What’s the future for IVAs?

by Catherine McNeill, Head of Insolvency at Financial Wellness Group

The IVA sector has come in for a fair amount of criticism lately. Earlier this year, the >Woolard review said that IVAs (and Trust Deeds) were not working well for consumers, and highlighted the number that fail in their first year. Whilst the >Insolvency Service has subsequently published figures showing that the first year failure rate has dropped from 8.8% for 2018 IVAs to 5.7% for 2019, it emphasised that the overall proportion of IVAs that don’t go on to complete successfully was increasing.

Whilst our first year failure rate is far lower that the sector average, we share the concerns raised by Woolard and the Insolvency Service amongst others. However, there are a number of changes coming to IVAs over the next few months that have the potential to make a positive difference for customers.

In February, Lord Holmes introduced an amendment to the Financial Services Bill that would have imposed tighter regulation on introducers. Whilst the amendment didn’t go through, in its response the government made it clear that it would be publishing the results of its 2019 consultation on insolvency regulation. The Insolvency Service has also started a Call For Evidence on the broader insolvency regime too.

Insolvency Regulation

An update to the way individual insolvency is regulated is long awaited by the sector. We’d like to see closer alignment between the debt advice and the insolvency regime. It’s clear that more must be done to clamp down on introducers passing themselves off as debt charities, for example.  It’s worth adding that whilst we do take IVAs from introducers we only work with firms that are either Insolvency Practitioners, or which are FCA authorised.

An updated IVA Protocol

The Insolvency Service made the point that failure rate for IVAs improved after the IVA Protocol was introduced in 2008.  An updated version of the Protocol is due to be launched soon. Whilst we don’t yet know the details of what this will include, we hope that it will further simplify some aspects of IVAs, improving them for customers. For example, we are hoping to see more clarity for home owners: currently they have to wait until near the end of their IVA before discovering how their property will be treated. It would be better for customers to have this clarity at the start.

DRO criteria changes

The Insolvency Service has just completed a short consultation on proposed changes to the DRO rules, with the intention of bringing in the changes from June. If they go ahead, as consulted on, this will mean that customers with a disposable income (DI) of up to £100 (rather than £50) will be able to access DROs, and the maximum debt level will be increased to £30,000.

Inevitably these changes will mean some customers who were starting an IVA will qualify for a DRO instead. There’s been a lot of debate in the sector whether or not these lower DI cases (under £100) are appropriate as IVAs or not. Whilst it is certainly true that these customers are more likely to struggle to stick to their payments, many do and go on to successfully complete their IVAs. Whilst giving these consumers access to DROs will be welcome news for them, creditors may rue the loss of the dividend previously received on these cases.

Beyond these changes, we are also campaigning for broader changes to the insolvency regime. For example we don’t believe that people starting an IVA should be ‘shamed’ by being placed on a public register. Worry over being placed on a public register acts as a barrier to entry for some people who should take an insolvency solution. It puts people at risk of identity theft and unsolicited marketing. Insolvency Practitioners also spend time and money applying to the courts for exclusions for customers who would be put in danger by being listed on the public register. A private register – which could be accessed by firms with a legitimate need to do so – would work just as well.

Overall we believe that, for the right customers, IVAs are a highly effective debt solution. The changes that are coming to the sector should reinforce that and provide further protections for customers. Whether they go far enough will remain to be seen.