The following is the text of a document we have circularised to the volume IVA providers:
The IVA Market - what next?
In October last year we at Compliance On Call issued a paper about the IVA debate. This appeared to strike a chord with those involved in the production and approval of volume IVAs and with encouragement from the British Bankers Association (BBA) we went as far as producing a standard IVA as the first step towards addressing the problems that existed at that time in the bulk IVA market. This developed into the forum now being run by the Insolvency Service (IS) and BBA and the most recent issue of Recovery magazine had eight articles on this sector, although sadly not one mentioned our role as catalysts!
This follow-up paper is designed to look at the current IVA market and present some different, and potentially controversial, solutions in a similar spirit to that first document. We do not have any particular aspirations for IPs to adopt the approach suggested, and there are some alternatives for which you should seek legal advice before you even consider taking action. If, however, you feel that the arguments below have merit, we offer them to you without charge, to consider and act upon as you see fit.
Background
The problem, from our perspective, is that the issues that our original paper and standard form IVA sought to address have changed, and the inclusion of other interested parties has resulted in them pushing their own agendas and losing sight of the original aims.
When we produced our paper the main problem was that the sheer quantity of IVAs made it impossible for the existing agents acting on behalf of the major creditors to vote in every IVA that was proposed. What was needed then, and may not be a priority now, was a simple fix to enable IPs to present a standard format for the majority of consumer debt IVAs for approval to creditors that their agents could process without the need for every proposal to be read in depth and modified on a case-by-case basis.
Now, however, partly as a result of hardening creditor attitudes, partly because of new entrants acting for creditors in casting votes and partly as a result of the unexpected results of the joint IS/BBA initiative, the problem has changed. Creditors are able to cast their votes in more cases, but certain voters are, despite assurances given at the IS/BBA forum, more willing to reject IVAs or put in place inequitable hurdles to ensure that numbers of approved IVAs are driven down. Inevitably, because debtors fear the consequences of bankruptcy and are unable to secure a realistic alternative settlement, more and more individuals are falling into the very ‘black hole’ of unresolved personal debt that the BBA are seeking to avoid. Increasing numbers have been denied a solution to their difficulties and are having to survive in a world of perpetual indebtedness.
A change of position?
As a result of the movement in the market, Compliance On Call has been forced to take a less even-handed approach in this paper. We started out with the intention of being an independent voice, prepared to challenge IPs, creditors and regulators to ensure that all parties, including debtors achieved a viable solution. We have been forced into a position where, in order to restore the balance in the industry, we are required to take a more pro-IP position for a while. The reasons for this are:
1) Since just before the BBA/IS initiative started, certain creditors have vastly reduced the percentage of IVA proposals they approve, forcing many debtors to commit to repayment levels that they and their IPs consider unrealistic. In some of the cases we have seen, the pressure exerted appears to be an unfair and inappropriate use of the creditors’ power.
2) Regulators have reacted to the increased publicity within this sector by placing increasingly costly burdens on IPs, requiring them to increase both the advice given at the point of first contact with the debtor and the evidence of liabilities, income and expenditure they obtain before they fully assess the viability of the debtor’s proposals, let alone report to court that a potential arrangement stands a reasonable chance of success.
3) Creditors in general have used the opportunity provided by the BBA/IS forum to attempt to drive down nominee’s fees without making any allowance for the increased work that an IP is being required to do, both in satisfying them and also the regulators.
4) Some creditors have sought to have their cake and eat it by both asking for IPs fees to be tied to a percentage of realisations and then capping the total.
5) Whilst trying to drive down IP’s fees, the creditors are setting up their own assessment procedures and conducting quasi-regulatory visits to firms, increasing the overhead costs of those firms.
6) In the confusion, a small but influential group of creditors have sought to reduce their formal write offs by rejecting IVAs in favour of unsustainably long debt management arrangements or the ‘black hole’ option, in which the debtor is not in any form of formal or informal arrangement and has no realistic end to their indebtedness. In many cases, individual creditors have then exerted unethically extreme pressure on individual debtors to try and force settlement of ‘their’ debt ahead of the other creditors. Two creditors in particular have even sought to exclude their debts from the IVA and negotiate their own repayment terms with the debtor, contrary to the collective approach promoted by public policy.
