear that, in this particular business, mistakes were made.
It is not the Government’s job to step in and ensure that businesspeople or boards of directors do not make mistakes. Part of the dynamic of a free market economy is that creative destruction takes place every single day on the high street. I pay tribute to any retailer that makes a success of the high street, but it is not an easy place. It is a very competitive place. You make mistakes and you bear the brunt of it, and that is principally what happened at Wilko.
Q135 Ian Lavery: These were not deliberate mistakes.
Kevin Hollinrake: Of course. I did not say they were.
Q136 Ian Lavery: These were decisions that were made by a company knowing full well what the outcome was likely to be, but that is for another time. It is a huge debate.
Kevin Hollinrake: I am very happy to have it.
Chair: There are sectors of the economy where we take a more precautionary approach to regulation, like the financial services sector. We ensure that there are parts of the economy that operate on a prudential regime, and we have regulators to check that they are running their businesses in a prudential way. This is one of the questions that is thrown up by this case, because you have a business that appeared to be ignoring the advice of its advisers, and as a result you have huge taxpayer losses and 12,000 people out of work.
Perhaps I will come back to that point, because I would like to bring in Mr Mills about the pension fund.
Q137 Nigel Mills: In the changes set out, unsecured creditors will get something like 4p in the pound, which is pretty tiny. It is not that long ago that the Government changed the rules on preferred creditors to reinstate some tax liabilities being preferred, but we still have a situation where a pension deficit, which is effectively deferred remuneration for people from their working lives, ranks as an unsecured creditor. Do you think it is right and fair that the Government should sit ahead of pensioners on their deferred wages?
Kevin Hollinrake: That is not particularly a problem in this case, as far as I know. You may be able to tell me differently, Mr Mills, but in terms of the approach, we had concerns in this area too. I wrote to the Insolvency Service on 5 October because of concerns that had been raised in the media and other places. We got a letter back from the Insolvency Service on 23 November, where discussions have taken place between the administrator and the Pensions Regulator. The line in that letter said there was no evidence of director misconduct at that point in time.
There is further work going on. Clearly, this is a huge business and a huge failure, and the director conduct report has to be done within three months, which it has been, but there is more work yet to take place. Officials are meeting with the administrators in January. We are keen to take a second look at this and make sure that there is no evidence of director misconduct.
In terms of the sequence of the order of creditors, it is probably something of a wider discussion. It is an interesting point, and perhaps one we should revisit, but the point that was made by the former chair of the business was that the pension deficit at a point where a business is no longer a going concern is at a completely different level than one that is a going concern. It is important that we take that into account.
Q138 Nigel Mills: Maybe the going concern value should have a higher ranking as a creditor, not the wreckage value.
Kevin Hollinrake: Yes, or the gone concern value, because that is the higher one. If you did that, it would put a lot of businesses underwater, so you would have a potentially catastrophic impact on the economy. We have to be very careful in making those kinds of changes because there would be adverse consequences. There would be adverse consequences of potentially bringing a prudential regime into the world of business generally.
The Financial Conduct Authority and the Financial Ombudsman Service combined have an annual budget of £1 billion. You would be putting billions and billions of pounds into regulation of this economy if you went down that route, so we have to tread carefully in terms of those kinds of suggestions.
Q139 Nigel Mills: The reason why I am asking on the pension deficit is that, if I am a supplier of a company, I can check its accounts and I can stop trading with it. I can attempt to seek some security. Indeed, we heard that some people did stop trading with Wilko before the problem happened. If I worked for a company in the 1990s, I cannot really protect myself against them hitting trouble 30 years later when they are still paying me the pension that I have earned. It feels like they have a right to some greater protection than people who have more of a chance of looking after their own interests.
Kevin Hollinrake: You make an interesting point. Clearly, there are requirements already on directors to make sure that they only pay out dividends, for example—this was a principal part of the conversation I listened to earlier in terms of the evidence that was being given—from either distributable profits or reserves, and that should also take into account things like pension liabilities, of course. There is a regime around that.
The Pensions Regulator is there now to look at whether the directors did the right thing and whether they were guilty of any misconduct. As I say, the initial feedback we have had is that that is not the case, but regarding whether that regime should be strengthened, we should always look and review our policies in different areas, this included.
Q140 Nigel Mills: You heard the history of the dividends and the rather convoluted transaction where it looks like money went out of Wilko to enable one set of shareholders to buy out another set of shareholders at some point, which seems a slightly unusual thing. You are saying that all that stuff is being reviewed to see if anything inappropriate was done. Presumably, if it was, then steps that we have seen before could be taken.
