Fair outcomes in personal insolvency
In the third quarter of 2015, over 19,600 people in England and Wales were made insolvent. This most recent data from the Insolvency Service is particularly interesting as it shows that insolvencies rose for the first time in the year, with a small uplift of 2.8% between Q2 and Q3 2015. However, the bigger picture shows that the overall total of personal insolvencies remains lower than the majority of the past decade and highlights an actual reduction of around 19% when compared to 2014.
Interestingly this new data does suggest that we’re beginning to move away from traditional patterns as Q2, which is traditionally the period which experiences the greatest volume of insolvencies, actually saw a fall and this trend continues into Q3.
Q3 2015 also saw a rise in the low contribution IVAs reflecting that individuals are finding themselves unable to manage lower levels of debt, and have less to contribute towards repayment. Those in an IVA are no longer the traditional employed home-owner; they are now more likely to have a greater reliance on benefits and be in a rented property.
Given the predicted rise in interest rates and the ongoing squeeze on benefits and tax credits, the need for debt forgiveness hasn’t gone away – and won’t any time soon. However, the shift in consumer profile will force a change to the way insolvencies are managed. Traditional fee and management models are becoming less appropriate and there will over time, be a shift towards fee models that spread cost out across the case lifecycle and deliver faster distribution.
Overview of the key market changes and predicted impacts
Debt Relief Orders (DRO)
Plans to enable easier access to debt relief for financially vulnerable people which were announced by Business Minister, Jo Swinson, in January 2015 and came into effect in October 2015. Now, the maximum amount of debt which can be covered by a DRO has increased from £15,000 to £20,000, and the government estimates that the changes will allow approximately 3,600 more people a year with problem debt to enter into a DRO.
TDX Group commentary: IVA volumes will further decline, with more individuals now eligible for DROs. The changes in DRO criteria are expected to increase the suitability and attractiveness of this solution versus other formal methods of debt forgiveness. Our data indicates that approximately 8.5% of IVAs proposed during 2015 could be suitable for a DRO using the new criteria of £20,000 outstanding debt and less than £75 in disposable income. Based on volumes over the last 12 months, this could see around 3000-4000 additional DROs annually which would formerly have been IVAs.
Changes to bankruptcy petitions in October 2015, mean that the minimum level of debt for which someone owed money can force a person into bankruptcy, is rising significantly from £750 to £5,000.
TDX Group commentary: The increase in creditor petition levels for bankruptcy will not have any meaningful impact on volumes. Changing petition levels will always be a compromise and some creditors, especially those with small liabilities will be driven to reach informal arrangements with consumers or to pursue repayment through court action. However, creditor petition levels had been unchanged since 1986, so after nearly 30 years a review of the structure to reflect the lending profiles and debt solutions we see today was well overdue. Speculation could suggest an increase in IVAs as a result of this change however, as creditor petitions are uncommon, we do not expect this to cause any dramatic shift in volumes.
The Insolvency Amendment Rules 2015 add an additional requirement to provide an estimate of fees and an estimate of expenses to all creditors where the IP proposes the basis or one of the basis for their remuneration should be time-cost. The IP will be required to seek approval from the creditors in order to exceed that estimate of fees.
TDX Group commentary: The new requirement for IPs to provide an estimate of fees will act as a ‘wake-up’ call for creditors on the true cost of bankruptcy. We believe the greatest impact of changes to fees covered by the Amendment Rules is on bankruptcy. Bankruptcy is very expensive for a solution of last resort and even more so when assets are available and trustees become involved. The requirement for trustees to provide fee estimates is therefore a very welcome move and long overdue. This will be a wake-up call for many creditors when they see how much of the bankruptcy dividend is taken by fees, or by ‘cost creep’ over the lifecycle of the case. Ultimately it is the consumer that pays trustee fees from their contributions and assets. As the customer journey in bankruptcy becomes more evident to creditors we expect to see more focus on ensuring fair outcome versus cost.
- The GfK UK Consumer Confidence Index decreased by one point in October 2015 to +2. Three of the five measures used to calculate the index saw decreases in this month.
- UK retail sales increased by 1.9% from August to September 2015 and were 6.5% higher year-on-year, the 29th consecutive month of year-on-year growth which is the longest period of sustained growth since May 2008 when there were 31 periods of growth.
- The ONS estimates that business investment increased by 1.6% in Q2 2015 compared with the previous quarter and was up by 3.1% compared to Q2 2014.