The IVA Protocol 2021 was published in April 2021. This replaces the old 2016 Protocol which should not be used for new IVAs after 1 August 2021. The terms of IVAs already in progress are not affected by the new version.
The new Protocol aims to be easier to understand for people in debt – for example “debtor” has been replaced by “consumer” and it has been put into the typical “gov.uk format”.
The Insolvency Service has highlighted some of the differences in Dear IP Issue 126.
If you are interested in the perspective of someone in the insolvency industry, see New IVA Protocol: what has changed for the Proposal and Conditions? by Michelle Butler.
This article looks at what I think the important changes are. It is aimed mainly at debt advisers. I’ll write a separate article for people looking at an IVA with a checklist of points. to be sure clear about.
Quotes in italics are from the new protocol.
Trying to stop IVA mis-selling
Various new clauses are intended aimed at IVA mis-selling.
The consumer may have been referred to the nominee by a third party. The insolvency practitioner should take steps to ensure that any third-party lead generator and/or debt packager referring IVA leads to the insolvency practitioner should be FCA authorised and, if they are not, the insolvency practitioner should direct the consumer to obtain advice from someone who is FCA authorised or the nominee should provide advice under FSMA exclusion.
My comment: Ineffective. The IVA firm will either be FCA authorised or, more commonly, give advice under the FSMA exclusion, so this is effectively null. It should have said that leads can only be obtained from a lead generator who is FCA authorised, with no exceptions and no ways around it.
The nominee has a responsibility under the Insolvency Code of Ethics to ensure that the lead from which they have received the referral for the consumer’s case has provided appropriate and detailed advice on debt options and has not misled the consumer in their advertisements. The guidance on monitoring insolvency practitioners: Advertisements, marketing and debt advice provides further information. Where the nominee considers the consumer has not received appropriate advice on the available options, they should ensure that the consumer receives such advice and has made an informed choice as to whether an IVA is the most appropriate option given their circumstances.
My comment: Misses the main point. It is essential to be sure that the first contact with someone with a debt problem is not misleading. Otherwise someone is already sold on the idea of an IVA being the answer to all their problems when they are passed to the IVA firm. Here is an example of people being lied to by a scammer sending threatening emails.
In the event the IVA is in breach, the supervisor should complete a review of the circumstances and document the reasons for the breach. If the breach occurred prior to the first payment to creditors, the insolvency practitioner should include in that review consideration of whether the IVA was a sustainable product for the consumer and consider if there are any lessons to be learned. If it is deemed that either the IVA was not the most suitable debt solution for the consumer or there is evidence to suggest that such a breach was likely (both based on the consumer’s circumstances and all the information they provided to their nominee, any lead generator or debt packager) any payments made should be refunded and the IVA terminated.
My comment: There is a good idea in there somewhere, but it won’t work in practice.
- It should not be limited to breaches before any payment is made to creditors – that is too early.
- The problem is mis-selling, not whether the IVA was sustainable. An IVA firm may consider the customer can pay £100 a month on a sustainable basis but if the customer was eligible for a DRO then the IVA was mis-sold.
- Refunding payments is not always the best solution for the customer. It may be preferable for the IVA to be completed on the basis of the funds paid to date if the customer would have to enter a DRO or bankruptcy where there would be no return to the creditors. The customer should be given the choice.
- A copy of the review should be given to the consumer who should be signposted to a free sector debt advice service for advice about this.
Clarifying equity release
How much equity might have to be released?
You might expect this was just a matter of getting a calculator out… but the 2016 protocol caused problems. The intention always was that you are allowed to retain 15% of the value of your property after any equity release, as Stepchange says here. There was a calculation showing this in Annex 7 of the 2014 Protocol. But this was not included in the 2016 protocol.
That omission resulted in some IVA firms asserting that a debtor can only retain 15% of the calculated equity, rather than 15% of the value of the property. As an example, see this Payplan calculation. There Bob may be asked to remortgage for 42,500 in addition to the mortgage plus secured loan of 100,000. So with a property value of 150,000 he would only be left with £7,500 of equity. Not 15% of 150,000 which is £22,500.
Of course not many people have been asked to get a remortgage, but these calculations matter for the people being asked to get a secured loan and for people who do not have much equity where they will only be asked to pay for another year if the equity is over £5,000.
Has the new 2021 protocol clarified this? Well probably. It does say in Annex 1 Standard Terms and Conditions:
Where the consumer can release equity, the value (net of any refinancing or other associated costs) will be introduced into the IVA up to 85% of the value of the property
Re-mortgages will bring the amount secured against the property to no more than 85% of the total value of the property.
