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.
Contents
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
Hi xxxxx,
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.
Mystery shopping
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.
90%!
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 compensationConsultation 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.
Tim Harness says
Thanks for your work on this Sarah and your good advice throughout the year, I’m sure it is much appreciated
Alan says
Is there a date for this to be completed by?
Sara (Debt Camel) says
The FCA’s proposal to ban fees for debt packagers? The consultation closed a couple of days ago. Unless that turns up something that makes them thing again (and I think they knew EXACTLY what they were doing) they said the rules could be live within a month. So end Feb?
Malcolm Hurlston CBE says
Your approach is absolutely spot on. There is no time for delay. I would like to individual practitioners’ records to be in the public domain.
John mccormack says
Hi Sarah I have had many failed IVA clients in the past 10 years these clients should never have entered into the IVA and they quickly completed a DRO. Most recently (2 in past month) has been clients who are told they must (no choice) use their PIP payments to pay creditors. There is no mention what happens if they lose PIP or that the PIP payment in a DRO can be discounted as it is given for personal needs related to their disability. Anyone else seen this?
Sara (Debt Camel) says
Unfortunately that isn’t that unusual. To many IPs it seems that disability benefits are just more income.
I don’t think disability benefits should be treated as income in an IVA (or if they are, there should also be a matching allowance for care costs, as in a DRO/bankruptcy). The only exception is where the client has a house with equity and using the disability benefits in an IVA is the only way to clear a lot on unsecured debt. That is rare…
Kevin says
Hello John , yes I have seen lots of IVAs ( volume providers) where they do NOT offset the PIP payment , the proposal states that the consumer wants to use this income to pay creditors.
However the consumer has not agreed that or was aware it was in the proposal. !
That is how the IVA firms get round it , very wrong and unfair
Nick says
I really need help, thanks for this btw. I have an Iva set up by the insolvency group and I really think after reading this I was totally mis-sold and felt pressured in to doing it also advised to lie about parts on my income and expenditures to “help” my case when it was presented to the insolvency practitioner. I’m in a bit of a pickle at the moment because I’m spperntly in breach of the agreement but I have no idea what I’m in breach of and apparently the only option is to extend it. I really need to speak to someone about this. I was promised that an Iva would solve my debt problems but it’s kinda added to it and I still have creditors after me. Once again thanks for the article as I felt that something ain’t right with this and that I was duped in to helping someone hit their sales target or something.
Sara (Debt Camel) says
Very sorry to hear this.
Can you give some details – when did your IVA start?
Are you buying or renting? How much are you supposed to be paying every month?
Has your income gone up, is that why they say you now have to pay more?
Also the creditors that are still chasing you – were those debts included in your IVA?
Kevin says
IVA mis selling is now massive , if you were told to lie then that’s the mis sell , your IP (nominee ) had a duty to make sure everything is correct and you understood the IVA , which by the sound of it you do not.
Julie says
Hi,we entered into an iva in 2015 after
An initial meeting was set up with a debt consolidation advisor, ( after visiting our local citizens advice bureau…)
Our main concern was that we obviously didn’t want to lose our home ( it’s still mortgaged )
We had quite a large debt and the iva seemed the best way for us.
Although our buisness was sold on ( if that’s the right meaning ) from grant Thornton to aperture then to debt solutions…we’ve not had any problems as such apart from having to extend to 6yrs as we had no way of taking equity out of our house.
When we finally abided by our iva commitments earlier this year..
Only problem now is I don’t really know what we have to do if anything by building up our credit rating ( not that we now require credit though)
Sara (Debt Camel) says
I have an article on how to do this: see https://debtcamel.co.uk/repair-credit-record-iva/
Gary says
I have been working in debt advice for too long, many IVA claimants I come across have been wrongly advised to apply for an IVA instead of a DRO.
I would say over 85% of IVA’s that I come across are incorrect, I can not remember the last IVA I have come across which was correct.
Cee says
Over the past 20 years I’ve worked at a major debt charity, I’ve also worked for an IVA packager and for also directly for Insolvency firms. I think debt charities funded by the creditors are not great. It’s clear the advice given in many cases is shaped by a criteria that favours generously towards lenders who heavily fund them. I’ve spoken to thousands over the years many spoke to Stepchange & were told they did not qualify for a DRO. I’ve advised them to apply for a DRO again elsewhere and upon a follow up call they were accepted. This happens far too often for it to be a one off. In my opinion, close down IVA packagers & stop allowing creditors to directly fund debt charities to remove the very clear bias as they are not impartial. All debt advice should be via a government funding, perhaps via a levy paid by the lenders but not directly. Its funny how so many are refused a DRO by stepchange but are then approved elsewhere – same client, same circumstances. The problem is much bigger than just packagers, but it’s a start.
Dawn Reed says
I looked into an IVA about 7 years ago.