Kevin Hollinrake: Yes. We disqualify about 1,000 directors every year, and there are steps that can be taken, if people have paid out dividends inappropriately, to recover those monies from directors or shareholders. There is a regime around that already, but it is only right and proper that you identify wrongdoing first, before you go down the track of saying somebody is guilty of that misconduct and therefore they should reimburse.
As I say, when we see a case like this, of course we want to see improvements. Of course we should question the system and the individuals concerned, but there are always other consequences of making any changes. That is what I would caution against.
Q141 Nigel Mills: Are you slightly surprised that you can have a holding company that is the wholly owned shareholder of a massive business that goes wrong, and it can have, on the last accounts we have seen, £9 million of listed investments, and yet the director can just sit here and say, “I have other responsibilities. I don’t need to tip those into the pot to help compensate those who have lost”? It feels slightly not how limited liability of companies was supposed to work in that situation.
Kevin Hollinrake: Limited liability of companies is a foundation of our market economy.
Q142 Nigel Mills: It makes a mockery of consolidated accounts, does it not? I can sit here and look at a picture of a whole group, and yet somehow there is £9 million of listed investments and the taxpayer has to pay their redundancies.
Kevin Hollinrake: Mr Mills, you have great experience in this area, of course. You are very familiar with the accounting profession. That was your profession before this. If you said to somebody you have distributed dividends to 10 years ago, for example a shareholder—and those monies were paid to those shareholders, so they were dividends they were entitled to—that they are on the hook for any future conduct of those directors in the short, medium or long term, again, that would have significant implications in the system where, as a shareholder, you have a right to a dividend that has been paid out on a bona fide basis.
Q143 Nigel Mills: That was not what I was suggesting. I was saying that I can look at the consolidated accounts for the Wilkinson Group. On its balance sheet, it discloses £9 million of investments in listed assets, and yet because they are in the holding company and not in the main trading company that is 99.9% of the other numbers in the accounts, someone can sit here and say, “No, I do not need to put those into the pension fund. I do not need to use those to pay their redundancies. They are mine”. That is not quite what we had in mind. That is not a dividend I am talking about. I am just talking about assets sat in a group of companies that hit insolvency.
Kevin Hollinrake: We have to work with the system we have today. The system, and the checks and balances around that, is making sure dividends are paid out from distributable reserves or profits. That is the key requirement. What happens to the money afterwards is not currently covered by that system, unless dividends have been paid out inappropriately.
Q144 Nigel Mills: These are assets still sat in the group of companies. They have not been paid out.
Kevin Hollinrake: It may be an unusual situation in terms of the holding company and the trusts that sit at the back of it, but that is not really something I can comment too much on.
Q145 Chair: You said that this was something that is kept under review. Does that imply that there is a review underway that is going to bring forward new proposals, regulations or legislation?
Kevin Hollinrake: No, that is not the case, but of course, when any failure happens, you look at it and think, “Has everything been done properly? Do we have the right checks and balances? Are the right requirements made upon directors, for example, in terms of whether the system is operating properly?”
Within that, as I said previously, you also have to understand that the vast majority of companies like this do not go bust in this kind of situation. You do not want to have negative impacts on the rest of the free market economy because it drives everything forward. Every public service that we benefit from is paid for by the private sector, effectively, so we have to make sure we do not bring about any unintended consequences. With all those things, of course, we look at these things and make sure the system is operating properly, but there is no formal review.
Q146 Chair: When you looked at the example of Wilko, did you conclude that the system was operating properly?
Kevin Hollinrake: I am not the administrator. Clearly, the administrator will see far more than I can. I listened to the evidence that was given by the former chief exec and the chair. From what I have seen, it appeared that Wilko had made significant mistakes in the lead-up to this administration, because there are other high street businesses in similar places that seem to be doing well.
There were specific situations around this high street business where it had made mistakes. That became pretty clear very early on. This was a business that seemed to be doing very well and then, over a period of time, ended up taking restructuring finance. At that point in time, you know there have been some probably injudicious decisions taken.
Q147 Andy McDonald: Minister, in business there is always going to be error and incompetence, but here we have looked at audit, audit reform and insolvency. The impression is of an architecture that just is not fit for purpose. Nobody is wanting to inhibit growth and entrepreneurial activity at all, but I am little bit disappointed, because when you were chair of the APPG, you had fire in your belly and you did a cracking job. The Chair has referred to it. In terms of insolvency, you said that people were “operating more akin to the Wild West than a developed western economy. The conclusions of our report are clear and extremely concerning. Insolvency practitioners often prioritise the interests of their bank panel paymasters at the expense of other creditors and shareholders. This is totally unacceptable and a clear breach of the duty of care. This behaviour is not being addressed by the membership organisations whose responsibility is to regulate them”.