7) Instead of IPs agreeing to be more ‘creditor friendly’ in return for concessions and a reduction in the number of hurdles and modifications from creditors, they have instead been forced to bend to the unreasonable demands of some creditors just to give their clients the chance of a solution to their problems.
We have come to the inevitable conclusion that this is a deliberate attempt by some creditors to exploit the current publicity for their own ends, cynically manipulating arrangements to protect their own share price by hiding the write offs that they would have to disclose in IVAs and pushing vulnerable individuals into situations from which they have no possible exit.
We have reluctantly acknowledged that the BBA, while publicly committed to a solution to the problem, appears to have insufficient commitment from some of its members, or power over the banking industry as a whole, to encourage all creditors to adopt a collective solution.
We also regret to note that the Insolvency Service, whilst professing to take a lead role, does not appear committed to a quick solution, possibly because it might undermine the impact of SIVAs when they finally come into force. It may be, however, that we are too impatient for results and are not making allowance for other priorities they may have.
We are also disappointed that whilst the IPs and creditors were seeking a way to improve the way the market operates by voluntary means, the regulators felt that it was necessary to issue a revised SIP 3. This takes no account of the changes already apparent in the IVA process and fails to differentiate in any significant fashion between consumer debt cases and those IVAs caused by business failure. Regulators have also impacted on the market by increasing both the frequency and scope of monitoring visits to those in the bulk IVA market. It even appears that certain regulators, possibly in an attempt to be seen to be ‘the’ regulator for those in this sector, have taken it upon themselves to depart from the principles of monitoring and take action against IPs without making the standards against which the IPs are being assessed transparent, or act independently from other regulators and apply the requirements of SIPs only as they see fit.
The way forward
We did not have a clear solution in mind when we started the whole process. We did not, as some have suggested, even have a marketing aim in mind. We simply wanted to try to fix a problem that appeared to be causing our clients some problems and was unnecessarily hurting individual debtors when they were at their most vulnerable. We felt that as a party with no specific axe to grind we had a chance of bringing a more independent view to the fore. We regret that we were wrong.
We believe that there are some possible ways to address the current problems that still follow those original principles. None of these should be seen as specific recommendations, but as it appears to us that the creditors and regulators have been getting their own way for six months without bringing anything to the discussions these are some ideas that we believe could help redress the balance:
1) All IPs could withdraw from the BBA/IS initiative until there is some real evidence that creditors are prepared to match their concessions with a significant move towards trusting them and approving those arrangements that they have stated in a report to court as being fit, fair and feasible. Since the chairmen of the various working parties are due to meet in early May, prior to a formal announcement of the results at a forum later that month, it may be too early to suggest such radical action but the forum will only succeed if its results are adopted by a significant proportion of those operating in this sector and ‘strike’ action should not be ruled out.
2) All IPs could set up a focus point, either independently or through an existing body like R3 or the Debt Resolution Forum, to collate information over a set period, say 6 weeks, and publicise all cases that are unreasonably rejected by creditors. If such an approach was taken, IPs could provide details of each failure (and we have all seen such cases) where a perfectly viable IVA was rejected or subject to an unachievable hurdle because of the intransigence of one or more creditors. The co-ordinating body would then use its contacts, and any that could be gleaned from other contributors to the process, to ensure that these stories reached the press, politicians and others with the ability to influence and lobby the banking industry. Although they have not directly offered their services, it would appear that R3 is ideally placed to co-ordinate such a campaign. Our only worry is that R3 has a duty to all IPs, including those who are voting agents for creditors and so may be conflicted and unable to endorse such a campaign. It may therefore be an opportune moment to test the resources of the DRF?
