There has been a substantial increase in the number of IVAs being entered into over the past 6 years, largely as a result of changes in the regulatory landscape.
In April 2014, the Financial Conduct Authority (FCA) were tasked with introducing stringent regulations into some previously unregulated areas within the debt management sector, when they assumed the responsibility for regulating Consumer Credit from the Office of Fair Trading (OFT).
Since then, new FCA regulations have been introduced with the intention of promoting higher standards of debt advice across the whole debt management sector and, to a large extent, these new regulations have been very successful in achieving that goal.
The new regulations made informal Debt Management Plans (DMPs) subject to scrutiny by the FCA, which, in turn, made them troublesome to manage and less profitable for Debt Management Companies (DMCs) to administer, with many DMCs being forced out of business.
Consequently, marketing companies that previously generated customers for the DMCs found their customer base shrinking, so some repositioned themselves to serve the heavily regulated IVA market instead.
It is no surprise, therefore, that since the introduction of stiffer regulations on DMPs, the number of IVAs being administered has risen sharply.
Unfortunately, this has been matched by a huge increase in the percentage number of IVAs that are failing to complete successfully.
Why is this a problem for consumers?
Prior to 2014, the advice that debt consumers received would, more than likely as not, have been to enter into a DMP because it was informal and unregulated.
A DMP is a relatively easy sell to the average consumer who was struggling with a debt problem, which meant that the marketing company didn’t need to employ qualified or trained advisors because, should the plan prove later to be inappropriate, consumers could withdraw relatively unscathed.
The same can’t be said of an IVA.
Due to its formal nature, an IVA is a complex solution with legally binding terms and conditions. It also comes with a requirement for the advisor to ensure that everyone they advise to enter an IVA is fully informed on the alternative options available to them, before they commit to the process.
Furthermore, due to the higher fees and the way that these fees are taken, the consequences of withdrawing from an inappropriately arranged IVA can cost the consumer thousands of pounds in lost payments.
Current government statistics show that nearly 1 in 5 IVAs terminate within the first 2 years of what is normally a 5 year agreement.
It stands to reason that the percentage increase in IVA failures is directly related to the quality of advice being received during the initial stages of the marketing process, and the lack of care and attention being given to the suitability and sustainability of each potential IVA.
This could be due to a lack of training, with some advisors simply not skilled enough to appreciate the subtleties of what solution is in the consumer’s best interests or, perhaps, it’s down to the overenthusiasm of a commission-driven sales person who is being financially rewarded on the number of IVA clients they can convert, rather than being incentivised to provide the most appropriate advice.
This is why it is so very important to only seek advice from advisors who are not being paid a commission and to only use FCA regulated IVA specialists, rather than marketing companies.
You should always make a point of checking the FCA license of anyone or organisation that you receive debt related advice from. You can do this by searching the FCA register at the FCA website, here: https://register.fca.org.uk/
You could also read this blog which provides some other pointers to help you determine whether you are receiving sound advice.
Telemarketing for IVAs
The success or failure for telemarketing companies often revolves around the quality of the data they are cold-calling and there are rich rewards for telemarketing companies that can generate IVA leads to sell to insolvency firms.
In most market sectors, the cold-calling approach is likely to be completely harmless, other than being somewhat annoying to the disinterested consumer, but when cold-calling strategies are employed within the IVA sector, issues can arise.
Some marketing companies operating in the debt management sector buy data related to people who have recently been refused a consolidation loan. If the data is very fresh, it can lead to them cold-calling potential customers about entering into an IVA even before the consumer has realised they have a financial problem.
For example, someone might have multiple debts they want to consolidate. That means they approach a loan company to take out a consolidation loan to pay off all their individual debts and bring everything into one payment. Consolidation loans like this offer a practical way of reducing the monthly cost of debt.
However, even though the person may feel completely in control of their debt, a consolidation loan company could refuse a loan if they consider there’s a risk the customer is overstretched. For some people, this loan rejection can be the first sign that they have a debt problem.
At this point, the consumer is unprepared and not necessarily aware that there are different options available as to how to solve their new-found debt problem. So, it’s easy to see how someone might be drawn into the belief that an IVA is their best option when it’s potentially being described as similar to a consolidation loan, in that you only have one repayment and it reduces your debt.
It’s also easy to understand how somebody who’s approached in that environment and in that way might take what they’re told at face value, without looking into it much further, only to later find out that there are several downsides that they maybe weren’t made fully aware of.
Knowledge is power
Marketing companies have become more adept at finding consumers who are more prone to needing an IVA as time has gone on. Their advisors have also become much slicker in terms of how they are able to highlight the benefits of an IVA to make this sound like it is, without doubt, the best option.
In life, it is often said – Knowledge is power, and this is particularly true in the world of debt advice. The person who has information holds a great deal of influence, meaning an advisor can influence someone’s opinion, just in the way they deliver that knowledge.
If a client trusts that their advisor is offering holistic advice but, in reality, they are simply distorting the alternative options to sound less favourable, they can relatively easily elevate the decision to opt for an IVA into a ‘no-brainer’ for the individual concerned.
This issue is further magnified when you realise that IVAs are the only debt solution that generate commission for the advisors. If an individual enters into a Debt Relief Order (DRO) or Bankruptcy, there is no financial remuneration, because those particular solutions have no commercial value to the marketing company.
