Money Advice Trust policy manager Meg van Rooyen explores the Insolvency Service’s latest statistics on individual voluntary arrangements (IVAs).
New figures published recently by the Insolvency Service paint a concerning picture when it comes to individual voluntary arrangements (IVAs).
The figures reveal that IVA failure rates have hit 8.4%; their highest level in 16 years. Almost one in five IVAs registered in 2017 failed within two years, while this rose to one in four within three years.
Why does this matter?
IVAs work as a formal legally binding agreement between individuals and their creditors. They typically last for 5 years and allow the person in debt to pay back what they owe during this time. People who apply for them have to do so through a debt management company or insolvency practitioner. If after the agreed length of time the debt isn’t fully paid, the remaining amount is written off.
The issue can be that failure to meet the terms of an IVA can have severe consequences. This includes the removal of the IVA and the reinstatement of the full debt. Crucially, any interest that would have accrued can be added in addition to any payments owed to the company or insolvency practitioner who set it up. For someone whose IVA fails, this can lead to them being in more debt than they were before.
Greater transparency needed
Looking at the Insolvency Service’s figures, the issue is not so much about what the data tells us, as about what it doesn’t tell us. From the information provided it is very difficult to work out why IVA failure rates have hit such a high level.
For example, the statistics are not broken down to show failure rates by individual firm. This means that this crucial indicator of IVA performance is not available. Clearly, each firm will already analyse their own figures, but these are not currently made public.
Greater transparency for consumers who are thinking of entering an IVA with a particular provider is needed. Without this, it is harder for people dealing with problem debt to make informed choices about which provider might be best for them.
What needs to change?
Some steps that could improve this situation include:
- Firms should be required by the Insolvency Service to disclose their IVA failure rates.
- Firms should be required to include these in prominent positions in all advertising and on their websites.
- IVA failure rates by firm should be published by the Insolvency Service as part of their published statistics.
- The resulting figures should inform the regulatory scrutiny carried out by the Recognised Professional Bodies (RPBs) (mainly the Insolvency Practitioners Association and the Institute of Chartered Accountants of England and Wales) on behalf of the Insolvency Service.
Clearly, there are questions to be answered if any firm has high failure rates. We would expect some IVAs to fail due to clients having unforeseen changes in their circumstances such as losing a job or through long-term illness. However, a high proportion of IVAs that fail very early on in the typical 5-6 year term, could suggest that a firm is potentially offering an IVA to a client for whom it is not suitable. This could be for a number of reasons.
- Their income is not stable, perhaps through a zero hours’ or temporary work contract.
- They are on benefit level income or their income derives purely from benefits.
- The client is expecting a reduction in income soon due to a change in circumstances.
We suspect that in some cases the financial statement put together by the firm is unrealistic or produced in haste. This could be because of the firm underestimating realistic housekeeping figures, or a vital item is omitted from household expenditure. Perhaps the budget is unsustainable as it provides no safety net for unexpected expenses or even essentials such as clothing.Based on the client’s circumstances a different way of dealing with their debts may be more appropriate.
A question of incentives
As it stands, there is little incentive for less scrupulous firms to behave well. If an IVA fails, it’s the consumer who shoulders the financial burden. Callers to National Debtline asking for advice about IVA failures are often taken aback when they find out how little of their outstanding debt their monthly instalments under the IVA have paid back. Many find they owe most or all their outstanding debts in full again. Creditors will add all the interest and charges back retrospectively, and in many cases the payments they have made will have gone direct to the firm who set up the IVA, due to the high cost of their fees and upfront payments.
Publishing failure rates will help to redress this problem of incentives, and encourage better practices. We have repeatedly asked the Insolvency Service to publish failure rates by firm, and hope that this is one of the outcomes of the Regulation of Insolvency Practitioners Call for Evidence which closed in July 2019.
Despite these challenges we are pleased to see that StepChange Debt Charity have announced that they will be the first provider to publish their failure rates. We hope this transparent approach will encourage all other insolvency practitioners to do the same.