The IVA Debate – A long year on

2008 and beyond – our view of the current and future issues

IP Independence

Despite our wish to remain impartial, our area of expertise is insolvency compliance and it is natural therefore that we start by looking at the main threat that has arisen to this area in the past year.  Although in part applicable to other agents who act on behalf of financial institutions, the main threat to IP independence that has arisen since we released our original article is The Insolvency Exchange (TIX). 

When we first met TIX before issuing our standard proposals and before they had formally entered the IVA market and unveiled their first creditor client, their initial proposals appeared positive.  They indicated that they intended to use management information to analyse each debtor’s most appropriate solution from the creditor’s perspective.  We initially welcomed this approach, considering that a small reduction in approvals for some marginal arrangements would be balanced by an increased voting capacity in the industry at a time when the traditional agents were struggling to cope with the numbers of approvals being sought from them by IPs

We had our concerns, given that we were aware that there was a connection between TIX and Clearstart, an IVA provider, but we considered that since Clearstart had at least one IP with regulatory experience, their integrity would ensure that the necessary Chinese walls were in place to prevent TIX from taking advantage of its position and ensure that it voted ethically in both connected and unconnected arrangements.  We did propose that the protocol protect arrangements from any undue influence by all agents who were connected to IVA providers, but we felt at the time that the existing regulatory structure would prevent abuse. 

Subsequent events have led us to have increased concerns about TIX and the way that it operates.  It soon became apparent that TIX would vote ‘No’ to viable arrangements that did not meet the artificial hurdle rates imposed, which just increased the headline reduction in its clients’ debtor book impairment.  Secondly, by driving down nominee’s fees and restricting supervisor’s remuneration TIX could compensate its clients for the fees they were paying TIX to vote on arrangements.  TIX vastly increased the number of modifications proposed for each arrangement, often repeating terms that were already in the proposals, and initially applied outdated income and expenditure parameters that forced debtors into unsustainable arrangements with unduly onerous repayment schedules.  TIX attempted to hijack the BBA/IS forum proposals by producing the ‘TIX Compliant’ IVA.  Then the group that TIX belongs to ‘sold’ Clearstart to Debt Free Direct (now renamed Fairpoint) in exchange for equity, so that connected parties of one of the more significant creditor agents now have a significant stake in the country’s largest IVA provider. Finally, TIX introduced a quasi-regulatory ‘accreditation’ scheme that poses significant risks to the profession as a whole – and they expect IPs to pay to be accredited!

Rather than repeat what is already in the public domain, we direct anyone interested in the link between TIX and Debt Free Direct/Fairpoint to an article produced in his own inimitable fashion by Steve Rhode of Myvesta
 
We continue to be amazed at how easily IPs have caved in to TIX pressure.  We were the first to admit that IPs needed to reform their fee structure to reflect creditor concerns and ally their interests more closely to returns to creditors under each arrangement.  We cannot understand, however, why the regulators are happy to allow an unregulated agent to effectively bully highly regulated IPs. 

Indeed, the recent accreditation scheme has met with almost total silence from everyone except R3.  We cannot understand why an IP would open his practice, including confidential documentation such as correspondence with his regulatory body, and commercially sensitive information such as “company financials” to a firm that appears to be hostile to IPs’ interests and is connected to their biggest competitor in the provision of IVAs.  What is even more incredulous is that IPs should then be expected to pay for TIX accreditation and their appointed audit agents who go on to state “Further detailed work may be required where issues arise out of this Proposed Work Programme. Such work will be subject to separate scoping and fees”.  Added to which, at present the regulators seem to be prepared to stand by and watch someone effectively act in a regulatory capacity without authority from the Secretary of State, without signing up to the Principles of Monitoring and with a clear conflict of interest because of its commercial connection to the largest organisation that it has already granted “accreditation ready” status to.  We also have significant concerns about the silent issue in TIX’s scheme, namely what is to happen to those who refuse to pay them for accreditation and are therefore left outside their list of approved suppliers.

