DebtMatters bombshell hits IVA industry

Shares in consumer debt advisers plunged yesterday after one of the leading providers of individual voluntary arrangements (IVAs) warned that the fees on offer no longer made the plans profitable.

DebtMatters Group said that creditors such as banks had cut the fees they were prepared to pay for restructuring unmanageable debt repayments to such low levels that IVAs were becoming uneconomic.

The firm warned that there was "continuing uncertainty surrounding the IVA markets", as banks continue to drive down costs. Shares in DebtMatters tumbled 50 per cent yesterday. Fellow IVA provider Debt Free Direct dropped 29 per cent and Debts.co.uk was down 53 per cent.

In contrast to bankruptcy, which wipes out most personal debt save student loans, IVAs ask that people only pay back a portion of their overall debt – usually around 40 per cent. After three to five years, the debts are written off, although the individual's credit record remains stained for six years.

IVAs had enjoyed a boom in recent years. As personal debt spirals, however, lenders are taking a tougher line. Debt management firms have been under pressure for nearly a year due to a dispute over the level of fees creditors pay them for putting together IVAs.

The change of attitude by creditors has undermined investor confidence in the sector, which is waiting for a ruling from a committee led by the British Bankers' Association (BBA). Yesterday, the BBA would only say that it was "tidying up the protocol and getting it signed off".

DebtMatters said IVA case acquisition costs have risen sharply in the face of rising competition, and that IVA conversion rates have worsened due to "hardening creditor attitudes, which have impacted on margins".

Although discussions hosted by the BBA and Insolvency Service had continued, the process "did not provide any firm conclusions on the issues of fees charged by practitioners," DebtMatters added.

"During September, we started to see certain creditors seeking to modify IVA proposals, such that on our cases, average nominee and supervisory fees would be reduced. Should these fee modifications become the norm, we may no longer be able to deliver IVAs profitably," it said.

For the time being, DebtMatters has suspended all direct advertising and said it would scale back its IVA division. It plans a full strategic review that could lead to the company's sale.

The key issue, said analysts, is the uncertainty in the IVA sector, particularly in regard to fee levels. Gerald Farr of Seymour Pierce said the whole industry was suffering from a "lack of visibility on revenues".

"The BBA and Insolvency Service have set up a working group, but have not yet come out with a full-level agreement over fees and practices," Mr Farr said. "The group was set up back in the spring, and we were expecting an outcome by the summer, but things seem to be taking longer than this."

Despite the uncertainty over fee levels, he added, IVAs as an instrument for debt management are here to stay. "IVAs remain a useful halfway house between bankruptcy and an informal debt management plan. Plus, they are part of the Government plan, as the Government has chosen not to change this."

Debt Free Direct, the market leader, said in a statement that IVAs were of "fundamental importance to the UK banking industry and Government policy" and would remain so. "The provision of IVAs and other services to creditors and over-indebted consumers is already a sizeable market and is set to grow in the foreseeable future."

However, it added that there had been a period of transition during the first half of the year – one from which it had not been immune.