At the recent IPA Personal Insolvency Conference, one of the sessions was supposed to be about the IP’s role in balancing the interests of the debtor and the creditors. When initial statements were read out committing to FCA principles and pledging to put the debtor’s interests above all and secure the best possible outcome for the debtor, I waited with baited breath for a creditor representative or a regulator to put the counter argument. I expected to hear a stickler for the legal niceties remind IPs of their duty, as nominees, to balance the interests of the parties, and as supervisors, to maximise realisations for creditors and enforce the terms of the arrangement as set out in the insolvency legislation, case law and SIP 3.1. I expected to hear the creditor side forcefully reject any bias and demand that the IP maximise returns for the creditors. Instead, speaker after speaker repeated the “debtor first, FCA principles” mantra. Maybe it is no surprise that there have recently been calls for IPs to be regulated by the FCA. Isn’t everyone playing by their rules anyway? Then, this week, we saw HMRC’s latest set of standard modifications, designed for use with both Protocol IVAs and those using the R3 standard terms. These seek to reiterate their opposition to the Protocol equity terms and firmly redress the balance in favour of the creditors in the contentious area of equity and the family home. They do so with a robustness that warms the cockles of an old insolvency examiner’s heart, although one does wonder whether this is just the start of a wrestling match, with a government department flexing its muscles against a quasi-government financial regulator. In a long, but inevitably still simplistic, article, we will try to set out why we think that HMRC’s modifications, and the separation of IP and FCA regulation, are essential for the healthy operation of the debt solutions sector and the wider economy.
To look at this issue properly, we need to go back 10 years, to the start of what became the IVA Protocol. In late 2006, with IVA numbers rising rapidly and creditor agents, who at the time were largely unpaid divisions of major accountancy firms, struggling to provide proxies in time for meetings, we had an idea. Our idea was to standardise proposals so that they did not need reading every time, saving the voting agents some time. As we developed the idea, we realised that for it to work, IPs would need to agree to do certain work and creditors would need to agree to vote within time limits and without amending the offer too much. We therefore came up with the idea of a “protocol” to back a standard set of proposals. The BBA had just mystery shopped a lot of IPs and was preparing to have a meeting exposing some pretty damning findings, but they met with us and saw some promise in the protocol concept. Their interest was not so much in a standard set of proposals, but in using the protocol to set standards that IPs should meet in verifying balances, checking the affordability of any proposals and, ultimately, cutting costs to align the IPs’ interests more closely to the creditors’. Also, at that time, the whole creditor agency concept was on the move, with TIX just entering the fray and using complex analysis of data to bring a harder edge to voting.
Over a period of around 18 months, our initial protocol concept was handed over to the joint care of the BBA and the Insolvency Service, and working parties of creditors, IPs, regulators and other parties developed what became the Simple Consumer IVA Protocol and is now known simply as “The IVA Protocol”, or, for the purposes of this article, “the Protocol”. During that process, the Protocol became the key document, supported by a set of IVA standard terms, and the original idea of a standard set of proposals was left behind. TIX had given the creditor voting side the capacity to respond in time for meetings and the idea of aligning creditor and IP interests and rebuilding trust between the “sides” became more important that trying to standardise the process. The Protocol was, when it came out, a tool to help IPs demonstrate that they met certain standards, in return for which creditors reduced some of the excessive voting practices seen in the past, where in excess of 30 modifications from each creditor were not unusual and we saw some cases with over 100 modifications proposed.
