Many people have been mis-sold IVAs when they had a better (cheaper, quicker, less risky) debt option available. These other options were ignored or not properly described by some firms that should have given proper debt advice.
IVAs are the only debt solution in England, Wales and Northern Ireland that generates large fees for the firms setting them up. These fees can distort debt advice given by commercial firms making them more likely to recommend an IVA which is not in the best interest of the client. There is no evidence this is happening in the not-for-profit sector.
Regulators are at last deciding to tackle this problem. The Financial Conduct Authority (FCA) is proposing to ban debt packagers from making fees by IVA referrals. The Insolvency Service is promising a review of personal insolvency in 2022 and has just started a major consultation on Insolvency Practioner regulation.
This article has a recent case study from a mystery shop, looks at the scale of the problem and gives a summary of the regulatory changes that are being considered. In this article, I just refer to IVAs, but all the points also apply to Protected Trust Deeds (PTDs) which are the Scottish equivalent of IVAs.
An example of IVA mis-selling
Debt advisers can’t give details about actual cases because of client confidentiality. But I can show you the email I was sent by an FCA authorised firm and share what happened when I mystery shopped them.
I have told the FCA who this firm is, but I will just call them XXX here.
The marketing email
With christmas time coming we understand how much of a financial strain this can put on people, especially when struggling with unsecured debts.
XXX is committed to helping UK households and our amazing staff will be working safely and remotely to ensure we can help anyone who needs free financial advice through this worrying time. Please reply to this message to arrange a time for one of our agents to call you. Stay safe everyone.
We at XXX are here to help you.
What Can We Do?
We can help reduce your payments so that debts are consolidated and become much more affordable to you. This will help you if your income does get reduced. We will ensure all payment plans remain affordable no matter what happens with your finances.
We can freeze your interest. This stops creditors adding extra charges and interest to your payments to keep them as low as possible and means your debt level will not get any higher whilst you are facing struggles.
– We can write a percentage of your debts off and give you legal protection from your creditors. This stops your creditors from trying to hassle you or asking for any further payments. This will help reduce some factors of stress that you may be currently facing.
My Debts Have not Defaulted And I Can Afford The Minimum Payments, Can I Still Get Help?
– Yes, everyone in the UK is entitled to seek help with their finances regardless of their circumstances. We understand you may be managing your payments fine just now but if your income drops or you are faced with challenges at work that will lead to a reduction in your wages, will you still be able to afford your credit
commitments? One of our main jobs at XXX is risk management. We help you put a plan in place now to stop any future scenarios from causing problems. Keep yourself protected by planning ahead.
Who Can You Help?
We can help everyone in the UK who is above the age of 18 and has credit commitments. We look at all occupations including Employed, Self-employed & unemployed as long as you are in receipt of benefits. We can also help homeowners, Tenants and those who are flat-sharing or living with family/friends – as long as you have a postal address, we can help you.
What Plans Can you Offer to Me?
– Every option is different and depends on your circumstances, luckily we have at least one plan to suit everyone so that you will never leave us without a plan in place (unless you choose to). Here is a rundown of the options we can provide:
Here’s a quick overview of some of the options which may be available to you based on your enquiry.
Option 1 – An individual Voluntary Arrangement – this is a legally binding plan bringing all your debts into the one monthly payment – we would consolidate your debts for over the 5 year period – you would be repaying back a proportion of your debt and writing off the remainder using the Government Legislation – it really does depend on your overall debt level how much you could write off. In the IVA plan, you would not make any further payments to your creditors, one monthly payment to cover all your debts. You would have to give up the use of any credit cards you have at the moment and we would ask you not to take out any further large credit agreements for the duration of the 5-year plan. The reason being, this is put in place to help you become debt-free so the last thing we would want you to do is to continue to take out credit which you may not be able to keep up with payments for. You would also benefit from obtaining a clean credit report so if your credit rating is sitting at poor at the moment, this gives you an opportunity to have a fresh start.
