“When you have eliminated the impossible, whatever remains, however improbable, must be the only option”  - with apologies to Sherlock Holmes.

Disclaimer

We have to start an article like this with a clear disclaimer.  This article is produced from our position as a small but significant lobbying voice in the insolvency profession.  It should be read completely separately from our normal fee earning work in which we assist IPs from firms of all sizes meet their regulatory requirements and improve their case processes to help minimise the risk of criticism and complaints, and increase efficiency.

Some of the following comments are controversial, and we have to make it clear that what we say in this article is very different from what we would recommend IPs to do during a compliance review.  On a compliance review we will always encourage IPs to take a cautious and compliant approach to the existing regulatory requirements, no matter how onerous or unfair we may personally consider them to be.

We recognise that some of our suggestions may cause discomfort to the regulators with whom we have built up a close working relationship and may alienate the small number of clients whose firms also act as agents for major creditors.  We hope that they will understand that our comments are driven by the need to see IPs operate free from undue influence.  They are not intended as a personal attack on any one regulator or IP firm.

It is our understanding that if the current creditor demands are accepted unchanged then many firms will have to stop offering debtors IVAs and offer alternatives that are less appropriate to the debtor’s circumstances because they will be unable to afford to comply with the requirements being imposed,.  However, none of our suggestions should be acted upon by any IP until they have obtained legal advice, but we would encourage IPs to join forces to obtain such legal advice and cascade it across the profession as soon as possible. 

Executive summary

There have been recent creditor moves to require IPs to collude with them in anti-competitive practices in the IVA market, to the detriment of debtors, creditors and IPs alike.  In order to combat this we have suggested a package of measures, some of which are quite radical, that IPs may be able to use to bring pressure to bear on creditors, regulators and the Insolvency Service to redress the increasing imbalance in the industry.

We make these suggestions with deep regret.  We have previously been highly supportive of moves to get the profession to come to an understanding with creditors that achieves an appropriate balance between the interests of all stakeholders, IPs, creditors and debtors, through negotiation and consensus.  We are saddened that the actions of a few influential financial institutions combined with weak regulation within the banking industry makes such positive action impossible and results in the balance being weighted almost entirely in favour of the financial institutions to the detriment of IPs and debtors. 

The ideas we suggest include direct action to break the relationship between creditors and their agents; lobbying to get the regulatory framework amended to reflect the current climate; potential changes to how IPs advise debtors to reflect the reduced options available; and consideration of possible legal action to penalise unfair and anti-competitive practices by the major financial institutions concerned.

The legal position

The basic premise of this section is that by setting the nominee’s fee at such a low level and limiting the supervisor’s fee to just 15% of realisations, an IVA is only economically viable for the majority of providers if the debtor is able to pay at least £400 a month.  Although the average repayment may be around this level, this is distorted by those making higher payments and the most common level of payment is nearer to £200.  This effectively creates an artificial hurdle rate that will only allow the higher earners with larger debts to enter an IVA and excludes many of the most needy debtors from debt forgiveness.  Furthermore, we consider that the decision of a group of creditors to sign up to such a fee scale may amount to price fixing contrary to UK and EC law and that any IP that co-operates may be guilty by association.

We consider that any blanket measures brought in by creditors that act as hurdle rates, whether individually enforced by one creditor or agreed, we believe unlawfully, by a group of creditors, are unfair by definition.  An IP has a duty to ensure that a debtor is given the most appropriate advice ‘in his circumstances’ and any externally imposed hurdle rate does not take the individual’s circumstances into account and must, therefore, be unfair as a matter of principle.

Our first set of recommendations relates to this fundamental unfairness:

1) IPs should seek legal advice on whether the current collusion of the major financial institutions in trying to set IP’s fees is anti-competitive and unlawful.

2) If an IP has a debtor who is unable to propose an IVA because of one of the artificial hurdles, or who has an IVA rejected on the grounds that the nominee’s and supervisor’s fees are too high, or that the proposal fails to meet some arbitrary hurdle rate, that debtor should be referred to Debt Mediation Services Limited, 6 Maes Lindys, Rhoose, Vale of Glamorgan, CF62 3LN.  This company is acting on behalf of a number of debtors to challenge unfair decisions by banks.  If they acquire enough clients who have been treated unfairly by a particular institution, they may be able to generate a ‘super complaint’ with the FSA or OFT.  We have no connection with DMSL, we receive no commission for referrals to them, and we have no personal knowledge of their ability.  We recommend them purely ‘because they are there’ and already involved in dealing with financial institutions in a similar field. Further information is available from the above address or Adrian Nicholas, Director.
 