In addition to TIX, other agents and creditors have also taken on a regulatory role to a lesser extent, whether by demanding increased evidence on selected arrangements to conduct desktop ‘audits’ of their appropriateness or by conducting site visits to test an IP’s systems and procedures.

We consider that the time has come for the Secretary of State and the other regulators to take formal action to police TIX and the other creditor agents, especially those who have connections to IVA providers.  It may be possible for the necessary provisions to be built into the forthcoming protocol, as we originally suggested when we designed the first version over a year ago.  At that time, we proposed that creditors should undertake to:  “Give voting instructions and, where voting through a managing agent, ensure that they give voting instructions that will not directly or indirectly benefit any associated company” and “Ensure that where any managing agent is directly or indirectly connected to an IP, it is not used to vote on any arrangement or bankruptcy directly or indirectly connected to that IP.”

As well as reinstating these proposals in the current protocol, we consider that the regulators should consider protective measures to control how creditors or their agents audit IPs.  These should specifically prevent any creditor or their agent from being able to require access to an IP’s premises to conduct an audit without the IP’s consent.  They should restrict any action that may be taken by creditors or their agents against any IP who refuses to co-operate with such an audit and they should specify the information that a regulator considers confidential between the IP and his client or regulator and which may not, therefore, be disclosed in any such audit.  The principle should be to ensure that the integrity of regulatory monitoring and inspection is respected and that IPs are independent and accountable only to their authorised regulator.

We think that the banking and insolvency regulators should specifically outlaw any purported accreditation under any compulsory or quasi-compulsory ‘kitemark’ or ‘accreditation’ scheme (i.e. where there are real or implied penalties for not complying) unless it has been formally approved by the Joint Insolvency Committee as the representative body of all insolvency regulators.  In the longer term, we would expect the wider operations of those acting on behalf of creditors to be brought under a formal regulatory regime to ensure that they comply with the sort of transparency and ethical standards that IPs and others in the sector have to comply with.

For the more cynical amongst our readers, we wish to make it clear that Compliance On Call has no interest in approving any industry ‘kitemark’.  Our job is to help IPs meet the requirements set down by their regulators.  We think that the industry needs less, not more, regulation and if such a kitemark is to come in, we would prefer to help our clients develop systems to meet the scheme parameters rather than audit and grant any such approval. Ironically, if TIX and others are brought into the regulated sector, we may have to declare an interest, as we would be uniquely positioned to help them reach the standards expected by their new regulator!

IP independence 2 – the ‘F’ word

Much play has been made in the last year on IP’s fees.  Although it may pain some of our clients to admit it, there was a degree of logic in creditor calls for a more transparent and reasonable fee structure.  Many IPs had relied on their traditional right to be paid for work done to ‘hide’ fees that related to the acquisition of cases rather than the work done on them.  In addition, many IPs had become adept at embedding additional fees and disbursements that inflated the basic fee for a case to unreasonable proportions and in some cases allowed them to ‘mop up’ any remaining assets when an arrangement failed.  Creditor pressure, together with changes in the ways that IPs advertise for clients and acquire cases, has led to a significant reduction in nominee’s fees and the imposition of caps on supervisors’ fees.  Although those involved in the creditor and IP sides of the industry avoid setting out figures of what is acceptable and use competition law as their excuse for doing so, it appears from our perspective that creditors find a nominee’s fee of around £1,600 to £2,000 acceptable and are happy to see IPs receive up to 30% of realisations as fees, as long as it is paid alongside dividends.

This would not appear too unreasonable, but for the current emphasis on pre-appointment investigation and advice and the way that the nominee’s fee cap is currently expressed in terms of the number of payments into an arrangement.  The combination of these two factors means that in order to recover the increased cost on the front-end work, an IP must achieve the nominee’s fee within 4 or 5 monthly payments, which has the undesired result of setting an artificial minimum payment of £400 a month. 

