IVA Market Crashed FCA Says: Here’s Why

Regulators have warned that millions of Britons who need debt advice due to the coronavirus pandemic could be pushed into inappropriate debt solutions by companies seeking to profit from commission.

“The market for individual voluntary arrangements in Britain is broken,” the Financial Conduct Authority said in a 68-page review of Britain’s credit and debt situation published yesterday morning.

It said the commission totaling ‘over £1,000’ handed over to lead generation third parties paid to register with Britons at Risk and fees of up to £5,000 charged to those in debt led to ‘potentially harmful business models’ and ‘ bad practices” that benefited neither consumers nor their creditors.

The struggle: 1-1.5 million people may need debt counseling in the wake of the pandemic, according to regulators

The struggle: 1-1.5 million people may need debt counseling in the wake of the pandemic, according to regulators

She called on regulators and the government to “quickly address” the problems in the “broken” IVA market, including the way advance fees have incentivized companies to push consumers into a controversial debt solution regardless of whether it’s right for them.

The warning from the FCA, which estimates 1 to 1.5 million Britons may need debt advice as a result of the pandemic, comes less than a week after the UK’s advertising watchdog criticized the marketing practices of unregulated advertisers accused of trying to “scam” Britons into handing over their details.

The companies, Fidelitas Group and National Direct Service, have imitated legitimate debt charities and claimed to be accredited by official government bodies such as the Money Advice Service in an attempt to lure visitors and pass their details on to debt solution providers in exchange for commission.

IVAs, or individual voluntary arrangements, and the Scottish equivalent of protected trusts are a form of debt solution that has boomed in popularity in recent years, at least in part due to their mass marketing as a ‘life hack’ and a way for those in debt to write off parts. large amounts of their debt.

They charge an average up-front fee of around £5,000 and see borrowers sign up to formal, legally binding debt repayment schemes that can run for five to six years.

They are usually only recommended for those who have more than £10,000 in debt and can see debtors required to use pension or other savings to pay creditors or remortgage their homes.

The number of IVAs reached an all-time high in 2020 for the third year in a row

The number of IVAs reached an all-time high in 2020 for the third year in a row

However, despite the fact that it’s not always the best course of action, the number of IVAs rose from 49,268 in 2016 to 78,478 last year, according to the latest figures from the Insolvency Service, an all-time high for the third consecutive year.

And the number of bankruptcies rose 1 percent year-on-year despite the fact that the number of insolvencies decreased overall, as did the number of bankruptcies and debt relief orders.

As a proportion of all insolvencies, IVAs made up seven in 10 last year, up from 54% in 2016.

The website and advertisements of the Fidelitas Group, which called itself the

The website and ads for the Fidelitas Group, which called itself “Step Debt Support,” and the national direct service, which called itself “Step Debt Support,” were blocked by the ad regulator last week.

Although they must bet set up by registered insolvency practitioners, IVA clients are increasingly being turned over to so-called “volume IVA” providers by companies such as Fidelitas Group and National Direct Service.

Although they often impersonate legitimate debt charities like StepChange or National Debtline, they are not authorized to do “anything more than pass on leads,” the ASA said last week.

What debt solutions are there?

Although IVAs are an increasingly popular route for those who become insolvent, they are not the only one. Here are some other terms readers should know in order to dominate the conversation about debt:

Debt management plan: An informal agreement to pay off non-priority debts (which means excluding things like council tax and mortgage bills) in one monthly payment, for those who aren’t struggling so much that debts have to be written off. It can be free or for a fee

bankruptcy To those who owe at least £5,000 and have no means of paying it back. It costs £680 and is an admission of someone’s inability to pay their priority and non-priority debts.

Debt forgiveness order: Those who owe less than £20,000 and have less than £50 a month making them unable to pay their debts can apply for one of these. It comes with an upfront fee of £90, which regulators warn has proven to be a ‘major handicap’ for some, and usually lasts a year and the debts included in it can be written off after that.

Source: Citizens Advice

In its review, the FCA said: “Many respondents raised concerns about the functioning of the IVA and PTD markets.

They have questioned whether the often high upfront fees for these solutions lead to bad outcomes and practices for both consumers and creditors.

While this falls outside the FCA’s purview, it does have an impact on areas within it.

“High levels of commission – at one point in excess of £1,000 per referral – have led to potentially harmful business models in the regulated debt advisory sector as well as the unregulated lead generation sector”.

A Yorkshire insolvency practitioner responded to the FCA’s claim that the IVA market is ‘broken’ and said that the practitioners are ‘closely monitored and held to much higher standards through frequent compliance visits’, and said the FCA had failed to claim the Insolvency Practitioners Association’s views.

This is the money that the Commerce Commission has been contacted for comment.

But the concern that debtors are taking improper routes appears to be reflected in the fact that 8.4 per cent of listed investment agreements initiated in 2018 failed within a year of signing after debtors failed to keep up with repayments, the highest rate since 2002.

More than a quarter of 2016 IVAs have failed within three years, the highest rate since 2009.

Failure can leave borrowers on the hook for everything they owe and can cause them to go bankrupt.

The FCA warned that social media platforms and search engines were clogged by impersonators, a practice reported repeatedly by This is Money, that could ‘make it difficult for consumers to find the best advice provider for their needs’. .

StepChange said it has already reported 17 cases of trademark infringement and misleading ads to search engines this year.

The percentage of rewards that failed in a year reached its highest level since 2002 in 2019, adding to people's fears of being offered inappropriate debt solutions.

The percentage of rewards that failed in a year reached its highest level since 2002 in 2019, adding to people’s fears of being offered inappropriate debt solutions.

Sue Anderson of the charity said: ‘We fully agree that the FCA needs to work urgently with government and other regulators to ensure the right debt solutions reach the right people in the wake of the pandemic.

Right now, there are a lot of barriers to people getting the right help.

These range from the activities of lead generators impersonating debt charities to drive online traffic to IVA providers, to costing £90 to enter a solution such as a debt relief order that people in debt on low incomes often cannot afford upfront.

“Tackling these issues to ensure the availability of free, high-quality debt advice that identifies appropriate, accessible solutions for financially vulnerable people is vital.”

The review, which also made 25 other recommendations including buy now, pay later services such as Klarna, said, ‘The FCA, the Insolvency Service and the Scottish Bankruptcy Accountant should collaborate to quickly address issues that can be quickly observed in the IVA and PTD markets.

This should include close attention to issues arising from the fee structure of IVA and PTD products on debt advice and lead generators.

In the long term, the FCA should work with these bodies to create a coherent and consistent vision for the debt solutions market and a plan to achieve it.

A spokesperson for the Insolvency Service said: ‘We work with a range of partners to support people in financial distress to access appropriate debt solutions that suit their circumstances. We will carefully consider the report and its recommendations.

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