We comment on Insolvency Service data

Individual Voluntary Arrangements can be the best debt solution for the right people - but poor market practice means failure rates are higher than they should be

_{30 January 2020}

We comment on new data released today by the Insolvency Service, showing that the number of new Individual Voluntary Arrangements (IVAs) arranged in 2019 continued to rise, but so did the proportion of IVAs failing in their first year.

IVAs are a form of insolvency solution, registered with the Insolvency Service. They can be the right debt solution for the right people, and we recommend them to clients whose circumstances make them suitable. However, we're warning that the failure rates within the wider market should ring alarm bells and suggest that the bar needs to be raised further on regulation.

The Insolvency Service reports that, across the market as a whole:

• The total number of IVAs arranged in 2019 was 77,973, up from 70,796 in 2018.
• The proportion of IVAs that failed within their first year rose from a recent low of 4.1% in 2013 to 8.4% in 2019, the highest proportion since 2002. The equivalent figure for IVAs arranged through us was 2.6%.

StepChange Voluntary Arrangements (our subsidiary that sets up IVAs) arranged 1,226 IVAs, down from 1,346 in 2018. This accounted for 1.6% of the market, down from 1.9% in 2018.

For the first time, StepChange Voluntary Arrangements [see note 1 to editors] has decided to publish its own IVA performance data. This demonstrates a markedly lower termination rate than the market as a whole. While some IVAs will always terminate early despite all best efforts, the charity is concerned that such wide disparity implies some elements of poor market practice in some quarters, exacerbated by the patchiness of regulatory oversight, which are setting some people up to fail when they enter into an IVA. This matters, because if an IVA fails it can prove very expensive, potentially leaving people in a worse position than before.

Typically, IVAs [see note 2] are set up to run for five to six years. During this period, people stick to an affordable repayment schedule agreed with their creditors, who freeze any further charges and interest, and on successful completion of the IVA any remaining debt is written off – a very effective way of balancing the interests of the lender and the insolvent borrower in difficult circumstances.

However, if the IVA terminates early, lenders can re-impose any or all of the frozen interest and charges. Given that the typical set up cost of an IVA is over £1,000 this means that if an IVA fails, especially at an early stage, then it can prove to be very expensive for the person who took it out, as all the payments they make into the IVA in the early months may go towards paying to the setup costs. In addition, they lose the protections and benefits that the IVA provided. This is why it is important that providers advising on and setting up IVAs take every possible step to check that the client’s circumstances make an IVA suitable and affordable for them, and likely to remain so over the IVA period.

The chart below shows the proportion of IVAs that terminate very early in the market as a whole, and the equivalent proportion for those set up by StepChange Voluntary Arrangements.

The regulation of IVA providers is not straightforward. While all IVAs must be set up under the supervision of a suitable qualified Insolvency Practitioner, these practitioners are regulated by a number of different professional bodies. The number of IVAs that the Insolvency Practitioner supervises can vary significantly – from a few hundred to many thousands of cases The Insolvency Service has recently consulted on the regulation of IVAs, and the outcome of this consultation is eagerly awaited. We look forward to contributing constructively to further debate on how regulation can address some of the more problematic elements of market practice.

There will always be some cases where IVAs terminate early due to changes in circumstances. However, the wide variation in failure rates suggests that market practices may be driving poor outcomes for some people in debt who could be being poorly advised to take out IVAs that should be identified at the outset as posing a high risk of failure.

Peter Tutton, StepChange Head of policy, research and public affairs, commented:

“The worrying trend in relatively high failure rates suggests that the IVA market is not doing enough to protect people from the harm that can result when an IVA fails. Our concern is that the regulatory system is not sufficiently robust to ensure that the pursuit of profit does not trump good practice, especially in terms of referral fees and lead generation. Further work is needed to ensure that the risk of IVAs failing is minimised.”

Peter Wordsworth, Head of StepChange Voluntary Arrangements, added:

“In publishing our own performance data and making it transparent, on a voluntary basis, we hope we are taking a lead for the large volume providers to follow. People considering taking out an IVA need to understand that it can be an excellent solution – but only if it is the right one for the individual, and if the chances of it completing are very high. It seems entirely reasonable that people should be able to compare how successfully the IVAs that individual providers arrange perform compared to the market as a whole.”

Notes to Editors

• About StepChange Voluntary Arrangements: StepChange Voluntary Arrangements is a subsidiary of StepChange Debt Charity that advises on and arranges Individual Voluntary Arrangements (IVAs). Neither StepChange Debt Charity nor StepChange Voluntary Arrangements charge fees for advice on IVAs. Like all other IVA providers, StepChange VA does charge fees for setting up and administering IVAs. All surpluses from fees are fully returned to StepChange Debt Charity, making StepChange VA the only IVA provider in the market whose proceeds are fully used for charitable purposes. Provided the IVA successfully completes, these fees are effectively borne by creditors (as the client will see a significant proportion of their original debt written off). Fees are broadly equivalent to the contributions to the charity made by creditors in support of other alternative debt solutions. StepChange Debt Charity and StepChange Voluntary Arrangements only recommend and arrange IVAs where these are the solution that is deemed to best meet a client’s needs and circumstances. StepChange makes every effort both at the outset and on an ongoing basis to ensure that as few IVAs as possible terminate early, as this can be expensive for the client, and will always try to work with creditors and clients whose circumstances change to enable the IVA to complete successfully. Clare Lindley and James O’Carroll are the licensed Insolvency Practitioners overseeing the IVAs arranged through StepChange Voluntary Arrangements.
• About IVAs: In England and Wales, an Individual Voluntary Arrangement (IVA) is a formal agreement between someone in debt and their creditors to pay all or part of their debts. An affordable monthly payment is agreed and paid over a period of time, usually between five and six years. An IVA is set up by a licensed Insolvency Practitioner, who will work with the debtor to put a proposal together for their creditors to approve. An IVA is then binding on all creditors included in the IVA, and if the person in debt sticks to the payments agreed, the creditors will write off the outstanding debt once the IVA has completed. More information about all the different forms of debt solutions is available here.