3) IPs could, where appropriate, and after taking legal advice, seek to challenge their regulators in respect of SIP compliance in particular. It is by no means certain that compliance with the SIPs could be enforced in the face of, say, a judicial review. In particular, given the regulators’ failure to redraft many of the older SIPs and their past decisions not to adopt certain SIPs or elements of them, it is doubtful whether a judicial review would find them to be adequate justification for something as severe as a professional reprimand and/or financial penalty. For example, until the recent re-issue of SIP 3 the regulators had agreed to waive the ‘requirement’ to hold personal interviews with debtors without changing the SIP and we are aware that at least one regulator has declined to take action over an accounting system that breached SIP 11 because they considered that the practice’s business model and controls allowed them to make an exception.
We believe that part of the reason why creditors can get away with rejecting IVAs is that they believe that debtors will not file for bankruptcy and the bank can gain more, and avoid debt write off, by agreeing a separate deal for ‘their’ debt without entering a collective procedure. We don’t have access to specific figures but we have heard that between only 1 in 15 and 1 in 20 debtors will file for bankruptcy after a rejected IVA. The rest, in the main, come to some sort of agreement with their main creditors and make token repayments. These will never pay off the debt but avoid the need for the bank to formally write of the debt and disclose the impairment to the stock exchange.
We consider that if an IP has a duty of care towards his clients after an arrangement is rejected, suggesting an alternative, such as a debt management arrangement, that he has already rejected as inappropriate, is incompatible with that duty. Since recommending bankruptcy is against the debtor’s wishes and will usually be ignored and the alternative of token payments does not offer the debtor a viable solution, we think that it could be argued that refusing to co-operate with the creditor is the only reasonable advice. Since the creditor will then be faced with petitioning for bankruptcy at some cost and with unreliable returns or agreeing to an IVA, we think that the IP would be justified in recommending such action.
4) Consequently, our next suggestion is that IPs could issue post-rejection advice to debtors encouraging them to rebut all creditor pressure and refuse to make payments of any kind until they agree to an IVA. Again, this suggestion would also require legal advice and should not be seen as any sort of recommendation to IPs. In addition, it may not be advice that debtors can comply with when faced with the ‘bully-boy’ tactics employed by some creditors, which have included doorstep challenges, phone calls to the debtor’s workplace and other aggressive chasing techniques.
5) We are also aware of the FSA’s recent requirements in respect of ‘TCF’ (Treating Customers Fairly). For those of you who are not familiar with the term, TCF is an FSA requirement for lenders to give transparent and clear advice and deal fairly with customers in a variety of situations. They have to have documented policies in place, both to address the scheme’s requirements and evidence the fair treatment given. Although the treatment of those customers in default does not yet appear to be included in the standard, we think it should be and we would recommend that all IPs take action as individuals and through their regulatory bodies and other organisations to which they may belong, such as R3 and the DRF, to bring pressure to bear on the FSA to include default dealings in the TCF policy.
6) Finally, we would recommend that debtors should request creditors who reject an IVA, which is the collective solution to over-indebted debtors promoted by legislation, to explain, in writing, their reasons for rejection. This could then be subject to challenge through the Financial Ombudsman Service’s complaints procedure. Such decisions should also be referred to the OFT where they show a bank making ‘unfair use’ of its relationship with the debtor. Individual debtors could also be encouraged to contact the FOS and OFT where the circumstances leading to their insolvency amount to ‘irresponsible lending’.
Conclusion
We may be exaggerating the problem; we may not have the solutions; but we will keep trying to come up with ideas to resolve this ridiculous impasse.
Until creditors are prepared to stop being unreasonable, and regulators recognise the need for IPs to do what is best for all stakeholders in the IVA process, we think that a combination of the above alternatives may be necessary.
For the next few weeks, we will try to field your calls and emails. However, as with our original standard, the actual action is up to all IPs ideally as a group. If you can agree a way forward, you have a potentially significant voice. If you continue to put your own interests first and reject a collective solution, sharing both the pain and the benefits, how can you expect the creditors to do the same for your client debtors?