Many providers have since amended their acceptance criteria to meet this economic necessity and we have seen cases where IPs have reduced their fees to uneconomic levels to allow debtors access to an arrangement.  In some cases, the restrictions have led to firms managing to get so few cases accepted that they have left the sector.  It also appears that others have been ‘forced’ to encourage debtors to enter arrangements that the IP feels uncomfortable with because they know that it is the only way to get an arrangement accepted.

This clearly impacts on an IP’s independence.  The IP has a statutory duty to balance the interests of debtors and creditors when giving his opinion on an arrangement.  If he is only free to give that opinion if the debtor is making a certain level of monthly payment, this fetters his judgement.  In addition, if an IP recommends an arrangement that he thinks is ‘fit, feasible and fair’ but subsequently sees it modified to such an extent that he no longer thinks it appropriate, there is no cost-effective mechanism for the modification to be challenged.  Indeed, we are already starting to see instances of IPs being penalised for not having enough evidence that a debtor has had any such modifications explained and been given time to consider his options.  Furthermore, there are many thousands of debtors who are unable to access the debt relief that statute offers them because IPs are unable to recover the costs of proposing the arrangement in the context of an arrangement that they consider the debtor can afford. 

We consider that one solution to this is for the creditors and IP representatives to agree a fee structure that provides access to the IVA process for all debtors if it is their most appropriate solution.  Without entering into any form of anti-competitive price-fixing, it should be possible to agree that the nominee receives a minimum fee to cover the work that is required by statute and common law.  That fee would override the current limit imposed by the restriction on the number of payments that can be taken as a nominee’s fee.  This minimum fee should be available in priority to other costs, whilst the aggregate of all fees and charges could still be limited to a set percentage of realisations to ensure that the balance is redressed later in the case. 

As a more radical and longer term solution, we make a recommendation below about adapting the proposed Simple IVA (SIVA) to reflect some of the features of Scottish Trust Deeds, giving debtors a financial solution that falls short of bankruptcy but reduces the need for up-front work and therefore allows nominee’s fees to be reduced.  Creditors’ rights to an optimum repayment would be protected by a statutory appeal system and supporting regulatory penalty scheme.

SIVAs and an adapted Trust Deed system

The original idea for SIVAs was a good one and we only suggested an alternative standard last year when it seemed that the idea had been abandoned.  SIVAs appeared to re-enter the frame when the BBA and IS took forward the forum and protocol ideas last year and it appeared possible that some of the elements agreed in the protocol might be incorporated in a revised SIVA.  Details of the proposed SIVA and the projected timescale again appear to have been fudged and it appears unlikely that anything will come to fruition until at least October 2008, by which time the revised protocol may have made its introduction unnecessary.

We consider that given the limited access to IVAs that the creditors are allowing at present, there is the need to produce an alternative to bankruptcy that debtors can access with ease and certainty, but which ensures that creditors’ interests are protected.  We recommend that the current SIVA proposals are abandoned and replaced by a new personal insolvency solution.  We think that the debtor should be able to enter the new procedure administratively, without the need for court or creditor approval.  By making a detailed declaration of their assets and liabilities, similar to a debtors’ petition in bankruptcy, they would be granted a one month moratorium, using a similar ‘notice of intention to appoint’ to that used in the current corporate administration regime.  At this time, an IP would be appointed nominee and would produce proposals in a much-shortened form, based on the principles used in Scottish Trust deeds. 

The debtor would immediately be bound and start making payments assessed by the IP as reasonable.  These would be based on existing standards, such as the BBA trigger figures, but the IP would be entitled to use his professional discretion to allow what he thinks the court would consider reasonable. This would enable the IP to include any regular, but not necessarily guaranteed, overtime and ensure that only annual reviews of the payment level would become necessary, while making allowance for costs relating to domestic circumstances, such as children’s schooling, that the courts have seen fit to allow even in bankruptcy.  Once the IP has produced the new proposals, they would be sent to creditors and filed at court and, crucially, be deemed approved within 28 days unless appealed. 