Over the intervening years, much of the trust between IPs and creditors has been rebuilt, but there is still a significant degree of concern about so-called “unregulated” advisors who generate leads for IPs and there are significant concerns about the role of non-IP entrepreneurs who fund and control volume IVA specialists. During that time, the financial regulators that preceded the FCA were changed and merged until we have today’s monolith. The FCA’s reach spreads from international banks and financial markets, through consumer lending, right down to the debt solution advice given to a distressed and impoverished individual. That influence has not always been unwelcome and the heightened attention to the needs of the individual debtor has given the debt advice sector a more humanitarian approach, but the debtor-first mentality that currently holds sway is neither healthy for the economy nor sustainable in the longer term. After all, a bank will not be able to lend £1,000 if regulation is so debtor-led that they can only expect to get back £250 at the first sign of trouble. The expectation has to exist within the system that while any continuing payments in the insolvency procedure should be affordable, any assets will be realised to the maximum possible level to repay the principle sum. The current approach of protecting significant equity levels in an IVA is inconsistent with an IP’s duty to maximise realisations.
When the FCA and its forerunners originally went in to bat for debtors, they were largely the unfortunate victims of reckless lending practices and economic conditions. The lending bubble had burst, the property prices that had secured the excess had fallen away and there was a strong need to help those who had fallen on hard times through little fault of their own, to find an escape route. In those economic conditions, a gentler approach from the creditors was needed and the FCA and its forerunners were in a position to both control the creditor side and protect the debtor side, through regulation. Treating the Customer Fairly (TCF) was a major initiative to protect debtors from draconian measures from the lenders that had recklessly contributed to their indebtedness. There was very little realistic prospect of equity in a property, even over the 5 years of the typical IVA, so although revaluation and the possibility of remortgaging to release equity were included as proposal terms, most cases ended up defaulting to an extra 12 months of payments in lieu of equity.
The current debtor, however, often arrives at the door, phone, or internet portal of a debt solutions provider through a very different route. They have slowly arrived at an unsustainable level of debt, not through reckless lending or economic upheaval, but through deliberate, if in their view unavoidable, borrowing. It is difficult to criticise a young couple on a barely adequate combined income when they borrow a little more than they can afford to fund Christmas, a much-needed holiday, or the “voluntary” payment for a school trip, so that their child does not stand out among their peers. Similarly, divorce, illness, or similar catastrophes can strike at any time and render a previously manageable level of debt unsustainable. However, if the debtors’ needs are put ahead of all other considerations, then there will be those who will try to take unfair advantage, leaving banks across the financial spectrum unable to lend with any certainty. We regularly hear stories of inappropriate advice given within the debt advice sector, but few people realise the barrage of half-truths and manipulation that some debt advisors face every day. For every honest debtor that has fallen on hard times through no fault of their own, there are those who, by their own admission, share a degree of culpability for arriving at their current level of unsustainable debt, and even those where an IVA is being used as an easy way of fending off pressure while another solution is sought, or to protect an asset that should really be made available to the creditors. We now see properties that have a reasonable prospect of equity, or even realisable current equity, excluded from an IVA and replaced by 12 monthly payments that in no way reflect the value of the equity in the property.
Before we go further, but possibly too late to avoid some criticism on social media and in the hallowed halls of the FCA, we should point out that when visiting IP clients we help them to comply with the current regulatory requirements, and the views in this article, while strongly held, do not reflect what we would have to tell a client to do on a visit.
So, in this environment, where everyone seems to be supporting the debtor and finding an affordable set of monthly payments, regardless of the underlying asset position, we welcome HMRC’s new modification, even though it is really just an up-to-date revision of their existing policy. Whereas the protocol requires a month 54 valuation and, if a remortgage is not possible, defaults to 12 more payments in lieu of equity release, with the property itself excluded as an asset, HMRC will now seek a modification that is much more clearly aligned with creditors’ interests and an IP’s duty, as Supervisor, to maximise realisations. HMRC are saying, essentially, that the property should remain an asset of the IVA and be valued in month 36, at which point the creditors’ views will be sought on the correct strategy, which could include the sale of the property. On one hand, their modification is more generous than the Protocol, as it excludes properties where the debtor’s share of the equity at month 36 is less than £10,000, without requiring additional payments to compensate. However, on the other hand, it is potentially significantly more draconian, in that for cases with more equity, if a remortgage or similar solution cannot be found by month 42, the property has to be sold to realise the debtor’s equity. Even that is not as harsh as it seems, however, because by dealing with the property earlier, HMRC are in fact allowing time for an alternative strategy to be put forward as a variation.
