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Report: What the IVA protocol review means for your business
Wednesday 13th January 2010At the end of last year the IVA Standing Committee issued its review of the IVA Protocol. Its objective was to establish the impact of the protocol on debtors, creditors and debt solution providers since its introduction in February 2008.
Individual Voluntary Arrangements (IVAs) were established in 1986 as an alternative to bankruptcy, aimed at enabling individuals who had assets or income (or both) to repay at least some of their debt, resulting in higher returns to creditors than bankruptcy. IVAs create a binding contract between debtors and creditors, enabling individuals to make manageable repayments over a period of time, normally 5 years, without incurring further interest.
An IVA proposal will be put to creditors and voted on. For a proposal to be approved at least 75% by value of the creditors have to vote in favour, once approved, the proposal is supervised by a licensed Insolvency Practitioner. Meanwhile, prior to approval, the creditors are able to put forward modifications to the proposal.
For brokers diversifying into debt solutions, the findings of the IVA Protocol review are important. The review emphasised the benefits of using a debt solution provider that is IVA Protocol compliant, as the number of modifications to a proposal can often reach very high numbers.
Interestingly, the industry perception is now viewed that an IVA is an alternative to a Debt Management Plan (DMP) rather than bankruptcy. There are approximately 4 to 5 DMPs for every IVA, which should be borne in mind when referring cases to a debt solution provider.
36% of debtors blamed ‘living beyond their means’ as the primary cause of their financial difficulties and almost 80% of debtors had been through one or more previous debt solution before embarking on their IVA. 71% of debtors had had alternative forms of debt relief formally discussed with them before they embarked on their IVA, with over 40% having tried some form of debt consolidation and just under 15% having tried re-mortgaging.
One of the regulator concerns remain that some companies are ‘flipping’ clients from one solution to another after several months to earn more fees. This practice is currently under investigation by the OFT and confirms the need to choose a provider that offers genuine all-round debt advice at the initial client meeting or consultation, often with the financial adviser sitting in.
The impact of the IVA Protocol has been to bring back into balance the use of an IVA as a very effective debt solution for highly indebted consumers with regular earnings and a reasonable level of disposable income. Base levels should be over £15,000 of debt with disposable income over £200 per month, though the industry average is over £50,000 of unsecured debt with disposable income over just over £300.
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