All of the debtor’s assets would vest in the supervisor, only re-vesting in the debtor if he fully complied with the arrangement in the specified term.  Any failure to comply with the arrangement beyond reasonable statutory discretion (say three months’ arrears with up to two months to rectify), would result in a ‘notice only’ entry into bankruptcy, with the supervisor as trustee.

Importantly for the creditors, there would be two key protective provisions.  Firstly, with no up-front duties and investigation, the IP would only be permitted fees on the basis of a percentage of realisations and distributions, based on a statutory scale similar to the current scale used in bankruptcies.  Secondly, any successful appeal against an IP’s assessment of a debtor’s circumstances would be referred, by the court, direct to the IP’s regulatory body as a complaint.  The regulatory body would be obliged to investigate any such complaint as a challenge to the IP’s fitness and propriety, potentially resulting in licence removal if he is found to have acted recklessly or negligently.  In the absence of any evidence of impropriety, it would still allow the regulator to order a compensatory payment into the arrangement so that the IP makes good any loss suffered by the creditors without committing the debtor to an arrangement that he had not agreed.

Realistically, we recognise that this would require primary legislation and probably all that we can hope for is that in the longer term something similar is made possible by amending the proposed protocol, which is a living document with a standing committee and so more flexible than any statutory scheme.

Why this is important – 2008 without rose coloured glasses

We’ve seen a variety of commentators giving their views on what could happen in 2008.  It seems to be generally accepted that house prices may well fall by 10% and some have even suggested that prices are overvalued by as much as 30%.  Although much of the comment on the credit crunch has centred on the situation in America, we believe that the creditors’ actions over the past year have artificially suppressed personal insolvency statistics in the UK and that many debtors who cannot afford to repay their debts have entered long-term debt management plans purely as a holding mechanism. We expect many of these to have to enter a formal insolvency procedure in 2008 and the coming years, and by deferring the decision they are merely ensuring that any assets available at that time are worth less and making bankruptcy more likely, especially if access is made easier by new proposals to allow Official Receivers to grant bankruptcy administratively without the need for a court application.

Many commentators suggest that IVAs could exceed 100,000 in 2008 and assuming that bankruptcies retain their proportion of the personal insolvency ‘pot’ this suggests that over 200,000 people could enter personal insolvency in 2008.  This may be realistic, but we can see a situation that is far worse.  If house prices take a significant fall and the economy enters a full-blown recession, we could see the sort of catastrophic increase in personal insolvency that the economy faced in the early nineties.  At that time, bankruptcies rose from an annual total of around 8,000 in 1989 to a peak of over 32,000 at the height of the 1992 equity crisis.  If a similar increase is seen over the next three years with the proportions of bankruptcies and IVAs remaining constant, personal insolvencies could exceed 500,000 by 2010.  Although the numbers would be expected to fall back after the peak, if they follow the trend of the last fifteen years they would then recover and exceed even that peak, making 1,000,000 insolvencies in one year likely by the end of the next decade.

If we are going to face these conditions in the near future, we consider that the insolvency profession and financial sector must prepare to manage the situation now.  Financial institutions must put past suspicions behind them and work with the IS and regulators to ensure that the regulatory framework in which IPs operate is robust enough for them to be able to rely on it.  IPs and their regulators should prepare a framework that ensures that large numbers of insolvencies can be dealt with efficiently, adequately remunerating skilled office holders while also guaranteeing fair returns to creditors and robust action against any IP that lets commercial considerations override his statutory duty.

At the same time, we consider that the government and the regulators in the financial sector need to address the weakness in financial sector reporting that allows institutions to blithely ignore the evident impairment in the value of their debt book just because the debtor has not yet entered a formal insolvency procedure.  We consider that this is a contributory factor in the current credit crunch, as banks refuse to lend to each other because they do not trust the underlying value of their assets.  Although this will require some harmful devaluation of financial institutions’ capital base and may need revised adequacy levels and interim measures to allow institutions to repair their underlying asset values without preventing investment, we think that it is impossible to expect banks to deal fairly with their distressed customers under the present reporting structure.