At first glance, it may appear that HMRC are opposing the Protocol or even, at risk of being demonised, not treating the debtor fairly. However, if you look at it from HMRC’s view, this is just a sensible approach that balances the debt forgiveness allowed with the sacrifice that the debtor has to make to warrant it. HMRC have only ever been reluctant observers of the Protocol. Their position is that of an involuntary creditor, deliberately deprived of money properly due to them under statute. They have never recklessly lent a penny and the money that they are owed is needed, ultimately, to fund the country. It is no surprise that they are less than happy to see a debtor underpay by thousands, but retain significant personal wealth in a property. Their new modification, which has been specifically amended to allow for the current trend of rising property prices and increasing equity prospects, is arguably a more appropriate solution than the Protocol equity clause that was forged in the fire of a property crash, with no knowledge of just how long the flat economy would continue. The fact that it seems to put repayment of the creditor ahead of the physical and emotional wellbeing of the debtor would almost certainly cause the FCA difficulties if it were proposed by someone in the FCA regulated sector.
Sometimes the FCA seems to regulate on the basis that the consumer always needs protecting from the “nasty” banks, because they would not have got into that position if they had not been lulled into a reckless sense of spending invincibility by aggressive bank lending. The World, and the FCA’s regulation of consumer debt, is obviously more complicated than that. Many financial institutions expend significant resources checking the affordability of any lending or financial product offered to any consumer, no matter how apparently wealthy or how strong their income stream. Even the demons of the 2006 financial crash, the credit card companies, are more careful about who they lend to, while the current “bad-boys”, the high-interest payday lenders, have rigorous affordability checks and only lend relatively small amounts. There have been mistakes and poor practices, but effective intervention by the FCA has generally addressed them. Making the whole financial industry wear sackcloth and ashes for past sins and accept poor returns from settlement arrangements because of some residual guilt, seems like poor economics. If, as some commentators would like, personal insolvency regulation is brought under the auspices of the FCA, we fear a further drift towards poorer and poorer returns to creditors.
We think that effective and robust insolvency regulation, outside the FCA, and prioritising creditor realisations over the debtor’s self-interest is essential. However uncomfortable the current IP exclusion from FCA regulation may be, the difference between debtor-focussed advice and independent, or even creditor-focussed formal insolvency solutions should be maintained. Insolvency regulators are increasingly looking back down the supply chain to look at the practices of those who refer individuals to IPs for IVAs. They are holding IPs responsible for the marketing and case acquisition practices of their referral sources. Far from being “unregulated”, many of those who generate such referrals do so within FCA regulation and provide debtor-focussed, ethical solutions, just one of which, in the right circumstances, is to refer the debtor to an IP for an IVA. We would love to see the IP exclusion extended to allow IPs to exercise the full range of their insolvency knowledge and skills to advise on entering bankruptcy, but we can also see the problem that the FCA has with the potential for the exclusion to be abused. In any event, we don’t think it is too hard for an IP in general practice to get a licence from the FCA to cover the few regulated cases that they are likely to run into each year. Any regulation requires a minimum standard on entry and constant improvement for continued regulation, but an IP that wants to work in that sector should be able to make the necessary adjustments. Clearly, any such application will be more complex for an IP operating with high volumes of consumer debt clients, but we see that as an IP working in the FCA regulated sector, not the FCA encroaching upon IP regulation.
