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.

ASA investigate IVA advertising

The Advertising Standards Authority (ASA) have confirmed to us that they are currently investigating several advertisements for IVAs and similar 'products'. One of the issues being investigated relates to advertised claims about the percentage of debt that can be written off in an IVA.

This will undoubtedly tie in with the recent warnings from the Office of Fair Trading to IVA providers who were falsely claiming that 'up to 90 per cent of your debt may be written off' when the maximum would be in the region of 60 – 70 per cent.

The OFT were wrong on the last point because, until quite recently, it was not uncommon for 75% of debts to be written off in an IVA but adverts which claim to 'write off' 90% or - in three cases which we have reported - 95% of debts are clearly false and must amount to mis-selling of IVAs.

The ASA say that their investigation is wider than the question of 'percentages' and we have also complained about major IVA providers falsely claiming to provide 'no fee' IVAs both on their web sites and in online adverts which link to their sites.

Google ads are often used to make questionable claims and as they can be hard to pin down they can also provide a neatly deniable moving target that nonethless sucks in the punters.

For now, all complaints against individual IVA providers are on hold while the ASA carry out their investigation and they are looking to make precedent decisions by which all advertisers selling IVAs will be obliged to follow.

The ASA have explained that, because their investigation could have wide ramifications for the way all IVAs are advertised, they will not be investigating new complaints or current complaints against individual advertisers and, once the precedents have been set, they will then be able take appropriate action on future complaints.

The ASA investigation is overdue and has to be welcomed but their position on advertising currently used by IVA providers to make significant profits raises serious concerns.

The ASA's powers are limited but it is too easily forgotten that somewhere behind every incidence of mis-selling or false and misleading advertising for IVAs there is a licensed Insolvency Practitioner. The recognised professional bodies (RPBs) have been remarkably silent on this but advertising complaints upheld by the ASA would lend significant support to complaints to the RPBs about the conduct of the IPs they are supposed to regulate.

As the OFT have already carried out their own investigation - without naming the IVA providers - it should not require new 'precedents' to decide that some IVA adverts are patently false but it seems that the ASA investigation might let past and current offenders off the hook without actually naming them.

Someone somewhere has to start naming, shaming and regulating !

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Tip from The Mole : Make a pdf copy of any web pages carrying offending google ads and use the copy to support your online complaints to the ASA.

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Googling 'Debt Resolution Forum'

Without intending to make a point about the lack of regulation of the IVA providers, The Mole decided to follow up on his article below by running a google search using 'Debt Resolution Forum' as the search term and, irony of ironies, the results produced links to various statements about the virtuous Forum but those references were surrounded by links to the dissolute.

So, in the red corner we have the knight in shining armour and in the blue corner we have a company called Debt Specialists with a google ad that provides a link to their site which says: "Debt solutions. Take 60 second debt test and see if you qualify to write off 95% debt". They make the same 95% debt reduction claim on their web site under the heading of 'Flexible IVAs'.

And in the blue corner we also have Debt Advisor Online with another google ad which says "Debt Resolution. Reduce your debt now. Up to 95% debt written off." The link also leads to a similar promise on their web site.

The OFT recently issued warnings to (anonymous) companies who the OFT said were falsely claiming that 'up to 90 per cent of your debt may be written off' when the maximum would be in the region of 60 – 70 per cent.

And here, when we google for the new policeman on the block we can come up with two 'advisers' that promise debt reduction of 95%..

The Mole suspects that the Insolvency Practitioners Association - who are heading up the Debt Resolution Forum - may find that it is preaching the virtues of chastity in a brothel full of pimps.

Too little, too late ?

Regulations but no Controls.

The recent press release from the Office of Fair Trading on the mis-selling of IVAs was widely reported but the final paragraph of their press release passed by without mention.

The paragraph is worth quoting in full because it unintentionally underlines the lack of controls over the 1800 or so insolvency practitioners who are the only people entitled, by law, to supervise formal IVAs. The OFT say:

"The Insolvency Service is responsible for authorising and regulating the insolvency profession. An insolvency practitioner (IP) has to be appointed to 'supervise' an IVA. The IP must be authorised by the Secretary of State for Trade and Industry (SoS) directly, or by one of seven professional bodies recognised by the SoS as being competent to do so. IPs must comply with several statutory requirements and follow best practice guidance and ethical guidance. Complaints about IPs considered to be acting unprofessionally, improperly or unethically can be made to the appropriate authorising body. Neither the SoS nor the professional bodies can intervene directly in individual insolvencies or give directions in relation to the conduct of individual cases. The SoS has no power to impose any disciplinary sanction or penalty against an IP but if complaints are found to be justified, the SoS will take them into account when an IP seeks re-authorisation, together with other relevant issues."

