Individual voluntary arrangements — why the latest data shows the market needs to change
By Peter Tutton, Head of Policy, Research and Public Affairs
New statistics just out from the Insolvency Service showing the termination rates for individual voluntary arrangements (IVAs) give another warning that the IVA market is not delivering the right outcomes for people seeking help with their debts.
The stats show a steady trend of rising termination rates over the past few years that continued in 2019 — putting year-one termination rates at their highest levels since 2002. Most worrying is the growing proportion of IVAs failing 1,2 and 3 years after being registered. Given that a completed IVA will typically last for 5 years or more, this means more IVAs are failing relatively early on.
This should concern everyone interested in tackling problem debt…. Here’s why.
A bit of background
An IVA is a type of personal insolvency, a debt solution for individuals created by statute. It gives a person who needs help with problem debts protection from creditors while the agreement is in force and writes off debt balances remaining on completion of agreed payments and other terms of the agreement. Consumers can only enter an IVA through an Insolvency Practitioner (IP), a legally defined and regulated professional who has responsibility for setting up and overseeing IVAs.
Why termination rates matter
IVAs can be an excellent option for people to deal with their debts, but — and it’s a big but — IVAs are far from risk-free for consumers.
Where an IVA ‘terminates’ before the agreement completes, there are serious negative consequences:
· The consumer won’t get debt relief or continued protection from creditors
· Interest and charges can be retrospectively added back on to debts
· Payments that have been made to the agreement won’t necessarily reduce debt balances by the same amount, due to the IVA provider’s fees.
So where a person does not complete an IVA, they can find themselves in a worse position than when they started it, and they will have started it with severe problem debt!
This is why the IVA failure rate really matters.
Now there may be several different reasons why an IVA might fall over, such as an unforeseen change in circumstances; but it is clearly important that consumers are protected from foreseeable risks. Here IVA providers are squarely responsible for ensuring that people only enter an IVA when it is a very good fit for their current and foreseeable circumstances and following a high-quality advice process.
What does an increase in IVA failure rates say about the IVA market?
For the first time StepChange Voluntary Arrangements (VA) is publishing the termination rates of its IVAs alongside the Insolvency Service figures. This shows StepChange VA termination rates are well below the industry average, and much lower for early years failures. The proportion of IVAs that failed within their first year was 8.4% in the market as a whole — which, given that our own rate is much lower, seems worryingly high.
The difference between StepChange VA and wider market performance strongly suggests that at least some providers are exercising a much less robust assessment of risks and consequences to consumers.
Perhaps some providers would argue that a more ‘flexible’ approach to risk increases consumer access to IVAs. While better access to insolvency remedies is certainly an issue, as with sub-prime credit access is only ever a good thing if it works in the interests of the financially vulnerable consumers the product is aimed at. This is not obviously true for IVAs right now.
Do we need an overhaul in the regulatory oversight of the IVA sector?
With sub-prime credit we have seen a significant increase in regulatory oversight of both conduct and products to help ensure that providers do not exploit consumer vulnerability. Providers’ risk appetites and commercial incentives have been constrained to protect consumers.
Concerns about problems in the IVA market have been kicking around for at least as long as sub-prime credit, but we are still waiting for a similarly robust change to drop. The Insolvency Service has moved the debate forward, with a critical review in 2018 and a call for evidence on regulatory change in 2019. Action on a new approach must now quickly follow on.
The current oversight of the IVA sector still relies far too heavily on an outdated professional self-regulation model that lacks both independence and clout. The IVA market is now dominated by a small number of ‘volume providers’, with just three firms accounting for nearly 60% of all IVAs. With such a concentrated market it should be easy for a more effective and ‘firm focused’ regulatory model to guarantee better consumer outcomes.
That said, concern about IVA failure rates matters as much as it does because of the possible consequences to consumers. Alongside better regulation, there is a very strong case for making changes to the IVA itself to better align this important debt solution to the needs of consumers using it now.