The rising level of Individual Voluntary Arrangements should sound a warning to the PPI industry, because the cover is just not good enough. Simon Burgess reports
Lucky for some, the number seven means many things to different people. For married couples it represents the seven-year itch so famously brought to life in the Marilyn Monroe movie. Some surfers believe the seventh wave is always the largest of a set, while motor racing enthusiasts will forever associate it with Barry Sheen who raced under the number seven.
However as far as Individual Voluntary Arrangements (IVAs) are concerned, one is now taken out every seven minutes in the UK, according to accountant PricewaterhouseCoopers.
Between 1998 and the start of 2005 figures from The Insolvency Service show there were never more than 4,000 IVAs in a single quarter. Since then the numbers have ballooned. There were 12, 228 recorded in England and Wales during the third quarter of this year alone.
But what exactly is an IVA, and why have they become so prevalent? IVAs were established in the 1980s and were intended as a vehicle to help sole traders who had floundered on financial problems, but wanted to avoid scuttling the business completely through bankruptcy.
An IVA acts as a legal agreement between a debtor and their creditors through which a certain percentage of the debt is paid off in monthly instalments.
For an IVA to be put in place, at least 75% of the creditors have to agree, after which an assessment will be made of the debtor's ability to pay and an offer put forward as to what amount of the debt can be cleared. Typically this is around the 40p in the pound mark. The contract lasts for five years and interest on the money owed is frozen. Once this period is up and the repayment schedule has been met the debtor is released.
IVAs offer debtors a much more flexible solution to their problems than bankruptcy and, while the contract lasts for five years, rather than the typical three it takes a bankrupt to be discharged, there is less impact on the individual's finances going forward.
Once an IVA contract has been completed, it is easier to get credit, take out a mortgage or look for a personal loan than it is for those just released from bankruptcy. There are also fewer commercial restrictions over being able to set up a business or act as a company director if an IVA has been taken out.
It is also unlikely that under the terms of an IVA an individual will have to sell major assets such as his home or their car while the actual costs attached to an IVA are less than those with bankruptcy. The term of an IVA may be longer, but it affords the individual a much greater degree of control and avoids much of the stigma that surrounds bankruptcy.
Given the level of debt the UK has plunged itself into it is not surprising that insolvency problems are becoming more and more of an issue. The real worry is the pace at which the problem is escalating and the potential it has to wreak havoc on personal lives and national economics. If people are unable to remain solvent in large numbers then there really are very few winners.
According to a report, Living on tick: the 21st century borrower by PricewaterhouseCoopers, the profile of the average debtor has changed markedly in the UK, and no longer is he a 45-year-old builder or shopkeeper, weighed down by tax bills and cash flow problems.
More likely they are in their twenties or thirties and have amassed debt through credit cards and personal loans. They are likely to be unskilled, earning less than £30,000 per annum and living in rented accommodation.
There are a number of problems that this creates. First and foremost is the huge cultural shift it represents where debt is not something to worry about, but something that we all live with and manage. Day-to-day living is done on credit and once we have started down this road it is frighteningly easy for things to spiral out of control. To counter this much better financial education must be given to people at an early age while we must look to change the casual attitude to debt that has developed.
As an industry however we are in an excellent position to do something about this wave of debt. There is no doubt that protection insurance can act as a breakwater and provide help to thousands of individuals and prevent them hitting the insolvency buffers. The tragedy is that at the credit card and personal loan end of the market the products in place are expensive, inflexible, and simply do not match the needs of borrowers. They just do not work.
According to the Office of Fair Trading the claims ratios on payment protection insurance (PPI) for unsecured loans is 18%. This falls to a measly 11% for credit card PPI.
Products in this market should be cheap, simple and modelled on volume sales that will help to shore up the protection gap for the millions of debtors we have in the UK while still allowing providers to make decent profits on reduced margins. No one is suggesting that selling PPI should be an act of charity, but it certainly should not be highway robbery as it is today.
As an industry and as a country it is essential that we set out to close the protection gap and help prevent insolvency becoming a very serious and widespread problem. Thereafter we must ensure the protection stays in place by continuing to provide the type of products consumers really need while educating them better to the very serious and damaging implications of unmanageable debt.
In the time taken to read this article, another IVA scheme has been approved. IT
' Simon Burgess is managing director of Britishinsurance.com
