The Review of the monitoring and regulation of insolvency practitioners that was published by the Insolvency Service last week found evidence of many of the problems in Individual Voluntary Agreements (IVAs) that I and other free-sector debt advisers have been talking about for several years.
Although it is often not specific about what has to be done, the report is clear that change has to come in several areas including poor advice at the start of an IVA and unjustifiably high fees. That is welcome.
But the report was reviewing existing regulatory arrangements, rather than conducting a comprehensive analysis of current IVA problems and how they could be remedied. So, at the end of this article, I have added a number of wider issues that the Insolvency Service should also be considering.
Background to the review
In 2017, there were over 59,000 IVAs; before 2003 there were fewer than 10,000 a year. so the background to this report is the increasing number of IVAs.
In itself that would not be a concern, indeed it would be expected given the FCA’s approach to regulating debt management plans (DMPs) since 2015, where overly long DMPs are discouraged if an IVA would be more suitable for the client. But this has been accompanied by other developments which are more problematic.
There is no reason why most people switching from unsuitable DMPs should have chosen IVAs, rather than bankruptcy or Debt Relief Orders (DROs). In addition, all free sector debt advice agencies have been reporting increasing numbers of clients with low or negative Disposable Incomes, which suggests that DRO numbers should have risen significantly. But that hasn’t happened, see 2017 Insolvency Statistics – the real story for details.
It is probable that some of the increased IVA numbers are people who would have been better off opting for one of the other forms of insolvency. The fact that IVAs generate large amounts of fees for lead generators and IVA firms, and bankruptcy and DRO do not, is the incentive for mis-selling IVAs.
For the past five years there has been an increasing concentration of business in a few “volume IVA” firms, where Insolvency Practitioners (IPs) are not directors and where they have little or no contact with their customers. As the report says:
The corporate structure of some providers means that the IP is often an employee, supervising several thousand cases with little control or say over the actions and policies of the firm.
Some points from the review
I am going to highlight what I see as the most important findings. Inevitably these are the ones where problems have been found.
Poor quality advice
The report points out:
The initial conversation is crucial in helping to determine the course of action chosen by the debtor and in our view a sample of calls where the IP is providing advice, and a sample of calls where the IP is going through the advice provided by an authorised introducer firm, should always be examined….It is an area of high risk as there is obvious benefit to the IP firm to recommend an IVA, even where other options might be more appropriate.
In a number of cases we observed, the debtor’s expenditure was seemingly manipulated to deliver an ‘on paper’ surplus monthly income of over £50 so that an IVA could be proposed and agreed. Whilst initially portrayed as an attractive debt relief option for debtors, there was little consideration given to whether it was realistic for the IVA to last for at least 60 months, and whether it was affordable.
Presumably, some of these cases would be likely to be suitable for DROs, although the report doesn’t mention this. these cases. But it did mention cases where bankruptcy was most likely to have been appropriate:
debtors were being steered towards an IVA due to the effects of bankruptcy, when in reality bankruptcy may have been the most appropriate option and would have had little or no more impact on the individual than an IVA …In some instances, there was also evidence that introducers (who are often not regulated and therefore outside the scope of the RPBs or FCA) may be misleading people about the bankruptcy process, including suggesting that bankruptcy would require the consent of creditors.
The review recommended that:
Where a RPB has identified poor or inappropriate debtor advice, there should be a focus on remedial action for the debtor, whilst recognising there may be practical limitations on what is possible, in addition to an investigation and disciplinary or regulatory action against the IP.
However it stopped short of making any practical suggestions as to what could be achieved
The review found that there have been significant increases in the disbursements – additional fees to cover specific costs – charged by volume firms and that these were often lower or not charged at all by “not purely commercial” firms such as StepChange. It concluded:
There is limited evidence that many of the disbursements charged in volume operations are providing real value to either debtors or their creditors. In most cases it is not clear whether they are required at all…
Whilst it was evident that inspection teams do challenge inappropriate charges whilst on visits and report back accordingly, we found no evidence that the charges were being reduced.
It also pointed out the very high levels of fees agreed with CMC firms appointed to recover PPI.
My views is that whilst the detriment here is mainly to the creditors, higher fees and disbursements also harm debtors, see Knightsbridge IVAs – must you agree to Creditfix’s variation?
Early exit loans
I was critical of these on their introduction in 2016. The IS review says:
The loans… ultimately cost the debtor substantially more… are sold on the basis they will help the debtor in the long term, by improving their credit rating. There does not appear to be any evidence that this is actually the case… By concluding the IVAs early the IPs concerned will also benefit by not having the ongoing cost of managing the IVA so there may well be a conflict of interest.
That is a fair comment on the Perinta/Creditfix loans, which have not been offered since the start of the year. But it seems a slightly harsh description of the Sprout loans, where the creditors take a haircut, reducing the cost to the debtor.
So a useful review but… some points not mentioned
Some of the following points may have been covered but were not mentioned in the final report;
- Although the review made the important point that “the initial conversation” was vital in the advice process, it was not clear if the visits included any listening to call recordings of the lead generators;
- It was unclear if cases selected included some that had failed in the first two years, where failure rates appear to be increasing;
- It was unclear if any cases selected had had equity released through a secured loan. This is an area of potentially huge detriment to debtors and the Insolvency Service and RPBs need to determine if it is working fairly in practice;
- There was no discussion about how complaints were handled and whether the IP/firm was providing an environment in which debtors felt able to make a complaint;
- Although it was identified that RPBs were not following through on redress in individual cases, there was no mention of whether individual case problems should be used to require a comprehensive review of potentially similarly affected cases by the IVA firm;
- There was no discussion of how vulnerable debtors were handled, either at the start of an IVA or if vulnerability issues such as health problems appeared during the IVA.
A more fundamental overhaul of IVA regulation is needed
As this was a review of how well the current arrangments are working, there was no consideration of radical alternatives. The Insolvency Service is considering whether the current multiple RPB system should be replaced by a single regulator. I suggest the following should all be considered by the Insolvency Service as part of this:
- whether the initial debt advice would not be better coming from a “generalist” firm that was FCA regulated, rather than an IVA specialist lead generator or an IVA firm. This is the approach being taken by TIP which is only accepting leads from free-sector debt advisers so the IVA firms on the TIP panel can be sure that the debtor has had proper advice on the full range of possible debt solutions;
- if specialist IVA lead generators continue to be permitted, their regulation needs to be considered in more detail: Should an IP be allowed to accept cases from an unregulated entity? Is the FCA checking adequately on lead generators who are approved persons? Who is checking whether lead generator websites fairly describe the other insolvency options?
- whether regulating IPs rather than IVA firms is anachronistic given the huge concentration of IVA volumes in a few firms;
- whether the overall regulatory objectives need to be revised to make it clear that treating debtors fairly is as important as maximising returns to creditors;
- how more information about IVA firms can be provided to people considering an IVA to help them choose;
- how a genuinely independent complaints procedure can be introduced that can provide compensation to debtors. The parallel with the bailiff industry is clear – the only people that think the current bailiff complaints procedures are satisfactory are the bailiffs.
Will this make a difference in practice?
The 2018 IVA statistics showed that IVAs dropped in the third quarter but then rose a lot in the fourth quarter. I think we will have to wait through 2019 to see if there is any real change from this good report.