Fresh mauling for debt-advice firms

Shares in the UK's debt-management companies plummeted for a second day yesterday, in spite of reassurances from several of the sector's largest players that the two profit warnings issued on Friday were not indicative of conditions across the sector.

Debt Free Direct (DFD), the country's largest provider of Individual Voluntary Arrangements (IVAs), saw its shares plunge more than 35 per cent yesterday in reaction to a profit warning which it issued after the market closed on Friday evening. The stock - along with that of most other debt-management companies - had already tumbled more than 10 per cent by the close on Friday, following a profit warning by its smaller rival Accuma earlier in the day.

IVAs are agreements between consumers and lenders, which allow them to write off substantial proportions of their debts. They must be approved by 75 per cent of creditors, by value, to become legally binding.

DFD and Accuma both said on Friday that they had seen creditors taking a harder line towards IVAs over the past few months, adding that they had also both been suffering from increased competition.

Debts.co.uk, one of the industry's smaller players, was the first to try to calm the panic in the sector yesterday, claiming that trading during the first six months of its financial year had been "up to the board's best expectations and in line with market forecasts".

It added that it welcomed current initiatives to increase transparency in the IVA industry, and said it was not experiencing any margin pressure from increased competition in the sector. Nevertheless, its shares closed the day down another 9.5 per cent, after falling more than 10 per cent on Friday.

In the afternoon, Debtmatters also reassured investors that its IVA and loan-broking businesses are both on track to meet market forecasts for the year to the end of March. However, the group acknowledged that it had seen increased competition and said it was tackling this by investing more money to improve the IVA division's efficiency.

The market remained unimpressed, however, wiping almost 30 per cent off the company's value, and making it the second fastest faller of the day, behind DFD. Shares in Accuma fell another 20 per cent after halving on Friday, while smaller rivals Brightside Group and Cleardebt also both fell more than 10 per cent.

Shares in the debt-management companies have rocketed over the past year, as rises in interest rates have increased the number of people struggling with their debts.

However, lenders began to take a tougher line at the end of last year, expressing their concerns that some debt companies were selling IVAs to consumers who didn't need them, advertising them as an easy way to walk away from their debts.

Lenders met debt-management companies two weeks ago at a forum to discuss raising standards in the industry.

The Insolvency Service will produce figures at the end of this week for the number of IVAs taken out in the final quarter of 2006.