On 26 January 2018 the Insolvency Service published two sets of statistics:
- Individual Voluntary Arrangements: Outcome Status 1990 – 2016
- Insolvency Statistics: October to December 2017
Predictably the news stories about this lead on the statistic that personal insolvency went up:
- The number of people who became insolvent jumped by 9.4% in 2017 – the second year running that figures rose. (BBC)
- UK insolvencies at highest level since financial crisis (Guardian)
But the overall rise in insolvency isn’t the most interesting story in the figures.
Only IVA numbers have increased
Of the three types of insolvency in England and Wales, the whole increase came from IVAs, which increased nearly 20%. Bankruptcy numbers were flat and debt relief orders actually decreased by 5%.
| number in 2015 | number in 2016 | % change on 2015 | number in 2017 | % change on 2016 | |
|---|---|---|---|---|---|
| IVAs | 40,384 | 49,745 | +23% | 59,220 | +19.8% |
| DROs | 24,175 | 26,196 | +8% | 24,894 | -5.0% |
| Bankruptcy | 15,854 | 14,989 | -5% | 15,082 | +0.3% |
As the table above shows, this is the second year where IVAs have increased massively and way out of line with the other two forms of insolvency.
I suggested last year in 2016 Insolvency numbers up that this showed that the main driver of the 2016 statistics was not the number of people with big debt problems, but some clients being mis-sold IVAs who would be better suited to other debt solutions.
The change in 2015 to increase the maximum debts allowed in a DRO from 15k to 20k would have been expected to increase the number of DROs by a third in 2016. So what appeared to be an increase of 8% in 2016 masked what was actually significant fall in the number of DROs against the numbers expected.
The drop in DROs in 2017 figures makes this argument even stronger – I am not aware of any free sector debt advisers who are seeing a reduction in the number of people who should have a DRO.
IVA failure rates are increasing
IVA failure rates had been generally dropping for some years. It’s hard to compare overall failure rates as these won’t be known for recent IVAs for many years, but the Insolvency Service has analysed how many IVAs fail in the early years and this shows that more IVAs are now failing in the first and second years:
- one-year IVA failure rates have risen from recent lows (4.0% in 2013) to 7.7% in 2016;
- two-year failure rates have risen from a low of 10.7% in 2014 to 12.7% in 2015 ;
- of the IVAs started in 2016, 12% had failed by the end of 2017.
This looks likely to be an early warning signal that overall IVA failure rates are once again rising.
Of the 12% of 2016 IVAs that have already failed, the debtors will have gained nothing and been left with an insolvency marker on their credit record, and the creditors will have received little or nothing. The IVA firms setting these up will, however, have had a lot of their fees paid – they are the only people that are benefiting from these failures.
Higher failure rates are the natural consequence of IVA mis-selling
An IVA failing in the early years is an indicator that the debtor’s situation may not have been properly assessed. If there are significant numbers of people having an IVA set up who would have qualified for a DRO, it is not surprising that many of their IVA will unravel.
What needs to happen to improve this situation?
The FCA, the Insolvency Service and the Money Advice Service need to take various actions that together will prevent the current mis-selling of IVAs. I propose:
- the Insolvency Service needs to set up procedures so that IVA firms are fined a significant amount for every debtor who is signed up for an IVA who is later found to have been suitable for a DRO;
- all lead generators for IVAs need to be FCA authorised;
- where a lead generator is authorised as an Appointed Representative, their sales calls and websites should be checked by the FCA in the same level of detail that commercial debt management firms are. This should not be a route to light touch regulation – people are having their finances ruined by being given poor debt advice;
- the Money Advice Service needs to ensure that DRO advice is properly funded and well advertised;
- the Insolvency Service needs to reduce the level of bankruptcy fees to prevent more IVA mis-selling.
Data would help people choose an IVA firm
Can’t afford to go bankrupt?
2018 – IVA number up & so are the failure rates
Nick Pearson says
As ever DC, your analysis and recommendations are right on the money. Anecdotally, the growth of IVA’s, esp for people with sub £100 disposable income to contribute to the IVA , (I understand the average contribution in 2017 was c£130 pcm) is a real worry and even more so for cases with £70pcm, which is often the minimum IVA firms will accept. I have suspected for some years that there is a massive problem of miss selling in the IVA market, esp from firms where they have opted to use the FCA IP “loophole” to avoid regulation. The irony is there is a potentially huge pool of people for whom an IVA is a great solution but who do not seek advice. The age old problem is to get those who could benefit from debt help to actually access it.
Pearse Flynn says
Sara, I think you should make sure that you point out that this is your opinion only. The analysis is naive and totally ignores the collapse of the commercial debt management market. So if one solution all but disappears then, it will be serviced elsewhere. Are debt management plans being sold correctly by the free sector? Why so little Iva”s? Could it be because they are funded by creditors? All your energy is anti fee sector, and it would be shining a light on your friends to analysis the above, which dwarfs the number of Iva’s done annually. There is no doubt some truth in your analysis, but it’s tainted with an agenda you and others are trying to peddle.