In all honesty, you are a Minister we really respect. We were hoping that that agenda would have been progressed, because there appears to be a great need for reform. We are not wanting to strangle economic activity, but in these key areas, it appears that we have to just suffer these disasters. We have had so many, from BHS in 2016 onwards. How many more times do we have to suffer these terrible consequences for our people and our high streets and so on?
Kevin Hollinrake: It is a very fair point, Mr McDonald. We are making changes to the insolvency process. That was a significant report. The one thing that we are not doing that I would have liked to have seen, which we called for in that report, was a single regulator. That is the only thing you referred to.
There is other work happening in terms of making firms accountable in the insolvency profession in terms of the code of ethics, for example, but in terms of the single regulator, the decision was taken. Bear in mind that we are probably in the last year of our Parliament. It was probably the wrong time to do that, but are we still considering a single regulator? Absolutely, that is something we should consider, but our view was that, given the timings, it was the right thing to implement what reforms we could in the rest of this Parliament rather than something that would not take effect had we legislated for that in the last year of Parliament.
Q148 Andy McDonald: Of course, the Insolvency Service does sit under you. We had it through the P&O crisis when the Insolvency Service, to our mind, did not respond in a proactive way to make sure that did not happen again. No legislative reforms have come out of that debacle. My personal worry is that we are going to be back here time and time again with these collapses unless the Government get to grips with this. As I said, I am not wanting to strangle growth and economic activity—quite the contrary—but there have to be better controls than this, surely.
Kevin Hollinrake: P&O is a slightly different issue. The Insolvency Service did an investigation and decided that there were no criminal sanctions available to it. There is still an investigation going on in terms of P&O’s approach to that.
In terms of fire and rehire, it is something that we are taking forward. There is a statutory code of conduct, and also further damages attached to that that an employment tribunal can award, meaning that employers are less likely to take that approach in terms of fire and rehire, but it is a slightly different situation.
In terms of the potential reforms to insolvency we are talking about, none of them applies to this particular case. It is connected in terms of the potential insolvencies here, but those reforms would not have made a significant difference to what happened to Wilko.
Q149 Andy McDonald: We need reform. That has to happen, and we are in the law factory.
Kevin Hollinrake: I agree, and that is something we are undertaking.
Q150 Chair: What is holding up insolvency reform then? You have said that the fire in your belly remains. You are keen to make progress. You have pointed to some of the constraints on time in the final year of this Parliament, although, frankly, we do not seem to be rammed with overwork in the legislative programme. I am sure you could have found some time if Government were so minded. Is it because there are just problems that need resolving and, if so, what are they?
Kevin Hollinrake: We are keen to find time, for example, to bring firms within the scope of insolvency regulation, which they are not currently. Currently, they are regulated at insolvency practitioner level, so that is something we want to find time for in this Parliament, and we are keen to do that, but there will always be competition, not just in terms of the time on the Floor of the House, but also in terms of the time taken to prepare legislation, for example. As you know, we were here until 11 pm last night, Mr Byrne, and we will be here possibly voting later on today as well, with the new piece of legislation being introduced on the Floor of the House.
We have taken forward other key pieces of legislation that you take an interest in. The Digital Markets, Competition and Consumers Bill, the Data Protection and Digital Information Bill and the Strikes (Minimum Service Levels) Act have all been taken through in my year in Parliament, so a significant amount of work has gone on in various areas. Of course, there will always be a prioritisation. We are keen to prioritise this.
Q151 Chair: You have agreed that there is a problem here that Wilko lights up. There are definitely some needs for reform. From what you have said to us just there, there are no particular barriers to getting on with it. It is a case of where the Government are putting this in their priority order of legislation.
Kevin Hollinrake: Yes, of course. It is within a Government’s gift and a Government’s right to do that. They will always prioritise what they think are the most important things.
Q152 Chair: This is not one of the most important things.
Kevin Hollinrake: We are taking forward reforms in terms of audit and insolvency. They may not be the perfect reforms that you would like to see. ARGA is a reform we are still keen to implement by legislation.
Q153 Chair: You have said yourself that you would like to see some of these reforms too; it is not just me.
