IVAs are now the most common form of personal insolvency in England. Clear Debt has recently stated:
Individual Voluntary Arrangements) (IVAs) have become the procedure of choice for those people who have debts they can’t pay and a regular income to enable them to make contributions to their debts.
But how often is the choice of an IVA based on accurate information about the alternatives and good advice relating to the client’s particular situation? Meg van Rooyen in Why the FCA must regulate insolvency practitioners and lead generators and Peter Sargent in Rethinking Insolvency Practitioner regulation have both argued that IVA regulation needs to change and that lead generators should be regulated.
This article looks at lead generators in more detail.
What is a lead generator?
A lead generator is a company that finds people with debt problems and then sells their details to a firm that provides debt solutions such as DMPs and IVAs. The above example was an article (well an advert really) seen on LinkedIn.
If you have emails, texts or messages telling you about a little known government scheme to wipe out 80% of your debt, that is from an IVA lead generator.
Lead generators find the leads by cold calling, spam texting/emailing or through people contacting them via their websites.
Once they get hold of your number, it can be very hard to stop them contacting you. For example, this mobile screenshot shows four texts in less than an hour. They were sent to someone on holiday, who had previously told Debt Navigator and their partner Creditfix several times to stop contacting her.
But apart from the fact that cold callers are pests, there are major problems with this way of “selling” a debt solution.
People think they are getting good debt advice
Lead generators don’t have to be FCA authorised and many of them aren’t. But a lead generator that isn’t regulated shouldn’t be giving debt advice. This often isn’t being made clear to people and most are likely to assume they are being given proper, balanced, debt advice by an expert.
Take the example of Debt Navigator, which is unregulated but whose site states:
At Debt Navigator we will give you the help and advice to control your debts. Just fill in the form above and we will work with you to find a solution that is right for you. There is no commitment and it’s completely confidential. You will soon be speaking with a friendly advisor who will run through your options.
and who sends out unsolicited emails advertising a “Free Debt Advice Service”:
Another example is Consumer Money Worries, also unregulated, whose site says:
Your Money Worries advisor will educate you on solutions available.
I doubt many people would appreciate that this adviser isn’t allowed to give advice. Nor are they likely to read the extremely long legal disclaimer in small print, capital letters, in grey on black in the footer of the website which explains this.
(Update: I have been informed that Consumer Money Worries was actually authorised as an Appointed Representative at the time I write this article. However their website did not say this.)
It can be surprisingly hard to tell who is regulated and who isn’t. Take Debt Wise – there is no sign on their website that they are FCA authorised and no physical address is given. Searching for that name on the FCA register doesn’t produce anything. It looks a lot like an unregulated lead generator … but they are part of Life and General Ltd, who are FCA authorised for debt counselling. In this situation even the most clued-up consumer has little chance of knowing who they are talking too or understanding the regulatory environment.
Overly positive impression of IVAs
Many lead generator websites are littered with claims such as these:
Read these sites and you would have no idea that a significant number of IVAs last for 8, 9 or more years. Or that if your situation changes and you can no longer manage the “affordable monthly payment” your IVA may fail.
Overly negative impression of other debt options
Some lead generator websites only talk about IVAs. Others appear to talk about the full range of debt options but ignore Debt Relief Orders. In 2016, DROs are nearly twice as common as bankruptcy, but from the menus on these sites someone – who could be entirely suitable for a DRO – would never know they exist:
Here’s a scenario that could be common:
- during the first phone call, there is a run through of the caller’s income and expenditure (I&E) which result in a Disposable Income (DI) figure of say £75;
- the caller is told an IVA is the best option for them and that they wouldn’t qualify for a DRO because a DRO has a £50 maximum DI. As they may never have heard of a DRO, the caller will assume this is some unimportant option being ruled out and not question this;
- however the I&E may have been rough, with some items wrong or omitted, and the caller could easily be under the £50 a month limit if a full I&E is completed by an advisor who familiar with DROs and the Common Financial Statement. The result is a mis-sold IVA, to a client with a clearly superior debt choice available.