We hit financial crisis in 2008 when our 1st child was born and our plans on how to deal with our debt were now impossible. I had been on token payment plan arranged with advice from Citizens Advice. A few years in, I sort further advice from a Community Money Advice debt advisor, as the amount of debt was adding to my mental health problem. He reviewed our income and expenditure with me and discussed IVA being a possible option to explore, so we decided to look at a the option, with my DA present. The representative looked at my CFS (as it was then) and moved lots of things about and suddenly had created a disposable income of £100 and was adamant that an IVA was the best option.
I did not understand how he had magicked up this £100 that was not there and nor did my debt advisor, so I dismissed the guy, but he kept pressuring and contacting myself and my DA to go down this route.
It would not have been the right option for us and I am so pleased I knew my finances well enough to know I did not have £100/m to pay an IVA. Thankfully I became debt free 2 years ago, but it was a long journey. And I have been working as a Debt Adviser at a Community Money Advice centre for the last 7 years. We have not had one client who an IVA has been the right option for!
Sara (Debt Camel) says
IVAs are great options for a small number of people with problem debts who have assets to protect, some disposable income and relatively stable finances. That does indeed rule out most clients!
A says
I’m currently in an IVA, I have roughly a year and a half left, I’ve paid £7k into it, even though they said I’d only pay £6k. I believe I was mis-sold, mis-led and manipulated from the start. I told them I’d built up the debt due to a serious gambling problem, they said they could help and “don’t worry, we can hide you gambling transactions from your statementSurname in order to get you accepted”. They manipulated my outgoings and my bank statement. I made a complaint over a year ago, they agreed to lower my payments. But now I’m thinking about using a solicitor to make a claim against them. Any advice on this would be most appreciated. Thank you.
Sara (Debt Camel) says
I am not convinced that solicitors are getting many good results. Most ask for an up front fee (possibly payable in monthly installments) to write you a “report”. That may back up your case and look lovely but it may not help you in getting any redress. When solicitors know they will win a lot of cases they usually start taking them on a “no win, no fee” basis – that doesn’t seem to be happening here.
I have sent you an email.
Issy says
Hi Sara I’ve finally received my termination letter and breakdown after asking my Iva to fail , is it normal that that have taken £3990 in fees ? , I was never told about this in the beginning, I was expecting maybe £1500 -£2000 but seriously, they’ve paid nearly as much to themselves and some of the items they have listed is a bit shocking , any advice ?
Sara (Debt Camel) says
IVA fees are often that much I am afraid – and they are mostly charged in the first couple of years, so your IVA firm hasn’t lost out by your IVA failing :(
Too many are rip off merchants, some of the itemised fees can be eye-watering.
But what matters now is you getting on with a DRO. Who are you talking to about this?
Issy says
Hi Sara , I’m no longer in my Iva , a creditor has told me they are refunding payments made by the Iva as the debt was write off but they have to return to them for data breach , and they were made by them on my behalf obviously, do the Iva now need to send the funds to me ? Surely they cannot keep them ?
Sara (Debt Camel) says
i don’t know, you can ask, they may distribute them to other creditors.
Are you making progress with a DRO?
Darren says
Have a IVA only running for a year but struggled to pay the £50 each months now my fuel bill has gone up by £40 rent by £50 and food fuel by around £30 so wipping out anything i had spare to pay my iva
my total debts are around £13.000 are joint wages cover the bills but nothing spare for my iva
also have a car loan and the car is only worth around £2000 max more than the loan and need my car for work i suffer from depression and anxiety and was diagnosed with learning difficulties
so dont know what to do anymore
Sara (Debt Camel) says
I suggest you talk to National Debtline on 0808 808 4000 about whether you may be eligible for a Debt Relief Order or what your other options are.
Clare says
Hi Sara, in 2010 I went into an IVA and was told by Debt Free Direct it would be the best thing to do. I struggled through the 5 years to pay the monthly payment of 450 a month and it also had to be reduced through the arrangement. I paid 40k back of debt and now finished and off my records. Is there anyway you can complain about going into an IVA as I still think I should of never gone into it. I had no assets as my boyfriend owns the house but I’m sure I should of declared bankruptcy. Can you complain about being mis sold an IVA? Hope you can help.
Sara (Debt Camel) says
I suspect in this case there is nothing that can be done as it is so old.
DFD went into administration in 2017 and open IVAs were sold to Aperture. I don’t know if Aperature would have any details of your IVA which had already been completed for over a year. even if they did, it would be hard to establish mis-selling and Aperture may have no liability for it.
Karen says
Hello Sara I’m asking this question again as I can’t find where I posted it previously so apologies.
My 18 yo son was accepted for 2 creation accounts within a year running parallel. He purchased entertainment goods. He was not in employment at the time of credit being given and has defaulted. Is it worth making an affordability claim?
Sara (Debt Camel) says
it was here: https://debtcamel.co.uk/no-calls-or-letters-about-debt/comment-page-3/#comment-483868