We are not convinced by the argument that any unregulated debt advisors and lead generators will be somehow miraculously rounded up and constrained by moving the regulation of IPs into the FCA sector. If the current combined efforts of the FCA and the insolvency regulators cannot stamp out unregulated advisors, why would taking out the insolvency regulators improve the position? We think that the solution lies in closer working between the FCA and the insolvency regulators, so that those who are carrying out regulated work without appropriate authority are identified and denied access to the market, while those dealing with them are warned, re-educated on the requirements of the different regulatory areas and, if necessary, punished. We suspect that some of the noise around the regulation of the debt advice sector is fuelled by the commercial rivalry of some of those involved in the sector. Some seek to carve out their niche by pushing their ethical credentials and hinting that others may not be so angelic, while others point the finger at larger firms, saying that they must be breaking the rules to be so much more successful. In the end however, professional jealousy is not a reason to change the regulation of an industry. The present separation ensures that the interests of creditors are protected, while the debtors also have a champion to ensure fair play. Vive la différence!
To look at this issue properly, we need to go back 10 years, to the start of what became the IVA Protocol. In late 2006, with IVA numbers rising rapidly and creditor agents, who at the time were largely unpaid divisions of major accountancy firms, struggling to provide proxies in time for meetings, we had an idea. Our idea was to standardise proposals so that they did not need reading every time, saving the voting agents some time. As we developed the idea, we realised that for it to work, IPs would need to agree to do certain work and creditors would need to agree to vote within time limits and without amending the offer too much. We therefore came up with the idea of a “protocol” to back a standard set of proposals. The BBA had just mystery shopped a lot of IPs and was preparing to have a meeting exposing some pretty damning findings, but they met with us and saw some promise in the protocol concept. Their interest was not so much in a standard set of proposals, but in using the protocol to set standards that IPs should meet in verifying balances, checking the affordability of any proposals and, ultimately, cutting costs to align the IPs’ interests more closely to the creditors’. Also, at that time, the whole creditor agency concept was on the move, with TIX just entering the fray and using complex analysis of data to bring a harder edge to voting.
Over a period of around 18 months, our initial protocol concept was handed over to the joint care of the BBA and the Insolvency Service, and working parties of creditors, IPs, regulators and other parties developed what became the Simple Consumer IVA Protocol and is now known simply as “The IVA Protocol”, or, for the purposes of this article, “the Protocol”. During that process, the Protocol became the key document, supported by a set of IVA standard terms, and the original idea of a standard set of proposals was left behind. TIX had given the creditor voting side the capacity to respond in time for meetings and the idea of aligning creditor and IP interests and rebuilding trust between the “sides” became more important that trying to standardise the process. The Protocol was, when it came out, a tool to help IPs demonstrate that they met certain standards, in return for which creditors reduced some of the excessive voting practices seen in the past, where in excess of 30 modifications from each creditor were not unusual and we saw some cases with over 100 modifications proposed.
Over the intervening years, much of the trust between IPs and creditors has been rebuilt, but there is still a significant degree of concern about so-called “unregulated” advisors who generate leads for IPs and there are significant concerns about the role of non-IP entrepreneurs who fund and control volume IVA specialists. During that time, the financial regulators that preceded the FCA were changed and merged until we have today’s monolith. The FCA’s reach spreads from international banks and financial markets, through consumer lending, right down to the debt solution advice given to a distressed and impoverished individual. That influence has not always been unwelcome and the heightened attention to the needs of the individual debtor has given the debt advice sector a more humanitarian approach, but the debtor-first mentality that currently holds sway is neither healthy for the economy nor sustainable in the longer term. After all, a bank will not be able to lend £1,000 if regulation is so debtor-led that they can only expect to get back £250 at the first sign of trouble. The expectation has to exist within the system that while any continuing payments in the insolvency procedure should be affordable, any assets will be realised to the maximum possible level to repay the principle sum. The current approach of protecting significant equity levels in an IVA is inconsistent with an IP’s duty to maximise realisations.
