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|
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.