Option 2 – Debt Management Plan – this is an informal arrangement between your creditors bringing your debts together and paying your debts back in full. A debt management company may be able to freeze the interest and charges on your debts for a short period of time which would be reviewed every 6 months. A debt management plan would show defaults on your credit rating as this is an informal agreement with your creditors and looks like you are not up keeping the payments creditors expect.
Option 3 – Bankruptcy route – this is available to everyone in the UK that is struggling with their debts however, generally seen as a last resort depending on the severity of your situation. It will clear you of all of your debt but does have some adverse stigma attached to it.
Two of the many problems with this email are:
- no real debt adviser would ever say they can “ensure all payment plans remain affordable no matter what happens with your finances” or “stop any future scenarios from causing problems“. Great sales pitch – but utterly impossible.
- no mention of Debt Relief Orders, even though these are more common than bankruptcy. Many of the clearest cases of IVA mis-selling happen when someone with no assets to protect is sold an IVA, when they may have been debt-free in a year in a DRO with no monthly payments at all, and just a single £90 fee at the start.
I decided to Mystery Shop them. The ability to prevent future problems was one of the most surprising assertions in the email, so I wanted to find out what they would suggest to someone who was worried they may lose their job.
I phoned and said I had about 15k of credit card debt, in work, renting, paying the minimum payments at the moment without a problem but being worried I may lose my job in early 2022.
I was asked if I could afford to pay £100 a month? Oh yes, I replied, I am paying a lot more than that now, but I am not sure that I could afford that if I lose my job.
They explained what an IVA was and how it was much better than a DMP. I asked if I could have an IVA as I was paying the minimums every month and was told yes, I was probably paying too much at the moment.
I asked again what would happen if I lost my job and I was told I just had to tell my IVA firm. There was no mention that an IVA could fail, I was left with the impression it would all be fine.
This sales job was wrong in every possible way:
- XXX had not asked what my income or expenses were. They knew nothing about my situation when they proposed an IVA paying £100 a month. It was not clear I needed any immediate help with my debts, let alone a form of insolvency;
- they dismissed a DMP without mentioning that an IVA was a form of insolvency;
- I had not mentioned any assets, so even if I did need an insolvency solution (unlikely) either a Debt Relief Order (DRO) or bankruptcy would probably have been better;
- IVAs should not be proposed unless they are likely to be sustainable – my concern about redundancy in the next few months should have ruled it out.
Would a dodgy referral be weeded out by good advice from IVA firms?
XXX is a “debt packager”. They don’t set up IVAs themselves. They just collect details of people who supposedly need an IVA and sell them to an IVA firm.
You would hope an IVA firm would take one look and reject the case I presented with.
But the FCA has found that where a debt packager recommends an IVA, in 85% of cases one is set up. This high number is what you would expect – a debt packager that routinely supplies leads that fail to convert would not be in business for long.
When debt advisers have been trying to sort out why an IVA has failed, clients sometimes report that they were advised to change their income or expenses so that the IVA would be accepted.
My guess is that I would have been encouraged to increase my expenses to show that the minimum payments weren’t affordable. In other cases, clients have been encouraged to reduce their expenses so it looked as though they could afford the proposed IVA payment.
IVA mis-selling – tens of thousands of people a year
Insolvency statistics show that IVAs have more than doubled since 2015, but bankruptcies and Debt Relief Orders (DRO) are little changed. And more IVAs are failing, many in the first couple of years. The only plausible explanation for both these statistics is that IVAs are being mis-sold to people who are unable to keep up with the monthly payments.
The FCA found that about 14,000 people in one year entered an IVA after a recommendation from an FCA-authorised debt packager firm. The FCA says:
in our evaluation of a sample of customer files where a recommendation of an IVA/PTD or a DMP/DAS was made, we had serious concerns with 90% of the files we reviewed.
So more than 10,000 people a year may be entering an IVA after advice from an FCA debt packager which the FCA has serious concerns about…
Not all IVA leads come from FCA debt packagers. Many come from firms that are entirely unregulated. There is no reason to think that these leads are of better quality than those from FCA debt packagers, indeed they may well be worse.
Leads from FCA-authorised debt packagers maybe about 20% of the total IVA market. So tens of thousands of people a year could be the victims of IVA mis-selling.
