In June the new 2016 IVA Protocol was published. It would have be helpful if the Standing Committee had issued a guide to the changes from the 2014 Protocol, but they haven’t, so this article looks at the significant changes, ignoring routine updating (such as replacing OFT by FCA) and some which seem to me to be very minor.
My thanks to Michelle Butler who wrote about the changes earlier this week. I agree with many of her comments, in particular:
“I do wonder why many paras have been added. Are there particular mischiefs that need to be dealt with? If so, then I do not see that slipping more words into the Protocol helps. Rather, I think the approach should be to highlight the issues to IPs, help us all to understand better what measurable standards are expected, provide examples of behaviour seen to be falling short, and/or take actions under the existing Code of Ethics to deal with anyone working in the extremes.”
The old “one 6 month extension” clause when a debtor is in difficulty has been replaced with a much more flexible “up to 9 months of payment holidays” clause. This gives considerably more flexibility without the need to call variation meetings. It will be interesting to see to what extent it is used and whether the length of IVAs tends to increase as a result.
The low point
The main disappointment is the failure to clarify the “secured loan” clause in 9.3. I have talked about this problem before where I described it as a time bomb and with a case study here. The new wording “Where the net worth is released by way of a secured loan, consideration should be given to the term and interest rate applied to the loan and the principles of treating the consumer fairly.” fails to address the problem. What is needed is some clear guidance that people can rely on – would the 15 year loan at nearly 19% which was proposed in that case study be acceptable?
What’s new in the 2016 IVA protocol – the details
The bullet points are my comments on the changes:
2.2 While IVAs are a product of insolvency legislation those IPs who are subject to FCA authorisation whether through their firm or as an employee of an FCA authorised firm must comply with the FCA’s Consumer Credit Sourcebook (CONC). They may adopt processes and procedures that comply with CONC so long as to do so would be consistent with insolvency legislation.
- On one level it would appear to be a statement of the obvious, but I am surprised it doesn’t include a statement saying that FCA’s CONC rules do not apply to a firm during the course of administering an IVA. On the other hand it doesn’t really matter what this protocol does or does not say on the subject of regulation!
2.6 added sentence at the end “Consumer means a person in debt or the debtor.”
- “Debtor” has been replaced everywhere by “consumer”. The word “Customer” has also been changed to “consumer” in various places. But references to “individuals” remain – I think this is sloppy drafting and nothing can be read into it. This all seems pointless to me – “debtor” seems the clearest word to use in contrast to “creditor”. But it’s hard to care about this.
2.8 The FCA describe vulnerability as follows…. 2.9 If the consumer is struggling with the standard processes, the IVA provider should make appropriate arrangements… 2.10 Explicit consent needs to be obtained from the consumer to disclose and record vulnerabilities …
- 2.8, 2.9 and 2.10 are all new clauses. Pretty much statements of the obvious.
3.1 the phrase “for example, but not limited to” has been added
- It’s this sort of drafting that gets lawyers a bad name. As the whole clause was prefaced by “is likely to be”, the addition would seem to be unnecessary. And even if it is, the new words “but not limited to” are not required because the phrase “for example” implies that other cases are possible.
- Is this clause meant to mean that the Protocol can be used for the self-employed? If it is, then this should have been explicitly stated.
3.2 added new sentence “IVA providers should consider the suitability of an IVA with caution for an individual whose income is mainly made up of benefits.”
- If the Protocol is the right place for this sort of thing, then it would be better to have something more useful in place. “An individual whose income is mainly made up of benefits is not normally a suitable candidate for an IVA unless they have assets to protect. And care should be taken that the additional costs of living with a disability are allowed for if any disability benefits are received.”
3.7 Consumers should be provided with a copy of the IVA protocol. This can be either through provision of a physical copy or providing an electronic link.
- The document is 41 pages long. It doesn’t matter how you provide it to consumers, very few people are going to read it!
5.3 new sentence “The IP has a responsibility to ensure that any lead generators that they use follow the rules and codes.”
- This sounds nice – however it isn’t clear what rules and codes are relevant? And what sanction is there if the IP doesn’t? And why does it say IP here rather than IVA provider?
6.1 Previous reference to an IS document has been replaced with “Every individual who proposes an IVA should be given this advice or information. Full information on the advantages and disadvantages of all available debt resolution processes should be provided.” In 6.2 The first sentence “Non-financial considerations should be taken into account” was previously in the previous paragraph. New sentences added “There are a range of options that may be appropriate in individual circumstances and all advice and information given and action taken should have regards to the best interests of the consumer. Sufficient information must be provided about the available options identified as suitable for the consumer’s needs.”
- If this happens there should be a drop in the number of inappropriate IVAs started. But I suspect most firms will say they have already been doing this, so the question is, what sanction is there if they don’t? And how does adding this sentence into the Protocol help at all?
- I would have liked to have seen an addition to the last sentence “Others may wish to avoid the perceived stigma of bankruptcy” to say that the IVA firm should ensure that if the only reason to prefer an IVA is concerns about the stigma of bankruptcy the IVA firm should discuss these concerns in detail with the consumer as they are frequently misplaced.
6.3 new paragraph: “In addition to other regulatory requirements the IVA provider should take the following into consideration: a. Fair treatment of consumers is central to the firm’s culture. 6 b. IVAs are offered accordingly. c. IVA and its service functions as the consumer is led to expect (likely to successfully complete). d. Advice is suitable and appropriate for the individual. e. There is clear information before, during and after appointment. f. There are no barriers created to make a complaint.”
- What happens if the IVA providers doesn’t take these points into consideration?
