Why we’re being transparent about the performance of the IVAs we arrange
By Peter Wordsworth, StepChange Head of Insolvency Services
This week, the Insolvency Service published its annual data on the IVA market, including a firm-by-firm breakdown of volumes of new IVAs arranged in 2021, and sector-wide performance of IVAs taken out over previous years. Yet again, following years of the same, the numbers give cause for frustration and concern.
Here, we shine a light on how differently our StepChange Voluntary Arrangements subsidiary data stacks up against the sector averages, why we think existing regulation isn’t fit for purpose in minimising the risks to consumers, and what can be done about it.
Why we’re making our own IVA data transparent
Two years ago, in the interests of transparency, we decided to make StepChange VA’s performance data public, and now we are doing the same again. We hoped that other firms would follow suit. They didn’t. Perhaps they will this time.
By way of background and context, as StepChange Debt Charity, we have all possible debt solutions at our disposal and we will support our clients in their choice of a suitable solution that fits their needs. This includes insolvency solutions such as bankruptcy, debt relief orders (DROs) and individual voluntary arrangements (IVAs), as well as repayment plans (and all Scottish equivalents). The charity has a subsidiary, StepChange Voluntary Arrangements, which sets up IVAs for those clients who choose this as a solution, where this is in line with a recommendation from the charity.
StepChange VA is itself classed as the sixteenth largest provider of IVAs, according to the latest Insolvency Service data, and registered 1.2% (983 out of the total number of 81,199) of all IVAs in 2021.
The Insolvency Service doesn’t publish performance data by individual firm, only an aggregate sector-wide picture. However, that picture isn’t pretty. Although termination rates on newer IVAs fell — probably because of the Covid-related temporary forbearance offered over the past two years — termination rates over the lifetime of an IVA increased from approximately 25% for IVAs registered between 2011 and 2014 to more than 30% for IVAs registered in 2016 and 2017. The 2016 and 2017 numbers are the highest since 2009 and are likely to increase further, according to the Insolvency Service, as many IVAs from these years remained ongoing as at 31 December 2021.
How does StepChange VA compare with the industry?
The chart below shows the overall industry termination rates of IVAs registered in each year, compared with the equivalent StepChange VA termination rate.
At this point, it is worth a reminder of why early termination on an IVA is so undesirable. In short, an IVA only delivers the benefit it is supposed to if it completes as planned. It is only at the very end of the 5–6 typical period of the IVA that the consumer gets the remainder of their debt written off by their creditors. If they don’t complete the IVA, then not only does the client lose the protections it offers, but they may find they have paid little or nothing off their debts despite having paid potentially significant fees to enter into the IVA.
That’s why we remain deeply concerned that the industry average termination rate is around double that of StepChange VA. In our view, this suggests that some IVAs may not be appropriate from the outset, and that others may not be adequately managed with sufficient flexibility and diligence during their lifetime. Although there will always be some terminations, we struggle to believe that in a well-run market there should be such a differential between our experience and the sector as a whole.
We see similar contrasting trends in completion rates between StepChange VA and the sector as a whole — that is, far more StepChange IVAs successfully complete than the industry average. The chart below outlines the contrast.
So, whichever way you look at it, we’re seeing a real difference between the experience of the wider market and of StepChange VA. This begs the question: why?
Why aren’t we seeing the same results as the wider IVA market?
There are likely to be several reasons:
· Certainly there is the potential for some difference simply because our market share is modest, so any individual year will not necessarily be in line with the much larger industry pool. However, we’ve seen the same trends for years — this isn’t coincidence.
· It’s highly likely that our risk appetite for failure is much lower than the wider market: because StepChange VA is a subsidiary of StepChange Debt Charity, which has access to the full range of debt solutions in the market, only those cases which the charity deems are most appropriately served by an IVA are ever introduced to StepChange VA. Stringent checks are in place to ensure that only cases likely to complete successfully are accepted, and there is careful management of every case — including renegotiating with creditors to allow IVAs to continue wherever possible if unforeseen circumstances arise during the lifetime of the IVA.
· However, we are also concerned that there is inadequate regulation of the IVA sector, and that under this weak regime some firms are selling IVAs in ways that put profit before the needs of the client.
On the basis that “everything connects”, it’s also no surprise that the problems we experience with impersonators — advertisers on search engines and social media platforms who purport to be StepChange or other debt advice charities, or who use branding, imagery and sometimes even URLs deliberately designed to confuse those searching for debt advice to believe they have reached us — are more often than not lead generators for commercial IVA providers.
Given the advertising tactics used, a number of which the Advertising Standards Authority has previously judged as misleading, it can be no surprise that some people are lured into IVAs without the benefit of proper debt advice and a consideration of all possible solutions and whether or not an IVA is truly the most suitable.
So what can and should be done?
The Government is currently consulting on the future of insolvency regulation (consultation closes on 25 March 2022), and is minded to create a single regulator for Insolvency Practitioners, sitting within the Insolvency Service. This would encompass the regulation of the firms providing IVAs (and not just individuals as currently under the multiple recognised professional bodies regime). This very much needs to happen, in our view, with more robust monitoring and more meaningful sanctions for firms who fail to meet professional standards.
Over the past two years, there have been multiple attempts by multiple regulators to address some of the worst problems, including robust proposals from the Financial Conduct Authority to ban debt packager firms from accepting referral fees.
We hope this means we’re facing a realistic prospect in the future of meaningful regulatory reform, which is to be welcomed. However, it isn’t here yet. In the meantime, the current review of insolvency practitioner rules (SIP 3.1) must result in a stronger requirement for individuals to have received appropriate advice before being referred. Monitoring of large providers should also be increased, with efforts to encourage more robust action — including publishing termination rates by firm. The Insolvency Service could also work with creditors, advice providers and agents to help them identify IVAs which should be flagged as high risk and not be approved. This could also be a forum to discuss the current problems in the market and issues with the design of IVAs themselves. Finally, continued pressure against misleading IVA lead generator activity — and inclusion of scam ads in the scope of the Online Safety Bill — would also help.
Let no-one think we are anti-IVA. For the right clients, in the right circumstances, an IVA can be a genuine lifeline towards a realistically debt-free future. The overall structure of the product was never designed, though, for the most financially fragile consumers and the payment risks they can face, yet IVAs are being offered to some of them. What matters most at present is that IVAs should only be put in the place where this is highly likely to deliver what the provider says it will for clients. On the basis of our experience we are sceptical about whether that’s happening — and about the responsiveness of regulators to what seems to be a problem sitting right under their nose. We remain keen to work constructively with the wider sector to improve this market.