3) IPs should obtain as much written evidence as they can direct from the financial institutions of their use of these unfair hurdle rates.  The financial institutions should be asked to provide the reasons for rejecting an IVA and IPs should consider advising debtors on how to make formal requests to those who refuse to co-operate by using Data Protection Act requests, complaints procedures and the financial institutions’ own regulators such as the FSA, Banking Ombudsman Service, etc.

Direct action

This section suggests action that IPs can take on individual cases.  We consider that the financial institutions can only impose blanket conditions if they are dealing with a homogenous IVA product.  We were in favour of a standard IVA format for consumer debts when it was required in order to allow financial institutions to vote at all, but faced with the current abuse of the process we consider that individuality and differentiation may be the key to the survival of the IVA industry. 

The following suggestions address this issue:

1) All IPs should immediately and publicly reject any unified standard.  This includes not only the TIX Compliant IVA, but also the Insolvency Service/BBA proposals and our own original standards that we suggested in December last year. Formal notice withdrawing from the IS/BBA process should be sent to both organizations and publicized through your usual press contacts.  You should also ask your regulators and trade bodies like R3 and the DRF to withdraw their co-operation from the scheme.

2) All IPs should do as much as they can to differentiate their IVA proposals from those of their competitors.  Even the larger IVA providers should use 4 or 5 different sets of ‘standard’ proposals in rotation to ensure that the creditors must read every set of proposals to decide whether to accept them or not. This will prevent them from imposing blanket modifications that are not appropriate to the debtor’s circumstances.

3) IPs should seek legal advice on the admissibility of creditors’ claims where their debt is disputed by the debtor.  If, for example, a debtor ‘owes’ a bank £5,000 which includes an element of disputed debt relating to, say, overdraft fees and penalties, it may be that legal advice would allow the IP to admit that vote for only such amount as he reasonably felt he could value the debt. This would, of course, be subject to possible challenge by the creditors, should they so wish.

4) IPs could refuse to deal with agents and only raise queries with the financial institution principal.  All such queries could be copied to their Chief Executive and registered office.  Even if IPs have no alternative but to deal with such agents, they should still copy the other parties into the correspondence.  It appears from a brief review of the OFT website that some of the current action may comprise a cartel. If this is the case, then it is necessary to notify all parties who may be complicit in the action of your objections.

5) IPs should consider complaining to the regulators about the unregulated nature of creditors’ agents.  There has been considerable adverse publicity about the ‘unregulated IVA factories’, which as we all now know are among the most highly regulated professionals in the country.  However, when acting as agents for financial institutions it appears that firms are not caught by either the financial sector or insolvency profession regulators, although those who are also Certified or Chartered Accountants will be caught by the general rules of those bodies. This is clearly unsatisfactory and should be changed forthwith.

6) IPs could seek a legal opinion on whether the current policy of accepting proofs and proxies that purport to be from authorised signatories but are signed using electronic signatures or stamps is acceptable.  It is possible that IPs could consider confirming the authority behind any signatory on a case by case basis and possibly, subject to legal advice, accepting original signatures.

7) IPs should seek legal advice on whether certain modifications are binding where they are not relevant to the case, repeat existing terms, unnecessarily restate statutory requirements like reporting to creditors or, for example, seek to limit the statutory premise that the nominee’s fees are agreed, in the first instance, by the debtor.  This advice should also consider whether a defect in one modification can be isolated or whether it negates all modifications proposed by that creditor.

8) IPs should consider moving their own banking arrangements away from banks that refuse to treat debtors fairly.  There is a large quantity of money deposited at banks across the profession and moving accounts to banks with a more ethical position would appear an appropriate response. IPs could also encourage their contacts in the accountancy and legal professions to adopt a similar policy to show solidarity.

No single measure is likely to have an impact on the financial institutions, but a concerted effort across the profession to withdraw the co-operation that financial institutions have come to expect and challenge their methods would have a cumulative impact that might encourage them to return to a negotiated settlement.