So that is clear. The example included in the National Debtline factsheet shows how the calculation is intended to be done.
But in Annex 7 it says:
Total equity is to be calculated based on 85% of the current value of the property less the value of any secured borrowings against the property (including any early redemption penalties or charges).
This is sloppily drafted so it can be read either way, depending on whether you take 85% of the property value and then deduct the secured borrowings (correct) or take 85% of the remaining property value after deduction of secured borrowings (incorrect). I hope this will not turn out to be a problem in practice and the firms using the previous incorrect calculation will change.
There is no included example in the new Protocol, which would have been very useful but a customer will be given a worked example for their own property before the IVA is proposed.
My comment: I think the new Protocol is clearer. And it is good that a consumer will get a worked example of their equity calculation at the start of the proposal. This will enable informed consumers to see exactly what is proposed and potentially decide to change to another IVA firm if they are not happy. But how many consumers are informed enough to look at this in detail and query the equity calculation? Debt advisers need to be aware of the potential issues here if they have a client saying late on in their IVA that the equity release is unreasonable.
Clarity from the start about when ER may be required
Previous protocols have led to many customers with mortgages not being clearly informed about what may happen in the last year of their IVA.
Some people were told at the start there was no chance of them having to release equity so their IVA would just be extended by a year, only to find they were being asked to take an expensive secured loan instead. Others were told as there was no chance of equity release, their IVA would be set up for 6 years instead of 5, but this was not in the signed documentation so after their IVAs were sold to a new IVA firm, they were then asked to pay for a 7th year.
So it is good that with the 2021 protocol everyone with a house will be told from the start which of three groups they are being placed in:
- Option 1 – equity is below the £5,000 minimum value. The customer will have a 5 years IVA with no need to review equity in last year.
- Option 2 – equity is over the £5,000 minimum value and it appears unlikely equity can be released based on “the current lending criteria of specialist brokers”. Here a 6 year IVA will be set up from the start with no need to review equity in the last year.
- Option 3 – 5 year IVA with a review of equity in 5th year and an extra year added if equity release is not possible.
But how well will this work in practice? It seems possible that some firms who are happy to make their clients take very expensive secured loans may put everyone with more than the minimum equity into option 3. Might some firms who would not contemplate a secured loan at very high rates of interest put all their clients into Option 2?
My comment: The percentage of clients being put into options 2 and 3 seems like a very important piece of information that clients should know before they choose which IVA firm to talk to.
Two other small improvements
Two other definite improvements in Equity Release proposals in the new 2021 Protocol are:
- stating that the property valuation is to be produced by the consumer;
- clarity that where a couple has interlocking IVAs, the de minimis value is £10,000.
But no more clarity about secured loan
The new protocol has the same provisions as the 2016 protocol regarding people having to take a secured loan rather than a mortgage. In other words there is NO protection against people being forced to sign up to long-term very expensive secured loans at a rate of interest that will be variable. I have seen examples of 19% interest being proposed.
My comment: No-one enters an IVA expecting to have to take on dangerous and expensive debt at the end of it – IVAs are meant to solve your financial problems. There should be some protection written in that limits the interest rate that can be charged on these loans, but there is nothing here.
Again this is an area where people taking out an IVA need to be informed whether their IVA firm has made any clients take out these loans and what rates were charged. So that people can compare firms and avoid the ones that do this.
No statutory interest
It is now specified in the Early Completion clauses in Annex 1 and in The consumer decides to sell their home clause in the General principles that consumers only have to repay their debts in full plus the IVA fees, and that statutory interest cannot be added on.
My comment: This is welcome.
Trust comes to an end with completion certificate
The Trust created by the IVA arrangement will be extinguished on termination of the arrangement or the issuing of the completion certificate by the insolvency practitioner.
My comment: At last! It was the absence of this clause in previous protocols that opened the way for the Green v Wright decision and the subsequent pursuit of PPI reclaims for already closed IVAs. Now this loophole – which was never intended to be there – has been closed for IVAs using the new protocol.
This certificate will be issued within 28 days of all payments and obligations being satisfied and no later than 6 months from the date of the last payment.
My comment: 6 months seems a very long time. But at least there is some deadline written in here.
Vulnerability can take many forms and insolvency practitioners should treat all consumers fairly… Insolvency practitioners should ensure they follow the current published guidance from their regulator on dealing with vulnerable consumers. The FCA guidance is a benchmark for the those providing debt advice to consumers who may have vulnerabilities.
My comment: It is good to see the FCA’s recent guidance recognised as best practice. Whether IVA firms will pay any attention to this is a different matter.