IVAs in 2018 – numbers jump and so do failure rates

On 29 January 2019 the Insolvency Service published two sets of statistics for 2018:

• Insolvency Statistics: October to December 2018
• Individual Voluntary Arrangements: Outcome Status 1990 – 2017.

Here are what I think are the three most interesting points.

1. IVA numbers again rose faster than bankruptcy & DROs

In 2018 IVAs increased by 20%. Already the most common type of personal insolvency in 2017, in 2018 IVAs increased to 62% of the total insolvency numbers in England and Wales.

The following chart shows how since 2015 IVAs have grown faster every year than bankruptcy or DROs:

And this chart illustrates how IVAs are now taking a bigger share of a bigger market:

In 2017 I wrote 2016 Insolvency numbers up – but rising debt isn’t the main cause. Last year I wrote 2017 Insolvency Statistics – the real story. Both articles argued that the increases in IVA in 2016 and 2017 were worrying because they suggested some IVAs were being mis-sold.

And exactly the same applies to the new 2018 insolvency statistics.

I am not surprised the overall number of personal insolvencies rose in 2018. Times are hard. Like every other debt adviser, I have been seeing more clients with too little disposable income to repay their debts in a reasonable time, even if interest is frozen.

But I do not know any free sector debt adviser who thinks that in 2018 the number of clients who were suitable for IVAs went up faster than the number who are suitable for DROs or bankruptcy.

The most plausible explanation for the outperformance of IVAs last year is still that they are being mis-sold.

2. IVA failure rates have got worse again

A year ago, the Insolvency Service analysed how many IVAs were failing in their early years. This found that one- and two-year failure rates had risen in 2017.

Now its analysis of 2018 shows that failure rates have again got worse.

The shaded area shows that the black, red and yellow lines were pretty flat from 2011 to 2014. This means that IVAs started during this period all had roughly similar failure rates in the first three years. About 5% failed in the first year, 12% failed within two years and 16% failed in the first three years.

Then these lines have started going up since 2014, showing that since then new IVAs have been failing much more often:

• 9% of IVAs started in 2017 failed in the first year;
• 18% of IVAs started in 2016 failed in the first two years.

We won’t know for several more years what the final failure rate will be for IVAs started in the last few years. But it looks as though we heading back to the bad old days of very high IVA failure rates.

The significant jump in early failure rates suggests that IVA firms are not properly assessing how sustainable a five or six year IVA will be for their clients. It is welcome statistical evidence supporting the anecdotal reports from individual debt advisers saying they are seeing increasing numbers of clients whose IVAs have failed, many of whom would have qualified for a DRO when they were sold an IVA.

3. 2018 Q3 & Q4 IVA numbers – an oddity?

In each quarter in 2018 the numbers of bankruptcies and DROs was much the same. But for IVAs there was a large dip in the third quarter followed by a huge jump in the fourth quarter.

It looks to me as though some IVAs that would normally have gone through in Q3 were for some reason delayed until Q4, giving a big bulge at the end of the year.

One explanation for this could be the reports on some IVA forums during the summer that one of the big IVA firms was having a lot of its creditor meetings to accept IVA proposals adjourned or postponed because of “paperwork problems”, which were never clearly identified. These stories dried up during the autumn. If this had affected several thousand IVAs, which were approved a few months later, that could account for the Q3 and the Q4 statistics.

Edit: the next quarter’s numbers in April 2019 confirmed my suggestion here.

Also in 2018 – regulators started talking about IVA mis-selling

In late September the Insolvency Service published a review of the monitoring of Insolvency practitioners that expressed major concerns about the poor quality of some advice to people entering an IVA. This was followed in early October by a Dear CEO letter from the FCA warning IVA lead generators about giving poor advice.

I hope that together these two reports will lead to a major improvement in advice on IVAs in 2019. But it seems likely that regulators may have to do more than just talk about the improvements they would like to see. Without any financial penalties for poor advice, every month that IVA lead generators and IVA firms can carry on as they are at present means more profits for them and more mis-sold IVAs.

---