Chairman’s Report

This is the IPC’s seventh Annual Report.

As in 2005, the IPC’s work was dominated by the further rapid rise in personal insolvencies. The IS' statistics showed that in the calendar year 2006 there were over 109,000 personal insolvencies in England & Wales and Northern Ireland, of which some 64,000 were bankruptcies and 45,000 Individual Voluntary Arrangements (IVAs), representing increases of just over one-third and 120% respectively. In Scotland there were 5,430 sequestrations and some 8,200 Protected Trust Deeds. In addition, according to an estimate cited by the IS, some 200,000 personal debtors entered informal debt management plans.

During the year the growth in personal insolvencies and its causes attracted front-page news stories, editorial comment and controversy in both the national media and in the specialized professional journals. In the view of the IPC by far the most important causes are the much wider availability of consumer credit and its intensive marketing to higher-risk borrowers from the mid-1990s onward and, more recently, the rises in interest rates, council taxes and the price of utilities.

The changes introduced by the Enterprise Act 2002 in the bankruptcy regime and the heavy marketing of IVAs, which some press commentators and bank lenders have put forward as alternative explanations, may well have influenced the timing and composition of the insolvencies, but have probably contributed only marginally to the total number of individual debtors in distress.

In our last two Annual Reports we expressed concern that IVAs were being proposed for debtors who could not sustain the levels of repayments promised to the creditors combined with the fees charged by Insolvency Practitioners (IPs) for setting up and supervising the arrangements. We also argued for improvements in the official statistics on the outcomes of IVAs to help the regulators and for tighter regulation and monitoring of IPs’ advice to debtors on the suitability of IVAs. Though we believe there is still cause to be concerned about possible misselling, it is encouraging to be able to report a number of positive developments on the regulation of IVAs and their marketing:

• The IS is now able to produce meaningful statistics on the completion/failure rates of IVAs both in aggregate and for individual IPs acting as Supervisors. These will be supplied quarterly to the RPBs. This meets one of the recommendations made in our last two Annual Reports;

• The RPBs, through the Joint Insolvency Committee (JIC), have accepted our recommendation that all IPs must give full information about all available options and documented advice to personal debtors on the option most appropriate for their circumstances when an IVA is under consideration. IPs will also be required to satisfy themselves that the debtors have sufficient income to sustain the payments required by an IVA. This should minimize the risk of misselling IVAs to debtors on low incomes;

• Action has recently been taken by the Office of Fair Trading to discourage potentially misleading advertising by IVA providers (this responds to representations made by some of the RPBs, by ourselves and some of the market participants);

• The banks and other creditors have instructed their representatives on creditors’ committees to reject IVA proposals for debtors whose only financial resources for making the required payments come from social security benefits;

• Steps are being taken by the IS and the RPBs to increase the frequency and thoroughness of monitoring the performance of the large IVA processing firms. We understand that IPs working for such firms will be reminded of the need (mentioned in our Annual Report for 2005) for them to meet their professional responsibility to ensure that appropriate advice is given to debtors; and

• At a forum organised jointly by the IS and the British Bankers Association (BBA) in Birmingham on 17 January 2007 (the IVA Forum) the major lenders (bank and non-bank), IPs and their RPBs and consumer representatives met to negotiate on how the setting up and processing of IVAs could be improved in the interests of all parties concerned. The aim is to produce agreed proposals by mid-April.

The developments described above are all welcome, but more remains to be done. The next steps should include:

• The IS seeking powers to provide regular information in electronic form to the regulators in the RPBs on the detailed financial outcomes of all IVAs proposed by their members, so that the monitoring of individual IPs’ performance can be better targeted and more effective;

• The setting of benchmarks by the RPBs for improving IVA acceptance and completion rates. According to the IS’ statistics around 27-28% of IVAs proposed fail, but we believe there may be significant variations around this average;

• Further research into why IVAs fail. We understand the IS is setting up a research project on this subject; and

• Reducing the costs and fees of IVAs. We recommended in our last Report that the risk that an IVA may fail should be shared between the supervising IPs and the creditors by ending the practice under which the IPs take much or all of their supervisory fees up front before any payment is received by the creditors. This would strengthen the incentive for IPs to satisfy themselves that the debtors would be able to sustain their payments over the life of the IVA. This idea was widely supported at the IVA Forum and we hope it will be successfully followed up. Other ways of reducing the costs of the IVA procedure may still require legislation under the Simple IVA (SIVA) initiative, but the more that can be agreed in advance between the market participants the better.

The IPC’s remit is limited to the ethics and professional conduct of IPs. However, in today’s market place the frontier between IPs and other debt advisers is rapidly disappearing. Over the last five years IVAs and other “debt solutions” have (like personal loans and credit cards) been commoditized and the business model for providing them has changed radically.

Individual debtors who get into difficulties are faced with a bewildering range of products, all of them heavily advertised as the “solution” to their debt problems. An increasing number of debt advice organisations (both in the commercial and not-for-profit sectors) provide telephone advice and services from call-centres on IVAs, informal debt management arrangements and remortgages. During the year the IPC has had discussions with a number of debt advice providers to get a better understanding of their methods of operation.

We believe that in this rapidly changing market all debt advisers, who hold themselves out as offering independent advice, whether in the commercial or not-for-profit sectors, should accept similar obligations to those required of IPs to provide clear and accurate information about all the options available and give documented appropriate advice to the debtors who contact them.

We have accordingly suggested to one of the four working parties set up following the IVA Forum that IPs, the debt advice firms and the IS should work together to produce a “plain English” guide to be given to all debtors in difficulties setting out a neutral factual description of the characteristics and advantages and disadvantages of all the main remedies, whether formal or informal, available to debtors. We also consider there is a need for more disclosure about success and failure rates of informal debt solutions such as debt management arrangements.

We welcome the work under way in the Debt Resolution Forum, representing many of the firms in the commercial debt advice sector, with assistance from the Insolvency Practitioners Association (IPA), to set up a self-regulatory accreditation system and the similar efforts being made in the voluntary sector by the Money Advice Trust.

The IPC’s remit is not limited to personal insolvency. In 2006 we have taken a close interest in two aspects of corporate insolvency; first, the growth of so-called “pre-pack” sales of insolvent businesses and, second, the cut-backs in the work of the IS in investigating the reports made by IPs in their capacity as office-holders on the conduct of the directors of insolvent companies. We make recommendations on these two topics.

We made two visits to Scotland during the year for discussions with the Scottish RPBs and to inform ourselves on the proposals for changes in Scottish insolvency procedures contained in the Bankruptcy and Diligence Bill.

The Bill was finally adopted by the Scottish Parliament on 30 November last year. Some details about its contents are given later in this report. We plan to keep an eye on how the new legislation is implemented and on its effects. Finally, I would like to express my thanks to all my colleagues on the IPC for their dedicated and thoughtful contributions to the Council’s work and to Mike Stancombe, our Secretary, for his hard work, organisational skills and enthusiasm.

My particular thanks also go to Gill Hankey who retired from the Council in December after seven years. Gill’s deep knowledge and understanding of the personal debt scene and the forthright expression of her views have made a substantial contribution to setting the IPC’s agenda. We wish her well in continuing to run the Bankruptcy Advisory Service and intend to keep in touch with her in the future.

Geoffrey Fitchew
Chairman

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