Finally, on the subject of treating customers fairly, the financial sector has to stop hiding behind the strict interpretation of the banking code and saying that they don’t have to deal with unsecured debtors in the same way that they have to with secured debt.  We call on the OFT and the BBA to expand the Treating Customer Fairly Charter and the Banking Code to apply equal treatment to unsecured lending and ensure that every debtor, whatever their past errors in judgement, is given a reasonable opportunity to recover. 

Conclusion

Our recommendations are:

Insolvency regulators should prepare and publish plans as to how they will deal with the potential insolvency of an IP or a firm run by IPs, and the criteria they will apply when deciding upon the approach to take in a particular case.

The government and the insolvency regulators should:

  • recognise that the current level of investigation and evidence in IVAs is unsustainable at the present fee levels.  They should either take action to ensure that IPs are paid for the work that they do, or reduce the amount of work required by SIP 3 to a level that can realistically be achieved at the current levels of nominee’s fees.
  • take action to prevent creditor agents from harming the integrity and independence of IPs as statutory office holders. 
  • regulate the involvement of creditor agents, particularly where those agents have a commercial connection with an IP or firm offering insolvency solutions and debt advice. 
  • consider the competitive impact of any accreditation scheme that treats IPs that refuse to participate in a non-statutory scheme differently.
  • consider whether it is appropriate for those acting for creditors to have any interest in those providing debt advice and insolvency solutions to debtors.

The government should take steps to ensure that IPs are free to take an independent view of the appropriateness of any insolvency solution, without being dependent on approval of his fees for the pre-appointment work by any one party to the arrangement.

If they are unable to restore the balance in the provision of IVAs the government should introduce legislation to give those excluded by the current creditor voting patterns an alternative to bankruptcy by adapting the proposed SIVA to deem approval of arrangements in a similar model to that used in Scottish Trust Deeds.

The insolvency and financial regulators should plan for insolvencies potentially peaking at 500,000 a year by the end of 2010 and possibly rising to 1,000,000 a year by 2020. They need to enable all insolvencies to be processed quickly, efficiently and without modification and they need to bring unsecured lending within the remit of the Banking Code and the Treating Customers Fairly Charter.

Background

Compliance On Call was set up by a couple of former insolvency regulators to help insolvency practitioners identify their weaknesses and fix them before they attracted unhealthy attention from the regulatory bodies.  We visit a wide variety of firms and so have a fairly comprehensive view of the insolvency profession.  We see both general practices and those dealing with Individual Voluntary Arrangements (“IVA”) in particular: from the much maligned but impressively systemised ‘factories’ that deal with such arrangements in bulk; to smaller practices who operate specialist IVA processing units and even down to those where IVAs are a rare opportunity to provide a desperate debtor with an alternative to bankruptcy.

In October 2006, we produced a paper about the IVA debate.  After some dramatic changes in the administration and regulation of IVAs over the past 14 months, this appears to be a good time to re-visit that article and consider some of the changes it influenced.  In addition, we look forward to the next year and try to recommend areas that we think should receive attention from those who have a stake in the IVA process.

Although we have, in the past year, often been obliged to support insolvency practitioners in their attacks on some of the more unreasonable behaviour exhibited by certain financial institutions, we have tried to return to our independent and even-handed approach for this paper.  Where we feel that insolvency practitioners are being unreasonable, we will say so, but we also take a hostile stance where we consider that the basic tenets of insolvency regulation are being undermined by actions of creditors or their agents.  We have also tried to consider the needs of a growing, but largely ignored stakeholder, the debtor, with some interesting results.

This paper starts by looking at last year’s recommendations and how subsequent events reflect on them, before considering some of the current developments and looking forward to the joint Insolvency Service (IS)/British Bankers Association (BBA) proposals (“The Protocol”).

