Under the law of unintended consequences, as defined by Robert Merton, where an action or policy is initiated to produce a desired result but actually produces the opposite result, recent changes or creditor backed fee reductions regarding professional compensation for Individual Voluntary Arrangement services will only lead to more complaints and issues surrounding the marketing and delivery of IVAs.

Just in the past week, some IVA firms are starting to fold up and with certainly more to come. What people generally don't appreciate is that the there are tremendous costs involved with finding appropriate candidates for IVAs.

In a perfect world the marketing of Individual Voluntary Arrangements includes many ancillary services that are delivered for free to consumers based on the total income derived from IVAs. These services include many, many hours of free advice, consumer education, general debt education to the public and many other unpaid public benefit services to consumers.

In the United States, as creditors tightened the noose around the necks of Consumer Credit Counseling Service (CCCS) groups, the primary delivers of debt assistance services, the first services to fall by the wayside were the free educational and general debt advice overhead that was no longer supported by the lower fees generated from creditors through the delivery of debt management services.

It is inevitable that as creditors in the UK restrict which consumers can access the government sponsored and regulated Individual Voluntary Arrangement service through arbitrary minimum return figures, which limits the client pool of IVA companies, and creditors push down the fees that Insolvency Practitioners can charge, that the unintended consequence to this will be growing dissatisfaction of IVAs, IPs and the IVA as a good solution to problem debt.

IVA providers, be they IVA factories or a small firm of Insolvency Practitioners are now labouring under a legacy of previous higher income from the selling of IVA services during the growth phase of the IVA market. Many obligated themselves to increased overhead during those boom times and are now carrying forward those costs into a rapidly decreasing income environment. In order to make ends meet, those businesses and providers are left with having to increase the volume of IVA clients they now assist just to maintain previous income. While we certainly can't feel sorry for those groups that did not plan appropriately for the future, it does help to shed light on the consequences at hand as a result.

At the same time the word on the street says that many new IVA provider groups are setting up shop, thus creating more competition for new IVA clients. If we apply product lifecycle logic this may be indicative that the IVA market is entering a market fragmentation phase where too many providers exist, increasing competition. If this is the case we should see a next phase of market consolidation of IVA providers into better organised factory environments that can essentially create little monopolies of IVA service.

Because of this, IVA companies will begin to push up marketing costs in order to increase their volume of clients. This competition for clients will escalate IVA acquisition costs at a time when fees are being pushed down by creditors. These opposing forces will lead to the failure or consolidation of more IVA firms.

The irony here is that at the end of the day the person that winds up suffering the most from these market forces is the consumer. The quality of IVAs will diminish as more consumers are directed into IVAs for practices to make ends meet. These consumers will receive poorer customer service as Insolvency Practitioners try to do more with less administrative overhead in order to reduce costs. Consumers will have less access to free and impartial advice since resources to spend free time with clients will be unavailable from even charitable sources. Additionally, consumers will find themselves less represented after the IVA is approved as the supervisor function begins to overwhelm the reduced staffs of IP offices.

Creditors appear to be acting only upon opinion and estimates, rather than scientific facts and will suffer from their own actions because the quality of cases put forward will diminish due to the new forces on Insolvency Practitioners and AIM floated insolvency providers. Complaints from consumers will rise, more regulation will be called into force to deal with complaints and regulation will lead to more overhead and administrative costs for Insolvency Practitioners.

Creditors will also suffer because many more consumers are going to seek financial relief through bankruptcy. Complicated IVA cases, due to increased overhead costs for those cases, will be turned away by practitioners, consumers will hear more negative press stories about IVAs promulgated by creditors in order to drive down IP fees as far as possible and people will be hesitant to enter into an IVA for fear they are making the wrong decision.

Ultimately the goal that should be achieved, providing the best advice to people in financial trouble, will be artificially manipulated by all of these market forces. The number of bankruptcies will increase and once that genie is released from the bottle and social stigma is reduced to bankruptcy due to more people finding it the only, and now justifiable way to deal with debts, and now desensitised, more people will in turn petition for bankruptcy.

The best course of action at this point in time would be for creditors to simply review Individual Voluntary Arrangement proposals based on the merits of the individual proposal put forward by licensed and regulated Insolvency Practitioners. Creditors could eliminate the artificial return rates they have in place and at the same time, IPs could entertain things that would make more sense to creditors, like monthly or quarterly disbursements to creditors.

At Myvesta UK, as a not-for-profit social enterprise, we have always been very focused on making sure that we are structured in such a way as to be able to provide unlimited free advice to consumers and operate in such a way as to maintain the quality of our services to those that need our help, no matter what the financial situation is. We are also ready to consult, for free, as part of our mission as a social enterprise, with any IVA provider that wants advice on how best to deal with these new changes. And as always, we are also ready to provide impartial help, advice and assistance to any creditor group that want to better understand how all parities can work together to create a solution to addresses the long term needs of creditors, consumers and providers.

In closing, let's turn back to the research of Robert Merton where he so accurately describes how these unintended outcomes can actually come to be.

The marketing of IVAs and the creditor pressure exerted on IVAs certainly would fall under his assertion of limiting factors in decision making that lead to unanticipated consequences.

For example, Merton describes how the lack of good information and knowledge can lead to poor decision making. This is certainly the case in the UK at the moment where the lessons learned by the failure of credit counselling and debt management in the United States due to similar poor creditor and provider decision making is lost, only to be repeated again here.

Error of creditor decisions in attempting to control the IVA market through fee caps and minimum return thresholds is also a primary factor of unexpected consequences. As Merton states, "A second major factor of unexpected consequences of conduct, which is perhaps as pervasive as ignorance, is error." "Error may also be involved in instances where the actor attends to only one or some of the pertinent aspects of the situation which influence the outcome of the action."

His research and work go on to specifically describe the immediate actions by creditors, in this case, lead to future problems when he describes the factor of "imperious immediacy of interest" where the creditors paramount concern with the foreseen immediate consequences excludes the consideration of further or other consequences by the same policy decision making.

Will we ever learn?