Lenders demand upfront fee cut from IVA providers

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Crisis talks between banks, credit card lenders and insolvency firms have failed to reach an agreement on the cost of individual voluntary arrangements.

Britain's biggest banks met with fierce resistance to their proposals for a 40 per cent cut in the fees lenders pay to the providers of IVAs, debt management plans that fall a step short of full-scale bankruptcy.

The meeting in London of 150 lenders and insolvency practitioners was convened after several banks went public with criticisms of IVA providers' fees.

Increasing consumer debt over the past five years has resulted in a significant increase in the number of borrowers entering into IVAs after finding themselves unable to stay on top of the cost of borrowing. However, lenders have become frustrated about the cost of each IVA, typically about £7,500. One concern is that the majority of the fee has to be paid upfront by lenders, even though a large proportion of borrowersdefault on their contracts and are declared bankrupt.

Eric Leanders, a spokesman for the British Bankers' Association, said lenders were not trying to set a market price for IVAs as doing so could be seenn as anti-competitive. "While we can't have a discussion about price, which is for individual IVA providers to negotiate with lenders, we can talk about the structute of the plans," he said. "If the plan breaks down in the first two years, as one in five IVAs does, the lender doesn't see any return, the debtor is in trouble, but the IVA provider still gets paid."

However, Sam Jaffa, a spokesman for R3, the trade body that represents insolvency practitioners, said many IVA providers had rejected the banks' complaints. "We feel that we need to be able to offer IVAs as an alternative to bankruptcy, particularly as they tend to return a great deal more to creditors," said Mr Jaffa. "When the banks put extra hurdles in the way of these agreements, that objective is not going to be met."

Mr Jaffa said insolvency practitioners were prepared to give ground on issues such as accepting a greater proportion of their fee over the term of the plans. But he said many lenders had become more aggressive about rejecting IVA proposals.

Research from the accountancy firm KPMG published last month warned that 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. However, insolvency practitioners said the true figure might have been as high as 30 per cent, as firms had stopped suggesting IVAs in many cases as they knew lenders were likely to reject the proposal.