Now, for one minute imagine that you’re in a restaurant and you ask the waiter to advise you on the best dish on the menu. If he were to say, ‘The spaghetti is best, by far.’ you may well order it.
But what if you were then told that the manager had agreed to pay a £5 bonus for every bowl of spaghetti he sold, would you still trust that the spaghetti really was the best dish?
At the very least you’d probably question whether the waiter was just recommending it because he’s getting that financial reward.
Yet this is exactly what’s happening behind the scenes in the debt advice sector.
With no checks and balances in place to measure the quality of initial advice being provided there’s a real risk of an abuse of power taking place, as described above and, ultimately, a higher risk that IVAs could be mis-sold.
Caveat Emptor – Buyer beware.
Now, it could be argued that responsibility rests with the customer to do their fact checking and not simply take their advisor’s words as gospel.
However, the uncomfortable truth is that many people with financial difficulties are already extremely vulnerable and they simply may not have the capacity to fully appreciate the different options available to them without someone providing some unbiased advice.
That’s why the onus of responsibility should rest solely with the individuals and organisations that are giving the advice.
It’s time for a fresh approach
Over the past 6 years, the IVAorg helpline has been offering advice and support to thousands of individuals struggling to understand the terms and conditions of the IVAs they had entered into with other insolvency practices.
It’s no surprise, therefore, that IVAorg’s management team recognised some time ago that change was needed in the way advice on IVAs was being provided. Change that would help to address the concerns mentioned in this blog.
It was this obvious need for change that drove us into opening our ‘Not for Profit’ insolvency practice, because we believe that there is no better way to effect the required changes than by setting the new standard of excellence in the services we provide and quality of advice we give.
Our primary aim is to help our customers better understand the debt they have and the reasons that lay behind it, helping to ensure that, wherever possible, any debt remedy we advise will be more than a temporary fix.
We take time to explain to each client how there are generally several different ways of getting out of debt and provide all the information that they need to empower them.
At IVAorg, we are trying to level the playing field.
We strive to deliver information without bias so that our customers can make an informed decision for themselves on how they want to tackle their debts, rather than being steered or manipulated.
By improving quality of advice, we also improve the sustainability for all our IVAs, not just the 70% who will survive an IVA through the current way that things are being done.
Obviously, we can’t know the future and we can’t say that every IVA we process will succeed, but we can hand-on-heart say that anyone entering an IVA with IVAorg CIC will have chosen to do so, after being made fully aware of all their options and the potential consequences, in the event that things don’t work out as expected.
How to deliver this fresh approach to debt advice
IVAorg was borne out of a recognition that there was a need for better quality advice in this space.
One key element to our approach is our desire to tune in to our customer’s circumstances. The better we understand their situation, the more relevant and helpful our advice will be.
Related to this is the way we articulate how each solution would be applied in each individual case.
This helps to demystify the solutions, by describing in layman’s terms how they would be applied to each client’s personal circumstances. This really helps people appreciate each solution for what it is, rather than focusing solely on the positives of one solution and the negatives of other competing solutions.
Removing the pressure to make a decision is also hugely important. Some of the marketing companies I’ve talked about will ask someone to commit themselves within minutes of receiving advice.
We allow someone space, to take things at their own pace. This process should be about helping someone to arrive at a conclusion they’ve reached for themselves, rather than being bullied into it.
We use our industry’s leading software, which provides efficiency throughout all stages of the process enabling swift action where necessary.
As I’ve said, the industry needs to move away from the model of commission-driven advice to one where all advice is provided to serve the best interests of the customer, rather than there being a danger of it being provided to serve the financial interests of the advisor.
That’s why we don’t pay our advisors any commission.
Better training for better advice
We train all our advisors to ensure they are following the ethos of the company. This is about cultivating the right mindset. It’s not only about having good, solid and reliable knowledge about the solutions. We encourage all our advisors to have an empathetic mindset that allows them to provide advice without it getting distorted by an underlying bias on their part.
As an advisor, it’s a liberating experience when you don’t have to worry about what option the client chooses. It gives you the freedom to explain things in detail and what’s remarkable is how good customers generally are at finding the best solution for themselves when they’re not being steered in any particular direction.
Putting in place some accountability
Currently, there is no accountability on the marketing companies or their advisors. When an IVA fails, the customer will have moved so far down the process that the commission the advisor earned will be kept.
We believe there needs to be more accountability, so we’ve created a pledge to provide a level of assurance that IVAorg will not stand to gain from a client’s misfortune, whilst also holding the whole process to the highest levels of accountability.
The IVAorg pledge
“Should your IVA fail to complete successfully through no fault of your own, we pledge that the fees you’ve paid will be used to reduce your debt to the maximum effect, guaranteeing to leave you no worse off.”
By introducing this pledge, we are holding ourselves accountable should the advice we have previously given prove, in hindsight, to be against our clients best interests.
Should any of our clients experience a change in circumstances beyond their control that is severe enough to subsequently render their IVA unable to complete successfully, IVAorg will reimburse any fees we have drawn to that point, ensuring that the client no worse off as a result.
To find out more about how this particular process works in more detail, please visit https://www.iva.org/our-approach-and-pledge and check back in next week for a new article on who we are and what we do.