So, complaints about insolvency practitioners can be made to the Secretary of State - this is done via the Insolvency Service IP Unit in Birmingham - or to an IP's professional body but neither of them have the power to intervene in individual cases. Not very helpful as debtors are only likely to complain about the conduct of their own cases and the majority will therefore see no point in complaining.

We then find that the OFT have the power to investigate companies mis-selling IVAs but it seems they cannot 'name and shame' those companies because, according to their own press release, that might damage their businesses. The continuing stress and misery they might have caused for debtors along the way is incidental. The fact that they continue to sell IVAs while they read the OFT's warning letter is immaterial.

But it seems the point is also missed that - by law - companies cannot set up IVAs. The companies - even the most incompetent and even those with the ethics of a loan shark - can only act as a front for the insolvency practitioners who are required - again by law - to exercise their independent professional judgement when they recommend an IVA to the courts in the form of their Nominee's Report.

The county courts are also supposed to act as the 'expert supervisory body' in IVAs. There is case law which emphasises this but - with some notable exceptions - the courts do not monitor Nominee's Reports. The IVAs are simply given a reference number and filed away in the court office and another link in the regulatory chain is broken. Unless an interim order is sought, the IVA will not be referred to a judge.

If even a sample percentage of the IVAs filed with the courts were referred to an experienced District Judge the risk of mis-sold IVAs slipping through would be reduced and the protection for debtors would probably improve overnight but the courts seem unable to act on their own initiative. They can only act on complaints made by debtors - and these are extremely rare.

The courts have the power to overturn any action or decision made by the supervisor of an IVA because technically the supervisor is only acting on behalf of the court. Debtors can apply to the County Court that has jurisdiction in their IVA under s.263 of the Insolvency Act but it seems that these applications are rare.

This should not be surprising. Debtors are in a vulnerable position because IPs are given extraordinary powers in personal insolvencies and complaining debtors are always open to abuses of that power and authority. Debtors can be intimidated.

Debtors are also unlikely to be able to afford legal representation. Public (CLS) funding is not normally available in insolvency matters and, if debtors try to represent themselves, they will inevitably be up against a legal team paid for by the insolvency practitioner's insurers.

Complaining through the courts can be a long-winded and expensive lottery that debtors in an IVA cannot afford to lose - but debtors have nowhere else to go.

And - despite all of this - insolvency practitioners continue to claim that are heavily regulated. The specialists in corporate insolvency may be regulated - but those dealing with personal insolvencies are not.

There is no doubt that there are volumes of regulations governing IVAs and IPs. There is the Insolvency Act; the Insolvency Rules; the Insolvency Practitioners Regulations; the Statements of Insolvency Practice and the Insolvency Service technical manuals and notices but, for regulations to work, there also has to be effective controls. Effective laws need both police and prosecutors.

If any insolvency practitioner is recommending 'mis-sold IVAs' then the OFT should also refer their complaints about the companies that employ them (or take kickbacks in the form of commission) to their regulatory body and they should be struck off for professional misconduct ....... and, if they really want to put their house in order, shouldn't the professional bodies be insisting that the OFT provide them with the evidence they need to initiate disciplinary action ?

Or do they really prefer to keep passing the buck ?

Googling Bad Debt Advice

The UK Insolvency Helpline - I've 'borrowed' their warning sign - provide a useful and cautionary list of things to watch out for in adverts from debt advisers who may be mis-selling IVAs.

Insolvency Helpline - who are a network of accountants and lawyers - rightly flag up abuses by unregulated debt advisers and even provide links to help debtors complain to enforcement bodies about bad advice.

However, it's one thing to complain about the 'bad advertisers' - and it may even be possible to pick them off one by one until they are regulated by law - but it's another thing to deal with one of the primary sources of those adverts: Google itself !

Significant numbers of debtors find their debt adviser or IVA provider by searching online and most of the warning signs of bad debt advice listed by Insolvency Helpline can be found in the google ads that pop up with every search term related to personal insolvency.

