personal finance

Fake advisers exploit flaws in UK insolvency rules

Neil Janes often sees people with money troubles in the course of his pastoral work as a rabbi. But when his father suffered a terminal illness, he realised that his own family was in need of debt advice.

As his father’s health failed rapidly, bills at his longstanding accountancy practice went unpaid. Struggling to pay the mortgage, Mr Janes’ mother clicked on what she thought was the website of the debt charity StepChange, but was in fact a fake, and found herself dealing with an imposter who claimed to represent StepChange, but seemed hazy on key details. He urged her to sign up to a debt repayment plan with hefty monthly charges and a suspicious lack of paperwork.

“We were vulnerable as a family. They [the imposter] were persistent and deceptive. It was frightening,” said Mr Janes, adding that the combination of debt, illness and anxiety had made them “a perfect target for making poor choices and being exploited”.

Mr Janes’ mother had fallen victim to one of the many bogus websites set up by unregulated “lead generators”, who sell people’s details on to debt management companies.

These copycats, which have targeted several debt advice charities, are just one symptom of a broader problem with the aggressive marketing and patchy regulation of insolvency plans — which potentially leave thousands of people worse off.

Almost invariably, lead generators — including legitimate, regulated companies as well as unscrupulous imposters — seek to steer people to a provider of Individual Voluntary Arrangements, or IVAs, a form of insolvency that allows people to clear their debts, typically within five years, without selling their home. These can be a good way for people with assets to resolve intractable debts — but they carry high upfront fees and can prove expensive if things go wrong.

Chart showing that the number of individual voluntary arrangements is on the rise again

The number of new IVAs climbed to a record 78,000 in 2019, up 10 per cent from 2018, according to the latest statistics from the Insolvency Service. While this could reflect a tough economic climate, there was little change in other forms of insolvency such as bankruptcy, or the Debt Relief Orders (DRO) available to people with smaller debts, low incomes and few assets.

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Meanwhile, the proportion of IVAs failing within the first year has doubled since 2013.

Debt charities say they are seeing more cases of people in difficulties because they have been poorly advised to sign up to an IVA they could not afford. “We see a lot of people in IVAs who shouldn’t be. Over the past few years it has become more prominent,” said a debt adviser at one national charity.

He added that people typically came for help after falling into arrears on their mortgage, council tax or utility bills because they were struggling to keep up payments on an IVA. Many were on very low incomes and could have qualified for a DRO — leaving them debt free at much lower cost after a year.

The statistics suggest recent efforts to step up monitoring of the IVA market are having little effect.

A year ago, the Financial Conduct Authority, the financial regulator, wrote to debt advice firms warning them not to refer people for IVAs with high fees when a better option was open to them.

But the FCA does not regulate lead generators — and the insolvency practitioners who supervise IVAs are generally overseen by their own professional bodies.

The largest of these is the Insolvency Practitioners Association. It claims there has been a “sea change” in the way it operates over the past year, with real-time data collection, more frequent visits and more monitoring of calls. Michelle Thorp, the IPA’s chief executive, said it has uncovered no evidence of endemic mis-selling, although some companies “definitely need to work on the quality of their calls”.

Chart showing that the one year failure rate of IVAs has doubled in five years

Outcomes of IVAs vary widely between companies, even though the market is dominated by a handful of high volume providers. Creditfix, which issued a quarter of all new IVAs last year, says its failure rate after two years is around half the market average of 19.5 per cent. Freeman Jones, the third largest, has disclosed a one year failure rate that also comes in well below the overall market rate. This suggests problems are concentrated in a few firms and reflect poor practice rather than the economic backdrop.

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Charities and industry insiders point to gaps in the regulatory framework. Some are calling for a move to a single, independent regulator, rather than professional self-regulation; and most think regulators need full powers to oversee firms rather than individual practitioners. Many are calling for all lead generators to be regulated by the FCA. The R3 industry body has called for clearer routes for whistleblowers to report unethical behaviour.

The Insolvency Service, which put out a call for evidence on the regulation of insolvency practitioners last year, aims to publish proposals for an overhaul of the regulatory framework in a few months.

Meanwhile, the fake websites continue to pop up, despite rule changes by Google, warnings from the FCA and strenuous efforts by Stepchange to put people on alert. Debt advisers say the lead generators’ dubious tactics are especially effective because debt still carries a social stigma and people are often uncritical of the advice they are given.

“Debt is shameful — people don’t like to talk about it,” said Mr Janes. “You’re panicked, and because debt is shameful, you think that when you have gone down the correct line, you don’t need to talk to anyone else.”

His family extricated itself and found other ways to manage his father’s debts. But the people claiming to be StepChange are still pestering them. The last call came two weeks ago, just as he and his mother were trying to register his father’s death.


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