Kevin Hollinrake: I definitely would, but you have been in Government, Mr Byrne, and you know there are competing priorities, and that others have a say in what those priorities will be. Reforms are happening, and we are keen to make sure they are effective. As I say, there is no evidence that I have seen so far that either of the reforms we are planning would have made a difference in terms of Wilko going into administration.
The salutary lesson here is about why that happened. It is not for me to dictate to you what you look at when you are taking evidence. Certainly, there are some real lessons to be learned in this particular case, but regarding the management of the company rather than the insolvency process.
Q154 Chair: Were you as alarmed as we were when you heard EY basically say that it had not made any mistakes on this and that it would do the same thing again?
Kevin Hollinrake: That is something, clearly, for others to take into account, be that EY or PwC. We have a regime that is proving effective in terms of the FRC. Under Sir Jon Thompson, it has shown far more willingness than in previous years to take forward action against auditors, and that really has changed the approach some auditors have taken.
Q155 Chair: You were not alarmed by what you heard.
Kevin Hollinrake: Was I alarmed to hear that no mistakes had been made? Clearly, mistakes have been made. I just do not know who made them.
Q156 Chair: Do you think, then, that there is a case for further and faster audit reform?
Kevin Hollinrake: Yes, I do. We are taking forward reform now, and we are keen to take forward further action, particularly in terms of ARGA, which is the replacement for the FRC. That would include a civil penalties regime, for example, which is a much lower barrier than normal in terms of them going to court and in terms of being able to sanction people who do not do the right thing. There are significant opportunities to tighten up further with that kind of reform, and that is why we are keen to take it forward.
Q157 Chair: That requires legislation.
Kevin Hollinrake: It does require legislation.
Q158 Chair: There is no legislation currently scheduled.
Kevin Hollinrake: There is none planned for this parliamentary session.
Q159 Chair: It is so important that it is not in the legislative programme for this Parliament.
Kevin Hollinrake: As I say, we think we are taking forward the most important things, such as internal controls, non-financial reporting and the comply-or-explain regime. I met with the FRC only two weeks ago to talk about how it was intending to take forward its reforms, which can be done on a much more fleet of foot basis than legislation, which, as you know, takes some time to get through the House and some time to implement in terms of things like secondary regulations.
Q160 Chair: Finally, what would you say to those Wilko workers who have lost their jobs during this collapse and who are now looking forward to what is a pretty difficult Christmas? What would you say the Government have learned from this to help ensure that we learn the lessons from this so that other workers do not go through what they have faced?
Kevin Hollinrake: I would like to express my sympathies to all those 12,000 people. As I said before, I have had the very difficult job myself of making people redundant, and those were people whose families and friends I knew. It is a devastating process because those people have to go back to their homes and explain to their families why they no longer have a job, so it is a very difficult situation for those people.
I am pleased to say that the various Government agencies have been very quick to try to make sure that people get redundancy protection, of course. The Redundancy Payments Service paid out £42 million, averaging one and a half days and paid out to 9,700 people, and we have provided lots of support for people through the job centre and other programmes to make sure people get back into employment.
The positive side of this, of course, is that many other retailers step in, where these retailers have failed, to take on some of those premises and employ some of those people, so I hope many of those people have found work in a similar environment. Certainly, those people who have not managed to find those different opportunities have my great sympathies going through a difficult Christmas.
Q161 Sir Stephen Timms: One of the problems facing those people is that they are unlikely, as things stand, to get the full pension, which they have contributed for and were promised. Do you think the Pensions Regulator should use its powers to claw back some of the dividends paid out by Wilko in recent years, mainly to Wilkinson family members, in order to plug the £50 million gap in the pension fund?
Kevin Hollinrake: If it can identify wrongdoing, yes, but it is only right that a fair process needs to be gone through. So far, the feedback we have had from administrators through the Insolvency Service and from the Pensions Regulator is that they have not found evidence of wrongdoing. It is important to see wrongdoing first before we make those kinds of calls.
People who are already retired get their full entitlement in terms of pensions. You will know this very well, Sir Stephen. There is a 10% reduction for people who have not yet retired, so there is a decent safety net. It is not everything, but in terms of calling for, or having a system that requires, directors to reimburse people or the Pensions Regulator in that situation, it is only right that we go through a process to identify whether wrongdoing has actually happened.
Chair: Thank you very much, Minister and colleagues. That wraps up our third panel today. We are grateful to you and your team for your patience in bearing with us. It was important for us to hear in full from our second panel. That concludes this session.