When the FCA and its forerunners originally went in to bat for debtors, they were largely the unfortunate victims of reckless lending practices and economic conditions. The lending bubble had burst, the property prices that had secured the excess had fallen away and there was a strong need to help those who had fallen on hard times through little fault of their own, to find an escape route. In those economic conditions, a gentler approach from the creditors was needed and the FCA and its forerunners were in a position to both control the creditor side and protect the debtor side, through regulation. Treating the Customer Fairly (TCF) was a major initiative to protect debtors from draconian measures from the lenders that had recklessly contributed to their indebtedness. There was very little realistic prospect of equity in a property, even over the 5 years of the typical IVA, so although revaluation and the possibility of remortgaging to release equity were included as proposal terms, most cases ended up defaulting to an extra 12 months of payments in lieu of equity.
The current debtor, however, often arrives at the door, phone, or internet portal of a debt solutions provider through a very different route. They have slowly arrived at an unsustainable level of debt, not through reckless lending or economic upheaval, but through deliberate, if in their view unavoidable, borrowing. It is difficult to criticise a young couple on a barely adequate combined income when they borrow a little more than they can afford to fund Christmas, a much-needed holiday, or the “voluntary” payment for a school trip, so that their child does not stand out among their peers. Similarly, divorce, illness, or similar catastrophes can strike at any time and render a previously manageable level of debt unsustainable. However, if the debtors’ needs are put ahead of all other considerations, then there will be those who will try to take unfair advantage, leaving banks across the financial spectrum unable to lend with any certainty. We regularly hear stories of inappropriate advice given within the debt advice sector, but few people realise the barrage of half-truths and manipulation that some debt advisors face every day. For every honest debtor that has fallen on hard times through no fault of their own, there are those who, by their own admission, share a degree of culpability for arriving at their current level of unsustainable debt, and even those where an IVA is being used as an easy way of fending off pressure while another solution is sought, or to protect an asset that should really be made available to the creditors. We now see properties that have a reasonable prospect of equity, or even realisable current equity, excluded from an IVA and replaced by 12 monthly payments that in no way reflect the value of the equity in the property.
Before we go further, but possibly too late to avoid some criticism on social media and in the hallowed halls of the FCA, we should point out that when visiting IP clients we help them to comply with the current regulatory requirements, and the views in this article, while strongly held, do not reflect what we would have to tell a client to do on a visit.
So, in this environment, where everyone seems to be supporting the debtor and finding an affordable set of monthly payments, regardless of the underlying asset position, we welcome HMRC’s new modification, even though it is really just an up-to-date revision of their existing policy. Whereas the protocol requires a month 54 valuation and, if a remortgage is not possible, defaults to 12 more payments in lieu of equity release, with the property itself excluded as an asset, HMRC will now seek a modification that is much more clearly aligned with creditors’ interests and an IP’s duty, as Supervisor, to maximise realisations. HMRC are saying, essentially, that the property should remain an asset of the IVA and be valued in month 36, at which point the creditors’ views will be sought on the correct strategy, which could include the sale of the property. On one hand, their modification is more generous than the Protocol, as it excludes properties where the debtor’s share of the equity at month 36 is less than £10,000, without requiring additional payments to compensate. However, on the other hand, it is potentially significantly more draconian, in that for cases with more equity, if a remortgage or similar solution cannot be found by month 42, the property has to be sold to realise the debtor’s equity. Even that is not as harsh as it seems, however, because by dealing with the property earlier, HMRC are in fact allowing time for an alternative strategy to be put forward as a variation.
