Today, 27 September 2018, the government’s Insolvency Service published its latest report into the monitoring and regulation of insolvency practitioners (IPs).
The report deals with Individual Voluntary Arrangements (IVAs). It brings change. Change in all the areas that consumer representatives, free-to-client debt advisors and creditors have been shouting for over the past few years. Change, frankly, that many insolvency practitioners who specialise in IVAs also want to see.
This report spells the beginning of the end for poor or inappropriate IVA advice. Slapdash commercial lead-generation and fees firms can’t justify should become a thing of the past. Cross-selling of products that don’t meet an IVA customer’s needs will need strong justification..
This will only happen if the insolvency regulators (the Recognised Professional Bodies or RPBs) step up to the plate. They have been found wanting and a more formal approach to IVA insolvency practitioner discipline (with more sanctions) seems certain.
“This report is a good thing. It should lead to change. IVAs should be better advised. Creditors may get better returns. But, on its own, it isn’t the answer to ensure everyone who is right for an IVA gets one – and that their IVA doesn’t just get them out of debt but helps rebuild their financial capability. This stops the rot – it doesn’t rebuild the ship.”
This report will bring higher standards in the selling, advising and administration of IVAs. It will renew the clamour for IVA firms to be Financial Conduct Authority (FCA) authorised and regulated. TIP doesn’t think that will happen or that it needs to – read on. It will bring tougher consequences for insolvency practitioners who don’t do things well (We were tempted to say “by the book” – but that is changing too). The regulatory culture is changing. This report and last November’s Insolvency Service guidance on volume IVA provider monitoring pushes IVA regulation closer to “treating customers fairly”. The doctrine that drives the FCA approach.
We need to guard against unintended consequences. But, this report will have a huge impact on restoring order to the IVA market – helping to bring about the trust between IVA providers and free-to-client advisors that is absolutely essential if this solution is to reach the thousands of people for whom an IVA is really the best option.
The key findings of the report are alongside. Read that far and no further and you might think that all in the garden is rosy – but with a little blight. Read on. The report is written with a straight bat by civil servants with no penchant for hyperbole. The report identifies major issues, where the RPBs must take clear, urgent action.
The report contains much that should bring about change that is good for customers. For example:
- The report states that monitoring visits identified
- “poor quality advice being given to debtors, potentially leading them to enter an IVA when other debt solutions may be more appropriate“.
- “it is not clear what the justification is for some charging of expenses”
- “financial products being potentially mis-sold to individuals who do enter an IVA“
- And, the report suggests an evolution in the regulatory approach that will make many IPs sit up and take note:
- “Although RPB monitoring teams identified concerns like this during their visits, the post-visit process appears to lack robustness in some cases, and there has been, at times, a failure to address the issues in a prompt and efficient way. The emphasis tends to be too much towards recommending changes for the future, without sufficient consideration of whether regulatory penalties should also be applied and whether remedial action should be taken where debtors or creditors have been disadvantaged.
- And~: “In the majority of these cases no regulatory action has been taken, even though there was evidence in some cases pointed to debtors potentially being in the wrong debt solution. In our view, the findings in many of the visits we shadowed were sufficiently serious to warrant formal investigation for disciplinary consideration.‘
The writing is on the wall for IP Regulators: Cosy relationships are out. The writing is on the wall for IVA providers too: Get it wrong and it’ll certainly cost you. And your IPs could lose their licences.
When it comes to advice, the report identifies examples of IVA providers inappropriately steering people toward IVAs and manipulating income and expenditure guidelines to do so. The report’s authors noted that the RPB caught these behaviours. But they don’t think the regulator took “robust action” as a result.
The report found cases where little consideration was given to whether the IVA was affordable over 60 months.
Cases were seen where solutions other than IVAs could have been better for the client – and they weren’t advised so.
Contracts between IPs and lead generators were found where a bigger commission was paid when higher IVA contributions were agreed. Some lead generators were not FCA regulated and seem to have been giving specific debt advice (and bad advice at that). The RPBs will now need to examine the effects of lead generator relationships closely.
The report concludes that “The commercial aspect to these agreements is, in our view, a driver for inappropriate advice“. Perhaps time for a reminder that IVAs arranged through TIP will always come from free-to-client debt advisors who advise on all options and aren’t paid.
It’s good that these long-recognised issues are formally identified in this report. And it’s good that the Insolvency Service came up with the following advice:
“…we recommend that RPBs should treat breaches of SIP3.1 in the same way as other serious misconduct and take appropriate regulatory action. Where there is evidence that indicates that a debtor may have not been properly advised, or isn’t in the right debt solution, the matter should be referred for formal investigation to the relevant committee. Consideration should also be given to remedial action for the debtor, where there is evidence that there has been poor advice. Any remedies should not prevent further disciplinary action but they may act as mitigation.“.