Lobbying

When we refer loosely to ‘the regulators’ in this section, we include not only the recognised professional bodies and the Insolvency Service, but also those with significant influence on the regulation of the profession, like R3 and the IPC, and those who would like to have a more prominent role, like the DRF. 

The regulators have spent considerable time trying to placate the financial institutions and produce information to assist them and show how IPs are regulated.  This is only appropriate when there is a benefit to you as their fee-paying members.  By their recent actions those creditors have now made it clear that the current difficulties have nothing to do with any actual or perceived lack of trust.  Their sole interest is in reducing IVA numbers by driving down IPs’ fees and rejecting perfectly viable arrangements to limit the damage caused by their own reckless lending policies.

It is possible that this article and some of the more lurid but no less valid documents produced by others over the last few days may encourage the creditors to reconsider their position.  However, if it does not, we consider that IPs should lobby their regulatory bodies and trade associations on some or all of the following:

1) SIP 3 imposes extra-statutory requirements that simply cannot be adhered to within the fee levels proposed by the creditors.  Accordingly, while action is being taken to change the creditors’ position, as a temporary measure, the regulators should be encouraged to suspend the operation of SIP 3.  Individual regulators have, in the past, shown themselves willing to disapply SIPs when appropriate and we consider that suspending SIP 3 would send a clear message of support to IPs.  IPs will still maintain their standards as far as the new fee structure allows, but will be able to cut back on elements of the disclosure and investigation that the SIP requires.

2) As stated above, we think that IPs should ask their regulators to withdraw co-operation from the IS/BBA proposals.  For those of you regulated by the Insolvency Service, this includes asking the Service to abandon the process.

3) We think that IPs should ask regulators to use their significant press and political presence to publicise the stance of the financial institutions and the unfair impact that this has on thousands of individuals, just as they have recently done with other creditor groups who are not seen as supporting the rescue culture.  Banks have already come under fire this year over overdraft fees, mortgage penalties and failing to apply interest rate changes to savings accounts, but despite that they have still recently indicated that their profits will exceed £42bn for the year, dwarfing their potential exposure from a reasonable approach to IVAs.  We think that their current policy of abusing their powerful position to attack IPs and treat swathes of their customers unfairly requires a much stronger response from the regulators.  We would suggest that all of the main regulators should use their power and influence to have the regulation of the banking industry examined, replacing the voluntary Banking Code and ‘gentleman’s club’ approach of the BBA with some formal statutory requirements and punitive decisions from the FSA.

4) On the subject of the Banking Code, we are aware that although compliance with it is not compulsory, once a financial institution has signed up to it, complaints can be brought through the Banking Code Standards Board (“BCSB”). The BCSB may decide to investigate the banks which you complain about, especially if more than one IP or consumer complains.  If the banks are being anti-competitive and treating customers unfairly it would be a serious breach of the Code.  At the same time, you should copy in the Code Compliance Officer of each bank to increase the pressure on the bank.

5) We think that IPs and regulators alike should lobby the Insolvency Service to introduce urgent legislation to protect IVAs. This should include a reduction in the current approval threshold from over 75% to a simple majority, removal of the right to modify arrangements and provision for the IP or the debtor to appeal to court where a creditor appears to have voted unfairly.  We note that the recent SIVA consultation made much of the creditor’s right to vote.  This ‘right’ should only exist where the creditor is prepared to exercise that right responsibly and we suggest that a reduction in creditor power is now necessary.

Advice and the future of IVAs

If none of the above measures work, hurdle rates are held to be fair and low-fee high-contribution IVAs become the norm, we consider that the profession is likely to be unable to sustain the remaining IVAs without significant change.

We expect many smaller IPs to simply drop out of the IVA market because they will not be able to operate within the new fee structure.  We expect many of the newer arrivals into the profession from the debt management and secured lending industries to leave the insolvency sector again.  By processing their clients into other solutions without the requirements of SIP 3 they may be able to produce a profitable outcome, although not necessarily the one that they would like to have been able to recommend and almost certainly not the one that would be most appropriate for the debtor.