At first glance, it may appear that HMRC are opposing the Protocol or even, at risk of being demonised, not treating the debtor fairly. However, if you look at it from HMRC’s view, this is just a sensible approach that balances the debt forgiveness allowed with the sacrifice that the debtor has to make to warrant it. HMRC have only ever been reluctant observers of the Protocol. Their position is that of an involuntary creditor, deliberately deprived of money properly due to them under statute. They have never recklessly lent a penny and the money that they are owed is needed, ultimately, to fund the country. It is no surprise that they are less than happy to see a debtor underpay by thousands, but retain significant personal wealth in a property. Their new modification, which has been specifically amended to allow for the current trend of rising property prices and increasing equity prospects, is arguably a more appropriate solution than the Protocol equity clause that was forged in the fire of a property crash, with no knowledge of just how long the flat economy would continue. The fact that it seems to put repayment of the creditor ahead of the physical and emotional wellbeing of the debtor would almost certainly cause the FCA difficulties if it were proposed by someone in the FCA regulated sector.
Sometimes the FCA seems to regulate on the basis that the consumer always needs protecting from the “nasty” banks, because they would not have got into that position if they had not been lulled into a reckless sense of spending invincibility by aggressive bank lending. The World, and the FCA’s regulation of consumer debt, is obviously more complicated than that. Many financial institutions expend significant resources checking the affordability of any lending or financial product offered to any consumer, no matter how apparently wealthy or how strong their income stream. Even the demons of the 2006 financial crash, the credit card companies, are more careful about who they lend to, while the current “bad-boys”, the high-interest payday lenders, have rigorous affordability checks and only lend relatively small amounts. There have been mistakes and poor practices, but effective intervention by the FCA has generally addressed them. Making the whole financial industry wear sackcloth and ashes for past sins and accept poor returns from settlement arrangements because of some residual guilt, seems like poor economics. If, as some commentators would like, personal insolvency regulation is brought under the auspices of the FCA, we fear a further drift towards poorer and poorer returns to creditors.
We think that effective and robust insolvency regulation, outside the FCA, and prioritising creditor realisations over the debtor’s self-interest is essential. However uncomfortable the current IP exclusion from FCA regulation may be, the difference between debtor-focussed advice and independent, or even creditor-focussed formal insolvency solutions should be maintained. Insolvency regulators are increasingly looking back down the supply chain to look at the practices of those who refer individuals to IPs for IVAs. They are holding IPs responsible for the marketing and case acquisition practices of their referral sources. Far from being “unregulated”, many of those who generate such referrals do so within FCA regulation and provide debtor-focussed, ethical solutions, just one of which, in the right circumstances, is to refer the debtor to an IP for an IVA. We would love to see the IP exclusion extended to allow IPs to exercise the full range of their insolvency knowledge and skills to advise on entering bankruptcy, but we can also see the problem that the FCA has with the potential for the exclusion to be abused. In any event, we don’t think it is too hard for an IP in general practice to get a licence from the FCA to cover the few regulated cases that they are likely to run into each year. Any regulation requires a minimum standard on entry and constant improvement for continued regulation, but an IP that wants to work in that sector should be able to make the necessary adjustments. Clearly, any such application will be more complex for an IP operating with high volumes of consumer debt clients, but we see that as an IP working in the FCA regulated sector, not the FCA encroaching upon IP regulation.
We are not convinced by the argument that any unregulated debt advisors and lead generators will be somehow miraculously rounded up and constrained by moving the regulation of IPs into the FCA sector. If the current combined efforts of the FCA and the insolvency regulators cannot stamp out unregulated advisors, why would taking out the insolvency regulators improve the position? We think that the solution lies in closer working between the FCA and the insolvency regulators, so that those who are carrying out regulated work without appropriate authority are identified and denied access to the market, while those dealing with them are warned, re-educated on the requirements of the different regulatory areas and, if necessary, punished. We suspect that some of the noise around the regulation of the debt advice sector is fuelled by the commercial rivalry of some of those involved in the sector. Some seek to carve out their niche by pushing their ethical credentials and hinting that others may not be so angelic, while others point the finger at larger firms, saying that they must be breaking the rules to be so much more successful. In the end however, professional jealousy is not a reason to change the regulation of an industry. The present separation ensures that the interests of creditors are protected, while the debtors also have a champion to ensure fair play. Vive la différence!
