Background – secured loans and IVAs
The following is a brief summary.
Before 2014, most IVAs had terms which say a debtor with equity in their house must try to release some of it in the fifth year of the IVA through a remortgage; and that if this isn’t possible a sixth year of IVA payments will be required.
At the start of this year the IVA Standard Protocol was updated to include an additional phrase “Remortgage includes other secured lending such as a secured loan.” This would usually only apply to new IVAs being set up, where it won’t be possible to see how this extra clause works in practice for over four years.
A few IVA firms including Debt Free Direct (DFD), a major provider of IVAs, have been asking existing IVA clients to incorporate the new wording into their IVA by a variation.
Some clients are therefore already being asked to take out secured loans and anecdotally some of these secured loans seem to be at very high and variable rates – 15%, 20% or more.
The regulatory situation
Insolvency Practitioners are regulated by one of several authorising bodies. Some of the largest providers of IVAs are firms which are regulated by the FCA, but once an IVA has been agreed, the operation of the IVA is not regulated by the FCA but by the authorising body of the IVA’s IP. This leads to a complex picture if a debtor wants to complain about their IVA firm, see my article on how to complain about an IVA.
The lender proposing a secured loan however will be regulated by the FCA and will not be covered by the exemption of IVAs from FCA regulation. The FCA’s Consumer Credit Sourcebook (CONC) sets various rules and guidelines for second charge lending – there is an extract with some of the most relevant ones here.
I have written a specific article about complaining about IVAs and secured loans.
Can a secured loan ever be in the best interest of the debtor?
After writing that article a more fundamental argument occurred to me:
Prin 9 (A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment) and CONC 15.1.10 mean that the lender has to consider the best interests of the client. But if no loan is on offer, the client will simply have to make 12 months more IVA payments and their IVA will complete. As the secured loan will always cost more tha 12 more months of IVA payments, the potential lender should therefore never offer a secured loan as it cannot be in the best interests of the client.
(I am ignoring here the rare cases where a client is offered a remortgage and would prefer to take a less costly secured loan. In that case the secured loan clearly would be in the best interest of the client.)
If this argument is correct, it renders the secured loan provision of the 2014 IVA Protocol effectively redundant as it should never be used. If a secured loan is offered, then the client can complain to the Financial Ombudsman. The client may also have good grounds for legal action against the lender – a breach of CONC can form the basis of an unfair relationship claim and Prin 9 is a rule (rather than guidance) so a breach could give rise to a free-standing claim for damages.
What about the debtor protection in the IVA Protocol?
I have heard it suggested that the secured loan provision of the 2014 IVA protocol is reasonable because of the debtor protection included: equity released would be a maximum of 85% Loan To Value; the incremental cost of the secured loan will not exceed 50% of the monthly contribution at the review date; and the remortgage term does not extend beyond the later of the debtor’s State retirement age or the existing mortgage term.
In my view this is inadequate for two reasons:
- it doesn’t assess the debtor’s circumstances at the time the secured loan is offered. The fact the cost of secured loan is limited to 50% of current monthly payments does not mean that it is affordable – some IVA clients are struggling badly by the time they get to the review point of their IVA;
- it ignores likely future events such as mortgage rates rises; a reduction in client’s income when children become 18; having to fund children at uni; needing to replace a car etc.
Even if this protection was enhanced to take account of these issues, it would not remove the regulatory need for the lender to only a propose a second charge loan which is in the best interests of the client.
What should the Standing Committee do?
The IVA Standing Protocol Committee meets about three times a year. Part of the committee’s remit is to identify problems/issues arising in the operation of the Protocol at an early stage.
In IVAs clients are at an extreme information disadvantage compared to their IP. For every client who finds his way to a CAB or a bulletin board and gets good advice about challenging a secured loan, there are likely to be more than twenty who just sign up to what ever they are told, especially towards the end of their IVA where they are desperate for it not to fail.
I think the Standing Committee should reconsider the inclusion of secured loans and, if necessary, take legal advice. Carrying on with the current wording could lead to major problems in four or five years time and it seems much better for the industry to review the matter now rather than end up in a situation with complaints to regulators or court action in the future. It is also making it hard for debt advisors to suggest an IVA as an option to clients with property.
If the 2014 IVA Protocol secured loan provision is not compatible with FCA rules for the secured lender then it needs to be deleted or amended for future IVAs and all existing clients with the term in their IVA should be informed by their IP that the clause will never be used.
I understand that the CAB’s representative on the standing committee raised the issue of secured loans at their July meeting but no amendments were considered necessary by the majority of the committee.
Are you already affected by this clause?
If your IP is asking you to agree to a variation which includes this secured loan clause – this situation was covered in my previous article.
If your IP is saying you have to take out a secured loan you should consider making a complaint and taking further advice.
My standard IVA advice warning – I am not a lawyer; the documents I have seen may not be identical yours; I do not know the terms of your IVA; and I do not know anything about your financial circumstances. I hope you find this article informative but it is not legal advice and the conclusions that I draw may not be appropriate for you.