Today, the Insolvency Service has published its annual performance data for 2020 about Individual Voluntary Arrangements (IVAs). StepChange has long been concerned about the performance of the IVA market as a whole, given the discrepancy between the sales and failure rates of IVAs among different firms. This year’s data does nothing to alleviate the charity’s concerns.
StepChange is calling for a review of the personal insolvency landscape, to improve how it works for consumers and ensure that the regulation of this important but often neglected sector is fit for purpose.
IVAs are one of the three forms of insolvency-based debt solutions [see notes to editors] available in England and Wales alongside bankruptcy and Debt Relief Orders (DROs). The data published today is broken down on a named basis among the larger firms who arrange them (including StepChange Voluntary Arrangements, a subsidiary of StepChange Debt Charity). As usual, it shows a wide discrepancy in the number of IVAs arranged by different firms.
In terms of performance, there continues to be a higher failure rate of IVAs than StepChange thinks is healthy. While the one-year termination rate declined a little in 2020, reflecting forbearance arrangements introduced as part of the response to Covid, already more than a fifth of the IVAs that were taken out in 2018 have terminated. Given that the benefit of an IVA is only properly realised at the end of the five or six period for which it is held, the risk of early termination is one that needs to be avoided as far as possible.
Poor advertising and selling of IVAs in some parts of the market is the underlying driver for much online charity impersonation by lead generators (recently resulting in the upholding of complaints by the Advertising Standards Authority, and the FCA Woolard report calling out the problem). StepChange has also heard from an increasing number of people who have been aggressively called recently by telephone and pressured to take out an IVA, by callers falsely purporting to be StepChange.
The reason such poor practice happens is because the selling of IVAs can be commercially lucrative. While IVAs can absolutely be the best solution for the right people in the right circumstances, they can also be very expensive and harmful if missold to people for whom they are unsuitable. If they fail, they can potentially put people in a worse position than they started.
It is telling that, while StepChange has arranged fewer IVAs over the past year (because the pandemic has temporarily changed the debt landscape, and also reduced certainty about people’s future circumstances), overall the number of IVAs sold in 2020 was virtually unchanged from 2019, at over 78,000. Recent rulings from the Advertising Standards Authority, and the conclusions of the Financial Conduct Authority’s Woolard report, all point to the need for regulators to take more action to address current market failings.
StepChange Head of Insolvency Services Peter Wordsworth commented: “IVAs are absolutely right for some people, but not for all. We are highly doubtful whether everyone who is being sold an IVA should be getting one. Our own experience of having to deal with a large number of misleading advertisers pretending to be StepChange in order to generate leads for commercial IVA sales, underpins this view. It’s crucial, as we head out of the pandemic period, that people struggling with a Covid debt legacy aren’t inadvertently hoodwinked into taking out an IVA by unscrupulous sales practices.”
The charity has also just responded to the Insolvency Service’s consultation on changes to widen eligibility for Debt Relief Orders (DROs) [see note 2 to editors]. StepChange Debt Charity says that the proposals are welcome, and likely to result in an increase of more than a quarter in the number of DROs that the charity arranges.
If the Insolvency Service proceeds with these changes, many more people will have access to DROs. In particular, based on the charity’s modelling, around a third of people who currently pursue bankruptcy as an insolvency solution may be able to access DROs under the new proposals, meaning they would face far lower costs than at present. However, even the modest £90 fee to access a DRO, while far lower than the £680 fee for bankruptcy, is a struggle for many clients. Clients frequently have to save for this fee over a period of months before they are able to proceed.
StepChange Head of Policy, Research and Public Affairs Peter Tutton said: “We agree with the Insolvency Service that now is the right time to update the eligibility limits to ensure that, in the wake of Covid, more people with low income and low assets who can really benefit from DROs are able to access them, and make a fresh start after a year. It’s also time for policymakers to make sure that insolvency is safe harbour for those who need it by removing barriers to access and rooting out business practices that are currently causing harm.”