One of the reasons why I've not signed this blog up for google ads is because I would have no control over the content of the ads and providing links from this site to a series of unregulated 'bad' debt advisors would defeat the object of the blog for the sake of a few quid.

Aren't Google in a similar position ?

In the first instance, their credibility relies upon their effectiveness as a search engine but, if the advertising that accompanies that service becomes increasingly questionable, then surely it would also be in Google's best interests to get ahead of the game and clamp down on the 'bad advice' ads before the regulators trundle into view and before googling simply refers in generic terms to 'online searches' rather than the brand leader itself.

There are other search engines.

IVA Providers up 40% - Supervision down.

The vultures are still circling. The Financial Times reported Friday that the number of companies providing an insolvency agreement service to debtors were up by 40 per cent last year.

The FT quotes research by the TDX Group - a company which claims to be revolutionising the debt industry with its focus on data and analytics.

Guess we could all do with more analytic focus but the detail of the TDX research is more important because it goes on to say that this increase in the number of Individual Voluntary Arrangement (IVA) providers also meant that the number of companies with insolvency practitioners setting up at least 250 IVAs each quarter had doubled.

Isn't that obscene ? No matter how many junior staff they employ, how can any IP competently supervise that volume of new IVA proposals ?

The simple answer to my own question ? They can't !

The number of IPs licensed in 2006 hasn't increased in proportion to the growth in IVAs or the number of companies offering them. So the quality of supervision must go down. But where is the accountability ?

Insolvency Practitioners are officers of the court and public servants and, so long as they carry out their duties according to the letter of the law, they are protected from civil legal action. But most of the big players in the so-called 'personal debt market' are not advertising themselves as IPs - they call themselves IVA providers and this is a different beast altogether.

Somewhere behind the adverts there must lurk an Insolvency Practitioner because only a licensed IP can set up and supervise an IVA - but they remain anonymous. The big players in the market never advertise the number of licensed IPs they employ and I wonder if they're getting away with something here.

Firms of solicitors and accountants do not operate anonymously. They declare their partners and their qualifications up front. They are visible. Why are the IPs employed by the IVA providers invisible ? Shouldn't they be named and listed in company adverts or literature ?

This visiblilty is important because the law gives IPs a status and protection that is similar to that granted to solicitors. They are also supposed to be a regulated profession and if there is any mis-selling of IVAs this should be a disciplinary matter for their regulatory body - not a matter for the Advertising Standards Authority or the Office of Fair Trading who can only direct their attention at the company rather than the IP.

The industry is accused of mis-selling but If IPs can hide behind the corporate facade of an IVA provider how can they be held accountable ? After all, they must be underpinning the mis-selling by their very presence. There are no IVAs without them.

OneAdvice.co.uk - An IVA Is A No Fees Solution ?

The smoke and mirrors art of mis-selling IVAs is littered all over the ads that pop up alongside google searches. Another outrageous example from a graphically clean site. Smooooth web design - shame about the content !

One Advice are claiming that an IVA is a no fees solution. They follow this startling revelation with the news that (quote): "There are costs involved in setting up and (sic) IVA, however, fees are deducted from the money paid to your creditors. Fees are not added to your payments."

Digest this for a moment:
Apparently, the debtor does not pay. The fees are deducted from the money owed to creditors. Great trick these IVAs. Creditors are actually paying for you to refund as little as 25% of the money that you owe them ?

Are the banks and credit card companies really that dumb ?

Of course not. The only money that is paid into a voluntary arangement comes from the debtor. That money has to cover both the payments to creditors and the fees.

It's simple maths. Let's say you have a rare 'rock solid' five year IVA and your debts total £50k. You have proposed payments at 25p in the pound. Creditors have agreed to that - so you have to repay £12,500.

If you have not contributed any other assets to your IVA fund then payments would be c.£208 per month for sixty months. So where are the fees ?

Let's say the nominee/supervisors fees total £7,000. That money still has to be paid. It is added to the total sum that you have to repay and increases the monthly repayments (over 60 months) from c.£208 to £325 per month.

That sounds like an addition to the payments to me !

But the smoke and mirrors continue to work their magic because it passes without mention that IP fees take precedence over payments to creditors. So, no matter what happens the IP will always take their money first.

An IVA is not a 'no fees solution'. It is always a 'fees first' solution for insolvency practitioners.