A review of the main issues in the 2006 paper

The regulatory approach to volume IVA providers

Last year we recommended that the regulators should take steps to agree a unified approach to the regulation of volume IVA providers, clearly communicate the new approach to their members and consider the use of corporate licensing.  Shortly after our paper was issued, suggesting that we were not the only people to have spotted the need, the ICAEW presented a paper to a meeting of monitors (regular meetings between the monitors working for the insolvency regulators chaired by the IS) on the regulation of IVA specialists.  As a result, the majority of the regulators adopted a more systems-based approach to IVA specialists, using an enhanced desktop monitoring process to identify those dealing in volume provision of IVAs and those who specialised in IVAs even if not yet providing them in bulk.  IPs were then targeted for an initial annual visit that concentrated on their systems and procedures, rather than the ‘cradle to grave’ case reviews traditionally undertaken.  Some regulators were better than others at communicating the new approach, but on the whole the changes have been successful and the regulators have considered the impact of the increased regime in the light of pressures to reduce costs and are prepared to be flexible when deciding how frequently to visit practices.   It has not, to date, been possible to introduce corporate licenses, although the IPA and R3 appear to be keen to see the idea pursued.  The difficulty is that any such move would require primary legislation and the government has many other priorities in its statutory timetable.

Whilst we welcome the steps taken so far by the regulators, we have significant concerns about two further areas of regulatory risk.  One, the independence of IPs, is so significant that we have produced a dedicated section for it below.  The other relates to the approach to IPs who find themselves managing or owning an insolvent business.  Traditionally, and quite appropriately, if an IP became insolvent, or if his practice entered insolvency procedure, his licence was generally removed.  In the past year we have seen IVA firms that have been dragged into an insolvency procedure because of problems in their parent company.  In both cases, the financial failure related to the non-IVA part of the business and the IP was not considered to be at fault, such that license withdrawal action was not taken against the IPs by their regulators.

We anticipate, however, that during 2008 it is likely that at least one IVA specialist’s business model will be unable to support the new cost and revenue structure that is being forced on the profession.  This could then result in the failure of an IVA specialist.  This poses an obvious reputational risk for the profession and an understandable knee jerk reaction would be to remove the IPs license as might have happened in the failure of a traditional insolvency practice.  The regulators are already aware of this risk and have identified potential ‘disaster recovery’ firms should the need arise.  We would like them to go further and both consider and then publicise their approach to the IPs who are in charge of a struggling business. .

Despite the reputational risk of allowing an IP with a business failure to continue to take appointments, we think that this may be an appropriate response if the IP’s only mistake was to set up a business model that was unsustainable given the sea-change in creditor attitudes, changes in permissible advertising, increases in front-end advice and investigation, and reduction in fees experienced in the last 9 months in particular.

It would be helpful for the regulators to agree and publish guidelines for IPs on the management of such a situation.  This should include the disclosure that they require IPs to make to them when a business starts to have difficulties and the sort of action that they will expect an IP to take to show that he has acted responsibly and appropriately to minimise the loss to creditors and employees in particular.  Whilst this is an IP’s speciality, it is always harder to identify issues that affect yourself than to do so when looking at a business from an objective outsider’s perspective.  It might also help for the regulators to consider a range of actions modelled on the existing statutory and case law provisions for director disqualification.  It would therefore be possible for more serious and damaging insolvencies where the IP was culpable to result in permanent license removal, with less significant failures attracting limited removal or license restriction, possibly coupled to restrictions on ownership and control of any new practice.  It should even be possible to set down ‘sentencing guidance’ that would allow, in cases where the IP was not considered to be at fault and where the interests of all stakeholders had been protected as far as reasonably possible, the regulators to permit an IP to retain his license without restriction.