7.4 Some deletions from the previous wording: “If the debtor lives with any person aged 18 or over, and there is reasonable expectation that this person will pay board and lodging to the debtor, this payment must be added to the debtor’s income in full.”
- The deletion of the word “and” is potentially significant but it’s hard to know if this is meant to be a serious change or someone thought they were just making it easier to read.
7.5 addition of “or Standard Financial Statement approved by the Money Advice Service (MAS)” and “The expenditure should be at a level that is likely to be sustainable and not cause undue hardship to consumers.”
- SFS inclusion is routine. This is also added to clauses 10.2 and 14.1
- Addition of the “not cause undue hardship” is welcome but (a) what level of hardship is considered acceptable? and (b) I would have liked a rewording of the examples of additional expenditure to say that any increased costs due to disability of the consumer or anyone in their household should be taken into account.
7.10 new paragraph “Where possible, the consumer should provide a budget which reflects the income and expenditure for the household. Where a budget is only provided for one individual in a household, there should be an explanation why further information is not available.”
- This is what commonly happens now.
9.2 new paragraph “In the event that additional contributions are paid, the term of the IVA will be automatically extended by the number of months required.”
- I have no idea why it is thought necessary to spell this out.
9.3 new sentence inserted “Where the net worth is released by way of a secured loan, consideration should be given to the term and interest rate applied to the loan and the principles of treating the consumer fairly.”
- And that is supposed to be reassuring? Without guidance as to what term and interest rate would be “unfair” it’s pretty worthless.
10.5 New paragraph, starting with the last sentence that used to be in 10.4 and continuing “Where the individual has failed to disclose and/or pay exceptional income, the term of the IVA may be extended by up to a maximum of 6 months to recover any sums due (to remedy the breach), without any variation being required.”
- Sounds sensible. This is a common problem.
10.8 The old “one 6 month extension at the discretion of the supervisor” clause has been replaced by: “If a consumer is faced with an emergency item of expenditure or an unforeseen reduction in income and they are unable to pay either the full amount due or anything at all, then, subject to the discretion of the Supervisor, they may be allowed to take payment holidays or make reduced payments without a variation being required. This is subject to three conditions, all of which have to be met: (i) Full details of the inability to pay must be provided to the Supervisor’s satisfaction; (ii) In total, no more than the equivalent of 9 months payments can be agreed to be missed in this way; and (iii) The duration of the IVA will be extended by no more than 12 additional months to recover the sums due, unless the consumer has otherwise made good the shortfall. Any missed payments agreed in this way should not be counted in the arrears of contributions which would be regarded as a breach of the IVA and details of this will be included in the next report to creditors.”
- At last a significant change that is actually helpful! There is considerably more flexibility here.
13.5 new paragraph: “Creditors should not put forward modifications which are already included in the proposal.”
- Is this a real problem?
14.2 reworded to “Creditors will follow the guidance in the FCA Consumer Credit Sourcebook and the Lending Code (or any Code that replaces it) if they are bound by it.”
- I can’t imagine what the point of reminding creditors of these obligations is. If it was going to say that all creditors will follow the guidance of CONC even if they are not bound by it, that would be different…
Annex 2 regulatory Framework
Various changes around the replacement of “authorising bodies” with “Recognised Professional Bodies”
The sections relating to the OFT and FOS have been deleted from the “Insolvency practitioners” section.
- I agree with Michelle Butler when she comments that “Clearly, updating this section has been long overdue. However, the new Protocol removes entirely this explanation from the Annex. The revised Protocol includes a new statement-of-the-obvious para (2.2) that, if an IP is subject to FCA authorisation, they must comply with the FCA’s Consumer Credit Sourcebook, but the Committee has now side-stepped the dangerous territory of where IPs sit as regards some RPBs’ Designated Professional Body status for governing certain regulated activities; the IP exclusion for advising in reasonable contemplation of an insolvency appointment; and the FCA’s regulatory zone. In my view, IPs have been piggy-in-the-middle of this territory war for too long: I would dearly love to see some unequivocal guidance.”
- I would go further. The fact that there are sections about the FCA and the FOS in the “Creditors and their Agents” could well be misleading for any debtors that read it, as they may well assume that they also apply to the IVA practitioners.
Annex 3 – Standing Committee
Membership – previously the OFT was listed as a member of the IVA Protocol Standing Committee, but an FCA representative was included in the Annex. Now the OFT line has been blanked out, not substituted by an FCA line even though the Consumer total is still left at 3. Has the FCA been invited? If not, or if it has refused, I think an additional Consumer representative is needed – this is not a well-balanced committee anyway!
Annex 4 – Standard Conditions
4(3) New: “In the event that the Arrangement does not provide guidance to the Supervisor as to what action he/she should take in any given situation, the Supervisor shall apply the provisions of the Act and Rules in so far as they relate to bankruptcy with necessary modifications.”
- It would be interesting to know the range of problems that this new clause is intended to cover.
5(2) – 5(7) general changes to wording around extensions – eg reporting extensions to creditors – probably mainly as a result of the more flexible new clause 10.8
14.3 Change to after-acquired assets – only to repay creditors and costs, the reference to “and interest” in the 2014 protocol has been deleted.
- This is potentially significant in the case of inheritances and large PPI refunds. I am not sure if it was intentional…
19(2) new words added in red: “With your consent, you or the Supervisor may propose variations to the proposal after it has been approved and these may be considered at a creditors meeting convened by the Supervisor for this purpose in accordance with paragraph 19.4.”
- I’m not sure what the point of this is, as the previous clause lets the Supervisor call meetings for whatever reasons he wants.
31 Surplus – clause deleted.
- I have no idea why
What have I missed?
Have I left out a change which is significant? Or missed the point about a change? Please add a comment below if you spot something!