For bankruptcy, a lot of points tend not to be fully explained. The worst cases may be mentioned but not what normally happens, so people can’t assess their situation accurately. For instance:
- you would have to make monthly payments for three years (80%+ of people who go bankrupt don’t);
- your car would be taken in bankruptcy (may be misleading);
- the official receiver takes everything they can (scaremongering);
- bankruptcy is worse for your credit record than an IVA (wrong);
- bankruptcies are advertised in newspapers (misleading); etc
People in debt tend to take the first solution offered
People with problem debt are often desperate, scared and ashamed about their situation. Mullainathan and Shafir in Scarcity: Why Having Too Little Means So Much, which I have reviewed here, have described how lack of money results in tunnel vision, making people “less insightful, less forward-thinking, less controlled.”
For these people it is a huge step to talk about their debts to one person – they are very unlikely to seek alternative opinions. They are also vulnerable to a sales pitch saying there is a simple solution for them. It is therefore essential that the early information they get, from a website and from the first phone call, is accurate and unbiased. This is not happening with many lead generators.
A product that promises protection from their creditors and only having to pay what they can afford can sound ideal. When told they “qualify for an IVA”, there is huge sense of relief that they can have what they need. So if later the IVA firm does go into detail about IVAs, it may not be closely listened to, and very few people will read the pile of documentation they are sent.
As a result:
- vulnerable people may be being pressured into signing up for an IVA with unwanted calls and texts;
- low DI IVAs may be being mis-sold to people who would have qualified for a DRO;
- where someone has a choice between bankruptcy and an IVA they aren’t given good information to make the decision;
- people with complex problems (e.g. interest only mortgages ending within the next 10 years; children going to university during the IVA; insecure jobs etc) are starting an IVA without being aware of the problems that may result;
- many people for whom an IVA is a good option are entering a serious, long-term legal contract having little idea of what it entails;
- after a rejection for an IVA, people may be signposted to the Money Advice Service but may not follow through if they have received a negative opinion of the other debt options. One website says “If IVA is not the right option for you, it will be very upsetting for you as it will cost you more.” That is simply untrue, but this type of statement may discourage seeking more advice.
How large are these problems?
You would hope that regulators are looking out for these sorts of problems and are monitoring how large they are. But lead generators do not have to be regulated and many aren’t. No one regulates the IVA firms either. As Meg van Rooyen points out:
we are now seeing a worrying growth in lead generation companies solely passing on leads to IPs for IVAs, which is a course of action that neatly bypasses FCA scrutiny.
The Insolvency Practitioners are regulated by their professional bodies, such as the IPA and ICEAW. So far as I am aware the professional bodies visit the IPs but not lead generators. So in many cases no-one is looking at lead generators’ websites or listening to any random selection of calls. Without this there can’t be any real assessment of the scale of the problems resulting.
Expecting IVA firms to monitor and control the activities of their lead generators appears unrealistic. The monitoring would cost money in itself and lead to fewer leads and so lower profits. IVA firms looking for business in the low DI end of the market need those leads coming through and the IVA fee structure means that even if an IVA fails two or three years in, the firm will have had most of its fees by that point.
The backdrop to this is the increased regulatory focus on debt management firms in England. Over the last six to twelve months many commercial debt management firms have been getting out of the business. Some of their clients may have had unsuitable DMPs. The growth in IVA numbers suggests that many of these have been sold an IVA. For some this may be an excellent move, but how many clients now have an unsuitable IVA instead?
The way forward
IVAs are very important part of the debt alternatives in England as the increasing statistics show. It makes little sense to have the FCA oversee debt management in great detail whilst the oversight of IVAs – pushed by commercial providers as the main alternative to debt management – have a much lighter regulatory regime. And it makes no sense for lead generators, who are often the first point of contact with people in a vulnerable position, to be unregulated.
The first contact with someone in debt is key as it sets the tone for the future exploration of debt options. The person in debt is very likely to take this as “advice” so it is not right that this can be a sales pitch for one particular debt option.
I agree with the two articles, cited above, saying that lead generators need to be authorised and monitored. The FCA appears to be the obvious body to do this to ensure similar standards and a compatible approach with debt management regulation. I suggest that as part of regulating lead generators the following is desirable:
- lead generator firms have a similar level of regulatory oversight to debt management firms, including visits from the regulator and having call recordings checked;
- any potential IVAs with a monthly payment of less than £100 or where all the income comes from benefits and where the debtor is renting should have to go through a separate formal check by a suitably experienced adviser to see whether a DRO is a possible alternative;
- cold calling, unsolicited emails and spam texting by lead generators for IVAs (and indeed any debt solutions) should be prohibited; and
- lead generator websites should have accurate descriptions of all of the three insolvency options – IVAs, bankruptcy and DROs.