Predators in debt advice: yes, I am talking about IVAs
Last November, I attended the Insolvency Practitioners’ Association Annual Personal Insolvency Conference to take part in a panel discussion about Individual Voluntary Arrangements (IVAs). The idea was that the Chief Executives of two large IVA providers would try to dispel some myths about this ‘little-known-about, government-backed debt solution that creditors don’t want you to know about’.
Myths.
Government-backed? In the same way that bankruptcy and Debt Relief Orders are? i.e. they are legal insolvency procedures covered by statute? Have any debt advisers out there ever been taken quietly to one side by an anxious creditor and urged not to mention the option of an IVA to an indebted client lest they discover this truly remarkable debt solution? Me neither.
I wrote about the day in two long blogs at the time (on here somewhere), but, given the recent item on Channel 4 news and forthcoming Panorama documentary (24/7 BBC1 8pm) about IVAs, it’s time to revisit this subject and put together a more concise article in an attempt to keep the debate going and the red flags clearly visible. Make no mistake, mis-sold IVAs cause absolute misery for people in debt and those doing the mis-selling are predators. No myth about it.
These were the myths I had a go at dispelling.
Myth One: IVAs don’t fail due to bad advice.
Well, not all fail due to bad advice, that’s true. Some fail because of changed (for the worse) circumstances. But are clients in debt being given full and impartial advice about their options? I described the failed IVA case I’d recently dealt with to the conference. As always, these cases start with a person needing help with their unmanagable debts and turning in desperation to Google/social media to find answers.
The top results are sponsored and are the usual suspects — marketing companies, sometimes branded as advice companies, sometimes egregiously masquerading as bona fide debt advice charities (a crimson flag about the ethics of the company in itself), often targeted to a particular demographic – mums-in-debt, dads-in-debt, second-cousins-twice-removed in debt, etc – always dangling promises of high-percentage write-offs and never mentioning the acronym ‘IVA’; why is that, by the way? Because of the tarnished reputation that IVAs have achieved over years of mis-selling and eye watering fees? At some point, they must have to mention the unmentionable, surely.
If any of the ‘debt solution’ businesses behind these adverts were giving proper debt advice about all available options and the genuine, unbiased advantages and disadvantages of each, they couldn’t have recommended an IVA to my client. She had no money, no assets and a pending eviction. Call it what you like — I say the ‘advice’ was shoddy, stemming from a misleading advert, leading to the sale of someone’s details to a company with only one debt solution in mind. It is by no means an isolated case.
We discussed these adverts at length and, surprisingly, there was a rather scathing question from the audience (of Insolvency Practitioners) about this subject to Paul Mason (CEO of Creditfix); the delegate was disparagingly quoting the sales pitch from Creditfix’s website. Mason explained the legality of advertising the ‘hook’ of an 81% total debt write off. i.e. it’s legal to advertise 81% if this has been achieved by 10% of their customers in the previous 12 months. A factual advert that states 90% of our clients did not achieve 81% write off isn’t as appealling, but the truth sometimes isn’t. And this is of course the bedrock of advertising, especially when the product is an insolvency procedure so dull and complex yet so highly profitable for the marketers/IPs that they simply have to deploy puffery to attract customers.
The debt advice environment that I and other not-for-profit debt advisers occupy is not comparable with that which purports to be ‘debt advice’ in this market. We don’t have customers, we have clients who ask for help and advice about their rights and obligations. We don’t have one debt solution or another to sell. We don’t have ‘fees’ and we don’t have anyone else’s interests in mind apart from the client sitting in front of us. We don’t have the money to saturate social media with misleading adverts, (although I can occasionally produce a decent meme). We are not predators.
So, no, not all fail because of bad advice, because for some people, an IVA might actually be the best option available, but in my experience this is a very small minority of the people I see (a single figure in over a decade). And what about all the rest, who could and should have been directed to less profitable remedies? Self-interest and income generation means that the advice is likely to be biased in favour of the one insolvency solution that makes a lot of money in fees. And if it’s not truly independent advice, then it’s unreliable. Unreliable advice, I’m afraid, is bad advice.
Myth 2: Without the IVA market — creditors wouldn’t get their returns and this would make obtaining credit difficult and less affordable
Here’s how I slay this wheezing dragon: What good does it do to lock people into repaying debts for years and years, not putting that money into the economy? How much of this debt has already been written off as ‘bad debt’? How much of this debt has been sold off at 9p in the £1, enabling the lucrative secondary debt market to reap the rewards? And what about the poverty premiums already in play, whereby sub-prime lenders are already charging higher interest rates to maximise profit from those whose credit reports are demonstrating less than buoyant finances? Just look at overdrafts. Some of the charges and interest rates are truly obscene. You might even argue that those teetering on the edge of unmanagable debt are given a firm push by creditors whose actions are guaranteed to make that individual’s situation worse. And I haven’t even mentioned the irresponsible lending that goes on, but consider the fortunes of Amigo, Provident and a number of other high-interest lenders whose business practices have put them out of business.
Myth 3: Not-for-profit debt advisers don’t deal with the same individuals (as IVA companies). Our clients have ‘multiple problems’ rather than ‘just predominantly debt’.
But our clients are not a different species. We do see the same clients, albeit some went down an IVA route first that wasn’t right for them or isn’t any longer. Many of my colleagues in debt advice say they feel like they pick up the pieces of these IVA failures. Many advisers ask why it takes so long to terminate an IVA once the client has decided to take this step (3–6 months). Insult, injury etc.
