Debt advice firms go into meltdown

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The Independent Online

Investors in debt management companies hit the panic button yesterday, after one of the sector's leading operators issued a shock profits warning.

Shares in Accuma, which specialises in organising Individual Voluntary Arrangements (IVAs) for people who can no longer pay their debts, slumped by more than a half while shares in other quoted debt advice companies also fell sharply.

Debt Free Direct (DFD), the largest company in the sector, followed Accuma's lead, issuing its own profits warning after the market had closed.

IVAs are agreements between borrowers and creditors, which allow individuals to write off a substantial proportion of their debts, without having to go into bankruptcy. The agreements must be approved by 75 per cent of creditors, by value, for them to become legally binding.

A number of lenders, including HSBC, have expressed concerns that customers are being pushed into IVAs when they are unsuitable, and have threatened to block many of the agreements.

Accuma warned investors that its profits would come in below expectations, because a small but increasing number of creditors were failing to approve its IVAs. The company also said it had suffered from increased competition, adding that a poor marketing strategy in the first half of its financial year had also added to its misfortune. An hour after issuing its statement, it released another revealing that its finance director had quit.

DFD echoed Accuma's comments in a more detailed trading update issued half an hour after the market closed. "It is clear that creditor comment in recent months has impacted on confidence in the valuation of IVA stocks. It is difficult to measure whether this has led to any loss in consumer confidence, as some commentators have predicted. Whilst we are not strong supporters of that view, it is apparent that changing creditor criteria for acceptance of an IVA is having an impact."

The company went on to say, however, that it expected "peace will break out" in the market over the coming months. "The difference between the 'good', the 'bad' and the 'ugly' debt advisers will become more apparent and the 'good' will prosper," it added.

Its shares are expected to fall again sharply on Monday morning, when its other rivals will be expected to provide their own updates to the market.

Accuma's statements spooked investors in companies across the sector yesterday, heightening fears that lenders have begun acting on their threats to put the squeeze on the IVA industry.

Last year, the British Bankers' Association mystery-shopped a number of lenders, discovering that many customers were being told they could "walk away" from 75 to 80 per cent of their debts using IVAs. As a result, the trade organisation organised emergency talks with the industry to try to raise standards.

Eric Leenders, an executive director for the BBA, said: "We have absolutely nothing against IVAs whatsoever. But we have to be clear that if you were to go to the Consumer Credit Counselling Service (CCCS), which is a not-for-profit organisation, they would say that IVAs are the appropriate tool in just 3 to 5 per cent of cases."

The CCCS is set to launch its own IVA service in April, which could add to the woes of its profit-making competitors. Furthermore, the OFT launched an inquiry last week into advertising standards in the sector.