The approval of IVAs and use of proxies from financial institutions

This was the ‘hot topic’ at the time that we issued our first article and it attracts similar prominence now, although for very different reasons.  At that time the agents voting for creditors, who were mainly unpaid service departments of large accountancy firms, were struggling to deal with the sheer quantity of proposals that they were being asked to approve.  We suggested three possible solutions.  First, that the financial institutions should trust IPs more and rely on their opinion, as expressed in their nominee’s report, that an arrangement was appropriate.  Secondly, that IPs and creditors could get together to agree a standard wording for IVAs that would reduce the need for agents to read each set of proposals that was submitted. Finally, we suggested that the IS should look to allow proposals to be deemed approved unless objected to by a set percentage of creditors.

We had underestimated the distrust of IPs exhibited by the major financial institutions and failed to anticipate the panic-stricken reaction that they would show to avoid the massive write-downs that a burgeoning IVA market threatened.  Simply asking creditors to rely on highly regulated IPs was never an option.  They claim to have been worried about the cost of IVAs and specifically the amount paid to IPs to act as nominee and supervisor, but it appears that the real concern was the sheer number of arrangements, and the fact that debtors who had not even featured on their radar as risky were suddenly looking to enter into a formal insolvency procedure.  Their response to this, which belied their stated objective, was to pay a third party to say ‘no’ to more proposals than ever.  They recovered the extra money paid to the third party by putting pressure on the fees payable in each arrangement, thereby making it uneconomic for the sort of volume processing that many IPs had set up to provide. The end result has been to undermine what little trust there was, with most IPs now convinced that the BBA is little more than an ineffectual puppet of the larger financial institutions.

Our second suggestion met far less resistance.  After discussions with the BBA we produced the Compliance On Call standard IVA which was the starting point of the soon-to-be-unveiled IVA standard and protocol. To be honest, we were disappointed that the original idea was taken forward in a more complex form with increased detail and a much greater emphasis on investigative work pre-appointment.  However, it would have been too much to expect everyone to agree with our ‘simple is good’ philosophy and we recognise that many conflicting interests have done a spectacular job to get as far as they have.  In writing this article before the final version is rolled out we risk being overtaken by subsequent events, but there are matters discussed in this paper that have a direct bearing on the acceptance of the new standard and protocol by IPs and creditors alike.  We felt that with only a few days before the new proposals are unveiled at the IVA Forum in late January and its scheduled implementation date in early February we could not wait and release our comments after the event.

Our comments on the new proposals and protocol are developed below, together with some expanded views on deemed approval of arrangements.  The latter explores the use of an adapted Simplified IVA (SIVA) modelled on Scottish Trust Deeds to guarantee a reasonable binding solution for those who want to make payments but cannot obtain a satisfactory solution under the present creditor-driven process.

What is an ‘acceptable level’ of debt forgiveness?

The warning that ended our original article bears repeating here: “Without such a framework the market will fragment and many deserving individuals will lose the opportunity for a fresh start, contrary to public policy and against the best interests of creditors and debtors alike.”

How true that turned out to be!  Our prediction that creditors would expect to see more than the 25p in the pound return that had previously been acceptable in IVAs was very true, as was our suggestion that some creditors would ignore any attempt to negotiate a fair solution and insist on imposing arbitrary and unfair ‘hurdles’ for acceptance of IVAs. The most prominent hurdle has been HSBC’s apparent 40p in the pound minimum dividend, but a startling variety of additional artificial barriers have been put in the way of what had previously been considered to be viable and appropriate arrangements.

This has caused much publicised difficulty in the IVA sector as a whole, with firms cutting back and in some cases leaving the market when they were unable to convert enough leads into arrangements.  One reason that the financial institutions have adopted this stance is that it appears to work in the short term.  Even though many debtors enter IVAs stating that they have no alternative except bankruptcy, it has been shown time and time again that their aversion to the stigma associated with failure is such that even if an arrangement is rejected, they will not take that final step and file for bankruptcy.  However, since by that time, the creditors have seen the debtor’s position and realise that there is nothing to be gained from presenting a creditor’s bankruptcy petition, the net result is that the financial institution is, ironically, in a better position from this than from any alternative solution.

