Dear Steve,

Were you aware that Northern Rock now has a standard modification which says "No fees to be drawn until a full provision is collected to cover bankruptcy costs"

Not that Northern Rock likes Individual Voluntary Arrangements (IVA) - but dare to default on the arrangement and the result is pretty obvious where they are a creditor!!!

The sub-prime brokers have been decimated by the Northern Rock crisis - it now very difficult to consolidate debts and secure them against a home. As a result more people are turning to IVAs and the volume will begin to rise. Does this mean we should expect TIX2?

Interested to hear your views.

Anonymous


Dear Anonymous,

Thank you for contacting me.

I think your observations and questions are very important. It brings up a greater issue about the ethical treatment of customers and consumers in banking and I just created a blog to discuss those very issues. Visit The Ethical Banker and join in the conversations and share your observations and points of view about the relationship today of banking and ethics in the same business.

The Northern Rock situation you describe might make good profit making policy, or not, at Northern Rock, but here is where I struggle with it.

We already know that Northern Rock is providing huge hurdles or blanket denial of access to customers that want to repay their debts through an IVA with the help of a licensed and regulated Insolvency Practitioner (IP). The IP puts forward a repayment proposal showing how the debtor, with modifications, can repay the debt and Northern Rock would be better off than if the debtor went bankrupt.

So the interesting ethical situation I see in this situation is that you have a debtor that has reached out in an attempt to repay what they can reasonably afford to rather than go bankrupt, Northern Rock has felt they would accept the IVA proposal but if for some unexpected reason the IVA client were to default on the plan in the future, Northern Rock, with this modification, appears to intend to bankrupt the customer with the reserved funds.

On face value that position does not make logical business sense but appears to be almost solely punishment for failing, and these situations are most often due to circumstances beyond the consumers control. 

The logical approach would be that if a debtor were to fail an IVA that Northern Rock would take a second look at the situation and see what funds could be reasonable and fairly repaid under the new situation before rushing to use reserved funds for bankruptcy. I’m sure that their argument would be that they would not rush to use reserved funds to bankrupt the customer, so why reserve them in the first place?

The other issue here is that because of this Northern Rock requirement the Insolvency Practitioner gets paid latter rather than sooner and the IP is the helping professional that is putting together the solution that is allowing Northern Rock to be repaid. Why punish the IP? If reserved funds were beneficial for some logical reason, which they are not, do it over time and not up-front.

The unspoken message in this policy appears to be that Insolvency Practitioners are not important, that Northern Rock will bankrupt you if you fail to make your IVA payments, and that the consumer matters little to Northern Rock when they fall on hard times and are seeking to resolve their debts in a fair, reasonable and sustainable way through a binding debt repayment program.

Thanks for the question.

Steve