Strangling the golden goose

BBC News are reporting a claim from Price Waterhouse Coopers (PwC) that the numbers of people going into IVAs is now falling.

The report is interesting when read alongside the profit warnings issued by major IVA providers at the end of January. It is obviously in the best interests of the IVA providers to put the best possible spin on events so the PwC report comes from the other side of the counter. They act in IVAs for many of the major lenders including banks.

The PwC report may also reflect a blip in the figures rather than a trend but the BBC report says the reason for fewer IVAs seems to be that the total amount of personal debt was stabilising after booming in the first five years of this decade.

But the other reason given is worth quoting in full. It says:

"Another reason for a fall in IVA numbers is that some lenders are adopting a more hostile attitude to the IVA proposals that are made to them on behalf of their indebted customers. IVAs are entirely voluntary and a creditor is not obliged to accept one if it thinks the person can in fact pay more of their debts than is being suggested.

In the past year banks have becoming increasingly irritated by a minority of people trying to push through IVAs who, they believe, would be perfectly capable of paying off more of their debts without such an arrangement.

Government research has shown that typically IVAs involve men in their 40s with debts of between £40,000 and £43,000. In such a case, an IVA usually cuts that debt to about £24,000, which is then repaid over five years.

But of that, about a third can be taken by the IVA company which has arranged the deal, with the lender such as a bank being offered only £16,000. The new hard-nosed attitude by lenders has led some of the new IVA companies, which have sprung up in the past few years, to report a downturn in business recently."

Doesn't this also sound as though someone has been strangling the golden goose by overheating the market for IVAs ? The marketing of IVAs by the debt factories - and particularly the TV ads - often seemed to be creating a demand for IVAs that might not have existed before.

The OFT are belatedly acting on the mis-selling of IVAs but the mis-selling has occurred at both ends of the market and this is not really reflected in the report.

At one end of the market, IVAs have been sold when bankruptcy would be more appropriate and, at the other end, IVAs have been wrongly sold as a debt avoidance tool that is simply another option in a credit card lifestyle.

IVAs are supposed to be a solution to insolvency, not indebtedness. Many of the factories - and the insolvency practitioners hiding behind them - do not seem to apply this test as rigorously as they should.

When mis-selling is mixed with sizeable profits it is no surprise that major lenders now pool their resources and act through agents like PwC to squeeze some of the abuses out of the system but the problem here is that the people who are now beginning to suffer are the genuine cases who have made every effort to make the best possible IVA offer to their creditors.

It seems that both sides are strangling the golden goose.

The IVA factories have been churning the debt market to satisfy their shareholders and, in an attempt to cut out bad practices, some lenders are now voting down the proposals put forward by those same factories and, as a result, lenders may also reach the tipping point where they will start to see a lower return on their bad debts as more debtors are forced into bankruptcy.

This may all be a tactic designed to move the supervision of voluntary arrangements away from the counselling factories towards the less expensive and more thoroughly scrutinised FTVAs supervised by the Official Receiver - but that is probably too fanciful.

One thing is certain. Debtors whose IVAs might have been approved only twelve months ago are seeing them voted down as a crude means of regulating an unregulated market.