So, these harms are now a clear risk to an IVA firms ability to trade. Things will change. Not least because if they don’t the Insolvency Service will ask questions of the regulators. A further risk lies in the reports call for regulators to “focus on remedial action for the debtor“. That phrase is like blood in the water for claims management companies.
IVA Early Exit Loans
A further key concern identified by the report is “financial products being potentially mis-sold to individuals who do enter an IVA”. The only such product I can find specifically referred to in the report is the early exit loan – something the free-t0-client advice sector has muttered and grumbled about a lot.
The report says: “The loans are sold on the basis they will help the debtor in the long term, by improving their credit rating. There does not appear to be any evidence that this is actually the case.” And: “Our concerns are that some IPs working for firms that employ early exit loans are using their position as supervisor to facilitate introductions to an alternative provider of finance. The relationship between the debtor and the supervisor might unduly influence the debtor to enter into the loan. By concluding the IVAs early the IPs concerned will also benefit by not having the ongoing cost of managing the IVA so there may well be a conflict of interest.”
This is seen to be an issue for RPBs too: “Although this practice has been challenged by RPBs on monitoring visits, there has yet to be any determination made, or regulatory action taken“.
We think this report is part of a bigger whole. It probably influenced last November’s revised guidance on monitoring volume IVA providers. The content won’t be news to the RPBs and recent events seem to show they are already taking action. The report itself refers to this.
But, there are still unresolved issues.
“Dear IP” letters give updated guidance to the insolvency profession. The last one contained a draft chapter banning disbursements (ie certain expenses) in IVAs. This wasn’t a sledgehammer-nut situation. Inappropriate disbursements are a big problem in our sector. But it was not a proportionate or helpful response. Some costs are absolutely necessary. Fortunately, the draft chapter disappeared before final publication – but it’s out for further consultation, TIP understands.
TIP’s view on this issue is that some IVA firms have used disbursements to increase the margin on IVAs where fees have been squeezed (perhaps inappropriately). TIP’s solution would be to ban any relationship (ownership by company or individual, management agreement, shareholding, etc) between an IVA firm or it’s owners and a company that charged it IVA costs. The Insolvency Service could consider a register of approved providers of services which have no such connections. They might consider publishing a spread of costs for each element too.
The report wants a new relationship between the RPBs and the IVA firms they regulate. The feeling we get from the report is that the Insolvency Service believes the relationship between regulator and regulated has been too informal, with not enough disciplinary action. There has been too much reliance on firms mitigating risks pointed out to them. Customers treated badly have not had their position rectified. We couldn’t find the word ‘cosy’ anywhere in the report, but we couldn’t help feeling it was there.
This report should lead to big behaviour changes once the RPBs absorb the implications and start monitoring and disciplining in the way the Insolvency Service wants. But…
Some will call for insolvency practitioners and IVAs to become FCA regulated. We’d agree that’s a debatable position. But right now we don’t think it’s the right solution. Revisions to the IVA Protocol and the 2017 volume IVA provider regulatory guidance mean the IP regulatory approach now closely follows the FCA in key areas. This report confirms that trend. And, we think, if the RPBs do respond to the challenge set out here, then they are in a position to be more agile and better informed than the FCA. And, they can take more rapid action to put things right. But, this report may cast doubt on the approach of RPBs (especially the largest) to their members and this is clearly the last chance saloon.
Now, unintended consequences. We’ve touched on disbursements: a straightforward ban is worrying. This could benefit the large IVA providers, and make it difficult for smaller firms to thrive. It could restrict access to IVAs. Firms that achieve poorer outcomes might cope. Those that do well for customers could crash out.
But the biggest unintended consequence comes from the more formal, discipline and punishment focussed regulatory approach this report wants to see.
We think that’s necessary and right. The worry is that the RPBs may want an early scalp to convince the Insolvency Service that they’ve got the message. A problem many have thought exists is that the larger IVA firms have the deep pockets to challenge disciplinary outcomes, or at least keep proceedings going for some time. So, this new, robust approach could have consequences for the cost of regulation. This might make smaller providers who achieve good outcomes consider their future. And, of course, the RPBs might consider those smaller firms as easier targets for this new approach.
TIP’s view is this report is a good thing. It should lead to change. IVA advice should be better. Creditors may get better returns. But, on its own, it isn’t the answer to ensure everyone who is right for an IVA gets one – and that their IVA doesn’t just get them out of debt but helps rebuild their financial capability. This stops the rot – it doesn’t rebuild the ship.
For another view, see this from blogger, Debt Camel.