Sara (Debt Camel) says
Hi Pearse,
Of course the collapse of the commercial debt management sector will have had an impact. I covered this last year in the section headed “Previous DMP clients opting for insolvency” in https://debtcamel.co.uk/2016-insolvency-increases/.
If all the different types of Insolvency had risen, perhaps with IVAs going up more, then that would be fine. But there is absolutely no reason to think that all ex DMP clients would be better off in an IVA than a DRO or bankruptcy. And it is hard to explain the fall in DRO numbers in any other way than over advertising and mis-selling of IVAs.
The free debt advice sector does tend to be distrustful of IVAs. The remedies for this lie in the hands of the IVA sector:
– Publish your failure rates.
– Get rid of the secured loan clause.
– Get a check from a DRO intermediary before proposing an IVA for someone with no assets whose only income is benefits or any low DI IVA.
– Do not do business with unregulated lead generators or regulated lead generators whose websites do not give equal prominence to all debt options.
Dean Smith - IP says
Hi Sara,
I am aware DC is not FCA regulated as it represents your opinion and not advice, but when an opinion is given on information does that then become advice that should be regulated ?
Just a thought.
Sara (Debt Camel) says
see https://debtcamel.co.uk/about/.
Dean Smith - IP says
Hi Nick
I have been involved in Personal Insolvency as a regulated advisor for over 20 years and have yet to hear of a proven case of miss-selling an IVA. It is however an accusation that is frequently thrown around. I do not think it is actually possible to prove miss-selling given the very stringent regulation over IVA’s.
Also, let’s not forget the reasons the FCA felt it necessary to regulate the Debt Management Sector, there was no effective regulation, so to finger point at IP’s and elude to them not being regulated and IVA’s is wide of the mark. We are heavily regulated, there is no “loophole” to avoid regulation.
Scott says
“yet to hear of a proven case of miss-selling an IVA”
Have a search on the ombudsman’s decisions website
Dean Smith - IP says
Hmm, I stand slightly corrected, but I am somewhat curious if “miss H” did subsequently follow the bankruptcy route, or paid off some of her debts, or just spent the refund she received ?
I do not agree that an unqualified third party’s view based on such insightful observations as “I don’t think this ….. or,… I think that” acts as anything like proof in the legal sense, particularly when there was actual written and recorded evidence to the contrary, so I will retain my view not having heard of a PROVEN case of IVA miss-selling.
If IVA miss-selling was really as widespread and blatant as some like to claim, why am I not hearing about it in radio and TV ads from claims companies like the PPI ones we all hear ?
Sara (Debt Camel) says
“an unqualified third party’s view” are you referring to the Ombudsman in that decision? Her career history shows:
“adjudicator, Solicitors Regulation Authority
adjudicator, Legal Complaints Service
practice standards adviser, The Law Society
solicitor, Goldstones Solicitors”
The FOS prefers decisions to be written in plain English, that doesn’t mean the Ombudsman is unqualified or not insightful.
“If IVA miss-selling was really as widespread and blatant as some like to claim, why am I not hearing about it in radio and TV ads from claims companies like the PPI ones we all hear ?” see https://debtcamel.co.uk/why-few-iva-complaints/ which looks at this issue. Claims Companies won’t pursue this unless there is significant redress available.
Dean Smith - IP says
May I suggest people read the following:
https://www.gov.uk/guidance/monitoring-individual-voluntary-arrangement-providers
Particularly the “Systems and controls – Appropriate advice and work sources” section. It may provide a better understanding of some of the hoops an IP has to jump through to operate within the IVA sector.
Karma Kommando says
We can all jump through paperwork hoops, how we perform in reality may be very different!
Karma Kommando says
Have you considered, dear Camel. the possibility that the rise in IVAs may be in part due to increasing levels (as in ££ per debtor) of debt making many unsuitable for DROs and DMPs? A recent report from Experian said that the profile of debtors is changing and that seems to mean many more higher-income middle-class debtors. Such people generally wish to avoid Bankruptcy, are in too deep for a DRO while a DMP would mean a de facto expensive life sentence.
No offence but the CAB deals largely, I believe with the eternally poor and vulnerable which turn may skew your perception!
Sara (Debt Camel) says
Of course there are people for whom an IVA is the perfect solution. But that I don’t think much of the rise in IVA numbers can be explained by increasing numbers of higher income middle class debtors with assets… a large number of recent IVAs are for debts under 20k.
Sara (Debt Camel) says
PS professionals commenting on these pages normally use their real names.
Karma Kommando says
Re under £20K – interesting, then many of them may not be making the right choice and may have indeed have been pitched by insolvency farmers. I think many people in financial difficulties are so distressed and unnecessarily ashamed that they will take whatever is dished out and do not of course research.
PS I am not a professional just a very persistent amateur!
Thanks x KK