By way of background. An organisation called Tix represent a number of the major credit card companies and banks, mainly those who have been throwing money like confetti to people who cannot afford to repay.
Tix are trying to impose on Insolvency Practitioners and their clients some fairly onerous terms for what they consider to be standard IVAs, which are effectively run of the mill 5 year income only IVAs for waged employee debtors. In essence they want 100% of the debtor’s free income (calculated by their figures which do not necessarily agree with the debtor’s view) over 5 years. With annual adjustments, if necessary.
And Tix are trying to impose limits on IPs’ fees. In essence Tix are looking for IPs to supervise IVAs for little more than the monthly pay of a paperboy. They are are arguing that there are huge inefficiencies in how IPs do things which need to be squeezed out. The IPs are up in arms, arguing that Tix are looking for a Rolls Royce service for a Reliant Robin price.
IPs firms outside of the factories are acutely aware of the huge gulf that has developed between what a debtor pays across to the Official Receiver in a bankruptcy (50% of free income over three years) and the 100% over 5 years required by creditors in IVAs. Once the relative certainty and speed of bankruptcy is also factored into the IVA/bankruptcy decision, this means IVAs are not the solution for 95% of people.
IPs are also arguing that if more people take the bankruptcy rather than IVA option, in the end the banks, who are already losing billions of pounds in bad debts (which bad debts surely arose out of the banks’ poor lending policies rather than the debtors’ choise of process to deal with debts which they cannot pay), will surely lose more.
IPs believe Tix’s efforts are counter productive and that there is in reality another agenda being followed by the banks here: namely to make IVAs less attractive to the normal Jo and Joanne in the street and the IPs who are willing to supervise them, so as to force people not to address their problems, deferring the day when the banks have to write off their bad debts.
At the moment, many firms of IPs are refusing to do income only IVAs where Tix clients are the creditors: IPs simply cannot afford to run them at the price that Tix is willing to pay. This either closes off the IVA route (not always a bad thing) at least at this time until the spat is resolved, or debtors are going to the IVA factories, who at the moment are better able to supervise IVAs for something approaching the Tix rates, at least in the short term.
Put another way, debtors are being forced into a corner by a band of (arguably) over zealous creditors who are eiher following their own agenda or, so the IPs claim, possibly breaching UK Competition laws and the banking code. Real people are being hurt, and unnecessarily. But for how long will this be the case?
The unfortunate answer is, there is no end in sight: the sides are a country mile apart. IPs will not back down, they feel that their services are being undervalued. They cannot afford to back down as they have an overhead structure to support which will not enable them to ever do such low cost work. The banks have made their decisions, only a court order ruling that their actions are unlawful (which is questionable) will get them to change their minds.
At the moment, debtors have the option of going to IVA factories for their IVAs. Or to hold the creditors at bay with the £1 per month payment option, in the hope that the spat ends soon.
But the real problem for debtors will come some time down the line, when the IVA factories have taken on too many of these loss-making cases to make a profit. With it often costing an IVA factory on average £1k in advertising costs to attracting the IVA in, £60 per month for overseeing an IVA does not go very far. And the banks expect the factory to carry out annual income/expenditure reviews, circulate annual reports, and pay regular dividends, all costly work. This coupled with the huge failure rate of income based IVAs, surely must mean that the factories’ business model cannot work in the longer term based on what the Tix creditors are willing to pay?: the factories do what they do to make money, not to provide a service for the good of the community. Surely they must start making losses soon, with some going out of business (with a major impact on the debtors whose IVAs they supervise)? And this loss making / factory closure scenario ignores the potential for such factories’ peddling of IVAs to become the early 21st century equivalent of endowmment mis-selling, with the huge claims that may bring against them.
It’s difficult to see at the moment where this will all end. What is sure is that the effects will not be pleasant, particularly for debtors. And that the future of the IVA factories, which after all have not been around for long unlike the greater IP community, is far from certain.
Filed under: Bankruptcy, General insolvency topics and news, IVA, Personal insolvency
It’s not that IPs’ feel their services are undervalued. Until the explosion of consumer debt (arguably fuelled by lenders’ soft credit policies), insolvency was always a bespoke procedure. It was, after all, designed for traders.
The consumer debtor ill suits the UK’s insolvency regime. Why not take consumer debtors out of the insolvency system? They and their creditors would be better served by something designed specifically as a commoditised, low-cost process.
Is this going to happen? Unlikely. The SIVA and IP-lite are as close as we’ll get and they won’t directly address the TIX/banks issue.
So, as you say, bankruptcy will become the procedure of choice for many more debtors.
Lenders’ soft credit policies are, in my view, the main reason we are where we are. If the lenders did not offer easy money, debtors could not take it. The lenders are after all professionals dealing with the relatively inexperienced public. The major part of the blame must lie with the professional.
What I find ‘interesting’ is the fact that lenders are promoting a systemised approach to formal insolvency situatons. Yet it is such a systemised approach that led to the situation arising in the first place!
Some other low cost procedure would certainly be appropriate for consumer debtors. And it would have to be a systemised, one size fits all process, rather than the bespoke processes IPs are accustomed to carrying out.
But a professional would still have to oversee the initial starting off and later implementation of the process so that it is not abused by the debtor. And who would put themselves forward to oversee the many thousands of such processes there would be – indeed the ready availability of such a procedure could lead to many more thousands of people going down this route than are currently taking the IVA or bankruptcy route.
The government do not have the resources (nor probably the will) to carry out such work, similarly the free help agencies. The banks would naturally be unwilling to set up a new agency to try to oversee these things or help fund them unless somehow forced to do so by the government bringing in a special levy on the banks. With the government having seemingly laboured over the setting up of the Pensions Protection Fund, taking many years to put in place what seems to be a poorly working beast, I cannot see this happening, in the medium term.
Leaving the debtor’s own morals aside, the best IPs can do is to advise people with severe financial problems that, in the current climate, bankruptcy should be their ‘default route’. Other routes should only be taken if they protect either their assets or livelihood.
Only if we see another huge step change (which could be possible)in the number of bankruptcies will a workable alternative procedure be put in place: driven largely by the OR’s offices being inundated by cases. That may happen, but there is no political will to do something entirely different, which would in itself deflect some valuable resources from the DTI.
In the meantime many thousands of people will every year be wasting time, money and effort going down the wrong (IVA) route.
I should certainly like to see consumer debtors have a far better understanding of their options, rather than at the moment being prey to unscrupulous IVA salesmen. I see one of our main tasks as IPs to help eliminate consumer debtors’ ignorance.
1 October 2007: Debtmatters, an AIM listed IVA factory with thousands of IVAs under their control, have announced that they are suspending advertising, resultig in a three quarters fall in value in their shares in just one day!
In other words, they have recognised that IVAs do not work for them financially under the new TIX fee guides. Surely other factories will follow suit as they recognise that their business model cannot work, and in doing so reduce the number of people attracted into IVAs, forcing more into bankruptcy, and causing the banks to suffer even bigger write offs?