The few larger outfits that can sustain the cashflow implications of the new fee structure and are prepared to limit access to an IVA purely on the basis of an artificial hurdle rate may manage to continue.  However, that remaining sector will become increasingly beholden to the financial institutions, such that when they reduce fees and increase the hurdle rates next year, they will be unable to do anything but accept.  In other words, this is the thin end of the wedge as far as the power of the financial institutions is concerned, and unless they can be stopped now, they will impose increasingly stricter conditions, which almost exactly mirrors what happened in the USA a few years ago.  

We therefore consider that IPs who currently offer an IVA service may have to adopt a new business model:

1) If debtors cannot afford the monthly payments that make an IVA viable and the alternative debt management plan would take too long and provide insufficient security, IPs should consider setting up ‘bankruptcy factories’.  This would enable you to continue to identify cases where the debtor is suitable for debt management or other solutions but would also target cases for bankruptcy where you could subsequently seek appointment as trustee, using the information collected earlier to identify creditors and obtain enough support.  This would have to be carefully structured to overcome the Insolvency Service’s current objection to appointing insolvency practitioners in ‘small asset cases’.

2) Given the continual attacks on IVAs over the last two years, it is much easier to justify bankruptcy as ‘best advice’, or as we prefer it, ‘the most appropriate solution’.

3) The pre-appointment set-up and acquisition costs of bankruptcy are negligible compared to IVAs.

4) The fee structure in bankruptcy is much less likely to be influenced by a single creditor, as voting is on a simple majority and if the creditors will not vote for fees on a time cost basis there is the fall-back position of the statutory scale.

5) This would vastly increase the number of bankruptcies, overstretching the Insolvency Service’s resources and forcing them to pass work out to insolvency practitioners again to avoid being criticised for failing to process enough disqualification and BRO cases.

6) The life cycle of a bankruptcy is likely to be much shorter that the 5+ years needed for an IVA and recoveries may come in much quicker.

There is a significant downside to this proposal, in that it risks creating a culture where people do not feel duty bound to repay their debts.  We believe that the rise in IVAs that the financial institutions objected to so strongly actually prevented a much bigger reaction to the relaxing of the bankruptcy regime.  If debtors had not been actively steered away from bankruptcy and encouraged to enter IVAs, we believe bankruptcy numbers would be approximately three times their current level.  One factor in this is that people who have ‘got away with it’ tell their friends that bankruptcy is not too bad.  They show how they have some free disposable income even under an income payment order.  They can demonstrate being ‘Free From Debt’ after just 1 year, often less.  As the word gets around that bankruptcy is not such a bad option, employers’ attitudes to bankruptcy will also change and the perceived stigma of bankruptcy will finally be overcome.

This in turn would cripple the value of financial institutions’ distressed debt and make much of its higher grade debt worth far less than it is now.  This would force banks to change their approach to unsecured lending, potentially stifling growth and crippling the national economy.

An alternative to the above could be to get the debtor to agree to, and to pay your nominee’s fee in full prior to the meeting of creditors.  There are various issues associated with this: you would need to make full disclosure to the creditors; there is a risk that they may react by capping your supervisor’s fees by a commensurate amount; you would have to develop a policy to deal with what happens if the proposal is rejected at the meeting of creditors, and for this to be clearly disclosed to the debtor. 

Such an approach could be open to criticism by regulators because it will usually result in a longer lead time between first contact by the debtor and the holding of the meeting of creditors to enable the debtor to make sufficient contributions to pay the nominee’s fees.  We are aware that this has been treated as unreasonable delay in at least one complaint.  The time lag will also increase the risk of creditor action and leave the debtor having to deal with chasing creditors for a longer period, something which should be drawn to their attention.

Conclusion

This is no longer just an issue of a few financial institutions trying to protect profit margins by avoiding write-offs and shaving a couple of percent off an IP’s fees.  Their current stance and approach needs immediate and concerted action from all those involved in the insolvency profession to ensure that debtors are given a viable alternative to bankruptcy. 

Without such action, we expect bankruptcy to become the common solution to financial difficulty, with consequential results for the UK economy.

Finally, in view of the significance for the economy as a whole and the unfairness to individual debtors, we would encourage all IPs and any debtors who feel that they have been treated unfairly to write to their local MP and encourage them to ask questions about the banks’ attitude and regulation in the House of Commons.

Note: More information about Bill Burch, the author of this article.