Bad advice to enter IVAs is not the only problem
The FCA says about 45% of people contacting a debt packager are given little or no advice at all. After a couple of questions, they are simply told to contact a not-for-profit debt advice firm.
At least they aren’t being mis-sold an IVA. But this is very unhelpful for people with big debt problems. It’s common for people to delay taking debt advice and to be worried by what may happen. For them to respond to an advert offering to write off 81% of their debt, is a big step. When told to go somewhere else, they may simply give up.
There is no follow-up on these cases. When a debt packager refers you for an IVA, you will get emails and phone calls from the IVA firm encouraging you to sign up. Non-IVA cases are just dropped. From the debt packager’s point of view, they are not wasting their time on unsuitable clients.
These firms are parasites on the debt advice process, with no real interest in the outcomes for their clients, only for their own profits.
Regulatory changes being discussed
FCA wants to ban referral fees for debt packagers
Most of the IVA market is currently outside of the FCA’s control. It looks as though about 20% of IVAs may originally start with a lead from an FCA-authorised debt packager. And few of the firms that set up IVAs are FCA-authorised.
The only immediate step the FCA can take to halt mis-selling is by changing how its authorised firms behave. The FCA has previously told debt packagers to improve the quality of their debt advice and in July 2021 it took supervisory action against five firms that led to them closing down.
But supervisory action against individual firms is a slow approach to halting harm when it is so widespread and when there are such large financial incentives for new firms to enter this business.
Instead the FCA has decided to go for the nuclear option – it is now proposing to ban debt packagers from making fees by IVA referrals. This isn’t just hoping to change their behavior – it removes the reasons for these firms to exist.
The FCA is clear that this is what it wants to happen:
We are proposing new rules which ban debt packagers from receiving remuneration from debt solution providers. We consider that addressing the remuneration model which drives non-compliance is the most effective way of delivering the appropriate degree of protection for consumers. This would end the debt packager model.
The short consultation has ended. The FCA has said that it is proposing to introduce the new rules within a month, subject to the outcome of the consultation.
Insolvency Service proposing to overhaul IP regulation
On 21 December, the IS announced a major consultation on Insolvency Practioner (IP) regulation. Much of the discussion about this is focussed on corporate insolvency – when firms go bust – but it will also help give better regulation for personal insolvency – bankruptcy, DROs and IVAs.
The IS summed up the consultation in this tweet:
NEW: We are proposing important changes to insolvency regulation:
✅ Creation of a single regulator
✅ Regulation of firms, not just individual IPs
✅ A public register of IPs
✅ Formal system for compensation
Consultation runs until 25 March.https://t.co/GN4HGCOvRF
— Insolvency Service (@insolvencygovuk) December 21, 2021
Getting rid of the current multiple regulators of IPs is sensible – the system has no real benefits and is confusing for consumers. Changing so that the firms themselves are regulated, not just the IPs, is long overdue – the current system is archaic.
Introducing a system that can deliver compensation when an IVA has been mis-sold will encourage people to make complaints – at present there is little point. And it won’t just help the customers affected, it will also provide a financial incentive for IVA firms to clean up their act.
Further changes are needed
The IS Chief Executive said in June 2021:
Ministers have also agreed that we should undertake a holistic review of personal insolvency framework.
I think it will be good to have a review of how all the parts of personal insolvency fit together. But I hope that urgently needed changes to help prevent IVA mis-selling do not have to wait for this.
The changes to the IVA Protocol this summer seemed to me to be largely ineffective.
It would be a major improvement if the IS (through the current RPBs) was to introduce mirror proposals to the FCA’s ban on fees being paid to debt packagers. This would put the unregulated IVA lead generators out of business.
I also think the FCA, IS and the Treasury should work together to introduce clarity on where people giving debt advice should have to be FCA authorised.
A simple approach would be to say that if it looks to a potential customer as though they are being given expert help from a debt adviser, that needs to be classified as advice and FCA authorisation should be required. This may involve changes to the FCA’s PERG rules and the Treasury reviewing the exemption for IPs from the need for FCA authorisation.