Banks take on IVA firms

After several years of anger and back stabbing the IVA companies and lenders are finally taking their fight public, not to protect the thousands of people who have been devastated by IVAs, but to protect their own profits.

The UK’s largest banks are preparing to threaten the debt management companies.  Individual lenders have been the most vocal against the IVA industry, including HSBC, Lloyds Bank and Northern Rock. 

On the table is the threat that the IVA companies must cut their fees 40 per cent or find lenders boycotting any IVA deals the debt management companies try to arrange. Last week, Capital One wrote to UK IVA providers alerting them that they will no longer pay more than £4,500 for each agreement. The company also said attached an amendment that stated they would refuse to agree to IVA if the fees exceed 15 %t of the debt being repaid by the lender.

The British Bankers’ Association (BBA) and the debt management industry will meet at a summit in London on Thursday.  Banks, credit card companies and individual lenders will mount a united front against the arrangements.

A spokesman said: "We have held a series of working parties working on proposals for a code of conduct for IVA providers and we now want to pull this work together."

Once again, the banks profits will hit the working class hard.  For many, the only alternative to bankruptcy is an IVA.  It is their only hope of keeping their homes, even though they are a total ‘rip off’ for most of their clients, forcing them to pay exorbitant fees, garnishing most of their wages, and tacking on penalties.

The banks know that their strong arm tactics will work because 75 per cent of creditors must agree to an IVA before it can be approved. 

It has been a catch 22 for most Britons. Unemployment, illness, caring for an elderly family member, a new child, or increased interest rates can all put them in financial trouble.  The only way out that gives any hope of keeping their home is an IVA.

The UK debt mountain nurtured a huge consumer debt industry over the past five years with many of these companies trading millions on the stock markets.  A small army of IVA providers found little to challenge their fees.  The Office of Fair Trading has not seriously challenged the IVA companies.  They charge both the debtor and creditor fixed fees for negotiating and administering the deals.

This forces lenders to pay huge fees for the privilege of receiving partial payment of a debt.  At first, it worked, then the IVA companies grew greedy.  The cost of each IVA averages £7,500 of which banks must pay at least ₤4500 at the beginning IVA. A problem arose when IVA firms tightened their grip so much that their clients were forced to declare bankruptcy within the first two years of the program.

The BBA’s members will tell the leading IVA providers that they will not continue to pay fees in excess of £4,500 each arrangement. The BBA will also demand a significant reduction in the portion of fees they must pay upfront.  They want the fee spread over the lifetime of the IVA, which averages five years.

Of course, this will not help the debtor. Consumer advocates are asking the government to step in and help the clients.  There are staggering reports hitting the media.  Clients who took a second job or overtime, because they could not live on what the IVA left them.  In return, the IVA company garnished the extra money. When the second job or over time stopped, the IVA company demanded the same amount and attached large fees onto the end of the period because the client defaulted.

Other reports state that the IVA companies often garnish all but ₤20 – ₤50.  The first illness, or emergency, leaves the debtor in default, forcing them into bankruptcy.

This week’s summit has already hit debt management companies’ shares. Accuma, Debtmatters and Debtfreedirect all experienced a sharp drop in their share value over the few weeks.  Many consumer watchdogs are worried that the IVA firms will try to ‘draw blood’ from their clients to make up the difference.

So far, the news hasn’t slowed the number of people applying for IVAs.  The first three months has seen an increase from 8 964 in the first quarter of 2006, to 13 223 in the first quarter of 2007, according to figures from the Department of Trade and Industry. A total of 44,000 borrowers entered into IVAs in 2006.

The UK has already experienced a slow down in approved IVAs.  Research from the accountancy firm KPMG states that 18.6 % of proposals were turned during the first quarter of 2007, an increase from 10.2 % in 2006.

While the proposed action may result in less paid in fees at the beginning of the IVA for clients, there is little hope that they will enjoy any relief.