If the debtor entered an IVA or a bankruptcy, the financial institution would have to write off the debt in its books and only write receipts back over the duration of the arrangement or bankruptcy.  Therefore, although there may be some longer term benefit from approving an IVA, the immediate impact on the institution’s balance sheet is the same as for bankruptcy.  In addition, with a significant proportion of IVAs prone to failure and any realisations devalued over time, the long term up-side of such arrangements is not as obvious to a financial institution as it may appear to a debtor or IP.  In contrast, if the debtor does nothing, the whole debt stays ‘live’ on the financial institution’s records and is not significantly impaired.  If the debtor follows the route chosen by many in the past year and enters a debt management plan (DMP) in the hope that things will improve so that they can submit alternative proposals when conditions are more favourable, the financial institutions can rely on past evidence of the return rates on DMPs, information that they do not have as yet for IVAs.  This enables them to write back a percentage of the debt immediately.  From the financial institution’s perspective, therefore, it is better to reject IVAs and take their chances that most of the debt will remain valid and free from any impairment.

For the debtor, the choice is pretty stark.  Doing nothing, which is the financial institution’s solution of choice, leaves them subject to continued harassment and stress, including door step challenges and phone calls, both at home and work, from hard nosed collection agencies.  If they propose an IVA, although a solution that purports to be certain, it only becomes binding if accepted and often requires a remortgage near the end of its term so that far from being limited to 5 years, it effectively lasts for 29 or 30 years.  We have aired our concerns about this before and given that the working parties for the standard IVA have settled on a 4th year remortgage, it may be too late to correct the balance now.

We consider that a debtor should have access to a binding solution to their difficulties, regardless of the amount of debt forgiveness it requires.  The underlying principle should be that the debtor should repay the maximum amount that they can over a set period, free from creditor pressure and with a guaranteed result at the outset.  We therefore believe that any solution should be defined at the moment of approval, with any equity available in an IVA valued at the start of the arrangement, not dependant on remortgage at a later date.  In return for approving arrangements on such a basis, creditors should be guaranteed that the IP has conducted a thorough investigation of the debtor’s circumstances and that only viable arrangements are proposed.  To police such proposals, where a creditor feels that an IP is proposing inappropriate arrangements, they should have a dedicated complaints procedure via the IP’s regulator with the regulator empowered to order a compensatory contribution from the IP towards any arrangement that the regulator agrees has been recklessly or negligently supported.

‘Best Advice’ in the IVA sector

Last year we recommended that IPs rely less on their standard disclaimer in their nominee’s report, which usually stated that they had relied on information provided by the debtor.  Instead, we suggested that a more detailed record of the investigation undertaken and evidence obtained to show that the debtor had been given appropriate advice should be provided.  Although we still see some practices that maintain the old approach and rely solely on information from the debtor, it tends to be those that only undertake a few IVAs each year.  The majority of those who deal with IVAs on a regular basis now have systems in place to record the advice given to the debtor and comply with the revised Statement of Insolvency Practice (SIP) 3 requirement to show that the debtor understands the advice given and the implications of the decision to propose an IVA.

Our original idea was for the improved evidence to be funded by improvements in efficiencies made possible by a simplified creditor voting process based on a standard protocol and a reduction in modifications proposed across the industry.  The problem with the events of the last year is that in fact there has been a significant increase in the front-end cost of each IVA which has been made an industry standard requirement through the imposition of a revised SIP before the IPs were given any method of recovering these costs.  As discussed later, the current restriction on nominee’s fees and the reduction in supervisor’s remuneration has led to IPs doing far more work for less money and there is significant evidence of detriment to debtors who are being excluded from an otherwise appropriate solution to their difficulties. 

We consider that there is only benefit in conducting detailed investigation and obtaining supporting evidence where it is needed to show that an IVA is appropriate for the debtor and where any such work is properly funded within the fee structure for the arrangement.  If creditors want to drive down IVA numbers and enforce a low-cost solution, they and the regulators have to accept that the IPs must provide a lower quality product and the government will need to provide an alternative insolvency solution for all of those who are excluded from the resultant IVA structure.