Britain's biggest banks will this week tell debt management companies to accept a 40 per cent cut in their fees or face the prospect of lenders refusing to agree individual voluntary arrangements (IVAs).
The British Bankers' Association (BBA) is to meet representatives of the debt management industry at a summit in London on Thursday after months of rising anger over the cost of IVAs. Banks, credit card companies and other lenders plan to mount a united front on the arrangements, which enable borrowers who fall behind with debt repayments to escape full-scale bankruptcy.
A spokesman for the BBA 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."
Under insolvency laws, 75 per cent of creditors must agree to an IVA before it can go ahead. The agreements, which enable borrowers to pay back what they owe with affordable monthly repayments over an extended term - often with a large chunk of the debt waived - must be brokered by a registered insolvency practitioner.
The huge growth in consumer debt over the past five years has spawned a small industry of IVA providers who charge creditors fixed fees for negotiating and administering the deals.
However, lenders have become increasingly angry about the cost of each IVA, which averages around £7,500. Many banks have complained they have to pay most of the fee at the outset of the IVA, even though a significant number of borrowers subsequently default on the agreements and end up becoming bankrupt.
While the BBA is prevented by competition laws from setting a maximum price for IVAs, its members will tell leading IVA providers that they are no longer prepared to pay fees of more than £4,500 for each deal brokered. In addition, lenders will demand a significant reduction in the portion of the fee levied upfront, with much more of the charge agreed to be spread over the lifetime of the IVA, which can be as long as five years.
Anxiety about the impact of this week's summit have hit debt management companies' shares, with the value of the country's three biggest IVA providers, Accuma, Debtmatters and Debtfreedirect all falling sharply over the past fortnight.
Individual lenders have also spoken out publicly against the IVA industry, with the most vocal critics including HSBC, Lloyds Bank and Northern Rock.
The number of IVAs agreed during the first quarter of 2007 reached 13,223, up from 8,964 in the same period last year, according to the Department of Trade and Industry. Some 44,000 borrowers entered into IVAs last year, a 450 per cent increase on the 8,000 deals brokered in 2002.
However, lenders have already begun flexing their muscles. Last week, Capital One, the US credit card lender which has built a significant business in the UK, wrote to leading IVA providers to warn them that, from 4 June, it will no longer pay more than £4,500 for each agreement. It also said it would refuse to agree to any IVA where the fees payable exceed more than 15 per cent of the debt being repaid by the lender.
Research from the accountancy firm KPMG suggests 18.6 per cent of proposals for IVAs were turned down by lenders during the first quarter of the year, up from 10.2 per cent in 2006.
Lenders have also become much more aggressive about how much of a debt they are prepared to write off. The typical IVA borrower now has to repay between 40p and 45p of each £1 owed, up from 18p to 20p only three years ago.
The IVA sector is also under pressure from regulators. Earlier this year, the Office of Fair Trading warned 17 IVA providers that their advertising was potentially misleading for borrowers.Reuse content