The difference is that we care (sounds sanctimonious, but we actually do) about the person in debt and the ‘how’ and the ‘why’ things became unmanagable. We need to know a bit about the person, their family, their employment or lack of, their housing situation so that we can provide advice which takes all of these circumstances into account, answering the ‘what-ifs’ and discussing the consequences as necessary. IPs would discover that their customers also have multiple problems if they only took the trouble to ask. They might then find out that a potential customer is about to be evicted, or is only in debt as a result of financial abuse, or should apply for this or that benefit to increase their income.
I’ve heard of clients being given 2 hours to sign up for an IVA after very brief ‘advice’ from the marketing company — to prevent the client seeking a second opinion, no doubt. The IVA is sold as a golden ticket to becoming debt-free that may be whisked away if the person doesn’t grasp the opportunity quickly. That alone should set the alarm bells off.
And special mention here for the IP who I won’t name, who recently opined at a webinar about debt advice quality standards, that there’s too much in the media about how dodgy IVAs are, and yet no transparency about mis-sold debt management plans and bad not-for-profit debt advice.
Debt management plans – the money making ones – are just as bad if you ask me, but easier to get out of for the client. As for bad not-for-profit advice? I’m sure we all make mistakes, but we are coming from a different place. Our only interest is to help the client – not ourselves – so the chances of us pushing a solution on a client for our own pocket’s sake, is non-existent. Knowledge is power – we share the knowledge, the client takes the power. The client can then make an informed decision about what’s best for them. Difficult to ‘mis-sell’ free empowerment.
Myth 4: A person with £76 per month disposable income…(less than £75 per month could mean the person qualifies for a DRO)
That’s the myth right there. Monthly disposable income. Yes, we have to use an arbitrary figure to show that someone qualifies for a Debt Relief Order, or can’t afford to pay their Council Tax or their County Court Judgment etc, but nothing could be less helpful and indicative of a person’s financial reality than the Standard Financial Statement, which uses guideline trigger figures based on the lowest percentile of the ONS Living Costs Survey. But we have to use something.
Here’s the big problem. To get a Debt Relief Order your monthly disposable income can be up to £75 per month. That’s the figure the Insolvency Service thinks it’s reasonably necessary for a person to have to stay afloat. The IPs on the IPA conference think that if you have £76 per month disposable income, then you have enough for an IVA and can pay this every month for 5 years.
This is a massive misunderstanding of what that £75 represents! The IPs should be disregarding that same £75 per month – just like the Insolvency Service does – and looking at what a person has to spare on top of that figure. Otherwise they are expecting their customers to surrender every spare penny to the IVA which makes for a tight and unrealistic budget. No wonder so many fail!
But why do we as a society promote and accept such low standards of living for people in debt? If you suffered misfortune through a relationship breakdown, poor health, job loss or even just a rise in the cost of living that defeats your bank account, why does this mean you no longer deserve a lifestyle that is in any way enjoyable? (I can still hear the words of a local authority creditor who complained that the Standard Financial Statement is ‘generous to the point of profligacy’.)
I will stake £76 of disposable income on this person never having had to live within the constraints of a tight budget that suggests that you spend the exact same amount of money on food, travel, gas, electricity, communication, clothing, etc every single month come rain or shine. Where’s the cushion for those economic shocks we all experience from time to time? A trip to the vets, a bad MOT, a broken boiler, a leaking roof, [God forbid] a dentist appointment? The price of food in the supermarket increasing every, single, bloody, week?
And so what if a person with debt has a takeaway? A couple of months ago I was in debt with my energy supplier. The last bill was an absolute joke — masked highwaymen with pistols at my door couldn’t make a more outrageous demand. And I had a takeaway that week because it had been a long, hard day and I didn’t feel like cooking. Should I have paid that £15 to Eon Next instead? A drop in the ocean. Sod that.
If one in four of us has no savings at all to rely on (source) then a disposable income of £76 per month is hardly something to aspire to, although many of my clients would welcome it at the moment.
And no, they shouldn’t be considering an IVA with a budget like that either.
Myth 5: IVAs aren’t perfect — but they could be improved!
It’s not a myth at all. IVAs definitely aren’t perfect. They go on for too long and are too financially beneficial to those that administer them. But I did find myself saying that compared with the ill-fated Statutory Debt Repayment Plan (may it forever rest in long grass), they are slightly more attractive, by virtue of being shorter and involving some element of debt write-off, even if much less than the truly mythical 81%.
If they were shorter still — 3 years? Maybe. If ‘introducers’ became a thing of the past, maybe. If those horrible, targeted blatantly-misleading adverts disappeared off the face of social media, maybe. If every IVA applicant firstly had impartial ‘proper’ debt advice, possibly. I’m not sure there is much appetite for real reform (too many profiting from the status quo) but I’d be happy to be wrong about that.
My last words to the conference delegates were about the lead generators/introducers (predators). Get rid of them, I suggested. You’re all professionals here, you don’t need them, they sully your profession. There were some nods in what I suspect was polite, humouring agreement.
Did it make any difference? Probably not. Will I keep flagging up the problems with IVAs at every available opportunity? Absolutely.
The Insolvency Service has an opportunity to do something about this when they decide what to do with their personal insolvency framework review. Are they willing to square up to the pinstripe power-suits and put vulnerable people in debt ahead of profiteering?
Remember, good, impartial debt advice pays for itself over and over again. Less stress, less ill health, less time off work, more money in the economy, more financial capability, less homelessness, more money for local authorities to spend on essential services…
It is, quite frankly, a no-brainer.
