FCA must regulate rising number of IVAs to help borrowers overcome mortgage hurdles

FCA must regulate rising number of IVAs to help borrowers overcome mortgage hurdles

 

 

This is amid a yearly rise in the number people registered for the debt management arrangement. 

Figures from The Insolvency Service show a steady increase since 2017, when 59,095 were registered. By 2018, this went up to 70,687 then to 77,961 in 2019. By 2020, there were 78,548 registered IVAs with the largest surge recorded in second quarter of the year, just as the reality of the pandemic set in. 

During Q1 2021, 19,165 IVAs were registered, the highest for the first quarter of any year since 2017. 

Darryl Dhoffer, mortgage and protection consultant at The Mortgage Expert, said this had the potential to worsen as it was likely suppressed by pandemic-related financial aid. 

 

Promoting IVAs 

Dhoffer noted that advertising was probably leading more people down the route of an IVA. 

“The argument is, if you type ‘clear debt’ into Google, the top debt management companies that come up are promoting IVAs. Following the FCA regime which brought in regulation for debt management plans (DMPs), the IVA market was left unregulated, so companies have said ‘let’s focus our marketing on that’.  

“When clients go to these companies, they’re put onto an IVA and there’s no mention of a DMP,” he added. 

Nick Morrey, product technical manager at John Charcol, said borrowers who were presented with an IVA as their best option were usually in a precarious situation, where alternatives did not look good.  

He added: “Unfortunately some firms advertise the assistance they give as ‘combine all your debts into one manageable monthly payment’ being the panacea to someone’s woes.  

Debt packagers and third party firms who refer IVA leads to an insolvency practitioner (IP) should be authorised by the FCA, but IPs are regulated by The Insolvency Service. 

Recently, the FCA suspended five debt packager firms over concerns of how they offered advice, including the referrals of IVAs to IPs. 

The regulator said “persuasive language” was being used to promote IVAs and risks were not always fully explained. It also said advice seemed to be weighted towards debt management options that would generate a higher referral fee for firms, such as an IVA, rather than the most suitable. 

While the Advertising Standards Authority (ASA) does not keep records of complaints against IVAs specifically, a spokesperson said the body had taken action against several debt advice firms over the last year. 

They said many of these rulings were because firms “misleadingly suggested they were qualified to provide debt counselling or made false claims exaggerating the speed and ease with which debts can be reduced”. 

Some complaints were also centred around the misleading suggestion that firms handling IVAs were endorsed by either the government, the Money and Pension Service or the Money Advice Service.   

There have been eight ASA rulings related to debt since the start of the pandemic. 

 

Full of regret 

Morrey said he did not have the sense that those with an IVA were always misguided, but rather consequences were not explained. 

He said: “What tends to be the reaction is ‘no one told me this could happen’.   

“So although we do not feel these people are necessarily being misled, we do feel that the ramifications and timescales may not have been as clearly explained as they could and should have been.” 

Paul Coss, co-founder of Haysto echoed these sentiments, saying: “The majority of people, if they could turn back the clock, they wouldn’t have entered the IVA. They’re trying to do the right thing and pay back creditors, but they are sold a dream and further down the line, they can’t get out of it because it’s a legal agreement.” 

 

Differing approaches  

There is an unfair difference between the treatment of those with an IVA and those with a DMP, although in some circumstances the amount owed and the amount being repaid is similar, Dhoffer said.  

He added: “If you’ve got a debt management plan, paying a minimum amount on a large loan, there are 14 lenders who will take you on with it currently running. There are an additional 26 lenders, including high street, who will accept you if it’s been cleared for a year.” 

According to a Knowledge Bank criteria search, for borrowers with an active IVA, five will accept an application and of those, four require the arrangement to be satisfied to proceed. For people who have been discharged from an IVA within the last three years, nine lenders will consider them and often with conditions. 

Morrey said following an IVA arrangement, clients are left with “a very negative mark on their credit reports that almost excludes them from any kind of borrowing, certainly any kind of mainstream borrowing, for over half a decade”.  

This is clear in the fact that many lenders require a historic IVA to have been cleared for at least six years before a borrower can be eligible for a mortgage. 

Dhoffer, who assisted Bluestone Mortgages on the development of their product for borrowers with an IVA, said the lender was seemingly the only true option as its criteria was less exclusive. 

Coss also praised Bluestone for considering people with multiple defaults who otherwise would have been turned away, as long as those same defaults were consolidated into an IVA. 

Borrowers with an IVA also need a larger deposit, as pointed out by Paul Haydon, finance consultant at The Mortgage Hive. He said this was “often a stumbling block”. Lenders that consider a borrower with an IVA, either active or cleared, ask that they also have a 30 per cent deposit or equity at minimum. 

 

FCA involvement 

Dhoffer said it was unclear why IVAs were being treated as higher risk but suspected it was down to the little knowledge of the arrangement. 

However, he said if the FCA was to start regulating IVAs, then lenders would be obligated to amend their criteria and open up to affected borrowers. 

“This is where I think the FCA has a responsibility and role, because they changed their tack and looked at other debt management in 2014. We are reaching a point where these IVA trends are only going to increase,” he said. 

  

Seeking help 

Dhoffer and Coss agreed that although mortgage options were limited, they were available as long as clients went to the right brokers. 

Coss said: “Every single broker that is qualified should be giving the same advice. Unfortunately, there are probably thousands of advisers who have never dealt with an IVA enquiry, it’s just not something they’ve come across.” 

Coss said these brokers should consider reaching out to peers who specialised in debt management.

Dhoffer noted that while mortgage options could be offered after an IVA has been entered into, the avenues to complain were restricted with the Citizens Advice Service being one of the few able to help. He also said the lifespan of these companies made it hard to take action against them.

“These companies tend to start up, then sell quickly. So, there’s no accountability. 

“Are we waiting for the FCA to increase regulations before we see lenders do something? Until people notice what’s happening on a wide scale there won’t be a solution. We need to hear from the powers that be who make these rules,” he added.