Posted October 28, 2022
The Insolvency Service has just closed its call for evidence on the insolvency framework.
As more people are increasingly struggling with “priority debts” such as rent, council tax and energy arrears, and household budgets become ever tighter, the chance to review the current regime could not come at a better time.
Carrot or a stick?
The concept of insolvency and debt relief is an important one: when it works well, it can provide significant benefits to individuals and wider society by reducing the harmful impacts of problem debt and helping people to recover their financial situation.
How it works for individuals experiencing problem debt is therefore vital.
We believe that the goal of the insolvency regime should be one that is consumer-focused with a framework that is aligned to consumer needs. This means an emphasis on a fresh-start ethos, with focus given to the financial and emotional wellbeing outcomes for people
The regime needs reform
Our evidence shows the current regime is not working well for people experiencing problem debt. In gathering evidence for our response to this call for evidence, we conducted a survey of advisers across the debt advice sector, in conjunction with six other debt advice organisations, which clearly revealed key areas where the current regime needs improvement. Our findings showed that:
- Less than half (47%) of advisers surveyed think the current insolvency framework works well for people in debt.
- Only a third (35%) think client journeys to insolvency solutions are consistent and accessible.
- Only a third (35%) think current regulations safeguard against bad advice, and ensure people end up in the most suitable solution.
This reflects what we hear from our clients too about their experiences – including many who have difficulty accessing any appropriate insolvency solution at all.
Our proposals for change
For the current regime to improve and work better for people who need solutions for problem debt, there needs to be fundamental changes to how it works now. We want to see:
- Access to free, FCA-authorised, independent debt advice embedded into the insolvency regime as a prerequisite to entering into any debt solution. This would help guard against issues we have seen around people ending up in inappropriate or unsuitable Individual Voluntary Arrangement (IVAs) (which 52% of advisers say they see often or very often), as well as issues where people may enter bankruptcy when they are eligible for a Debt Relief Order (DRO).
- A potential model for this would be via a single gateway into insolvency options where free FCA-authorised independent debt advice would be required before entry into a debt solution. Individual solutions such as DROs could be reformed to become the normal debt option for anyone with minimal assets and minimal available income.
- Reform of current fee levels to ensure these are never a barrier to people accessing an appropriate solution. 45% of callers to National Debtline have a deficit budget, making it almost impossible for them to find the fee for a DRO application, let alone for bankruptcy.
- Fundamental reform of IVAs and the regulation of providers to tackle poor practice and better protect consumers. Over half of advisers surveyed (52%) said they often or very often speak to people who have either a failed or unsuitable IVA, with a further 32% saying they sometimes do. We see people being put into unsustainable or unsuitable IVAs when they should have been on a different solution because of a combination of misleading advertisements, high fees, lack of regulation and poor or misleading advice.
- Improvement to bankruptcy and DRO rules to increase access and ensure these work well for people in debt. DROs should be flexible and not revoked when circumstances change during the moratorium period. Debt limits and asset levels need increasing, especially for vehicles. People should be able to add debts in retrospectively and access a DRO more than once every six years.
- For bankruptcy, as well as fees needing reform, there should be a compulsory debt advice stage before anyone goes bankrupt. We would also like to see reform of how assets are treated, particularly equity in the home, with half (52%) of advisers surveyed saying the prospect of losing assets such as their home or a valuable vehicle was one of the top three barriers to bankruptcy. There needs to be a solution for people who are asset rich but cash poor. The public insolvency register should also be made private – to bring it in line with the debt respite scheme (Breathing Space).
- Insolvency options made more flexible to changes in circumstances, including making it easier to transfer between solutions. This can be a particular issue for people whose IVA fails, but who cannot move onto a DRO without a termination certificate. It should be easy to transfer to different insolvency procedures and these should work together to support our clients when their circumstances change.
- The insolvency regime does not work for people who have unstable and fluctuating incomes. This includes people who are self-employed, or are on zero hours contracts, who may struggle to predict their incomes over 12 months or may see high fluctuations month-to-month. We need a framework that is more accessible and effective for these groups.
Some bedtime reading
We have sent in a mammoth 84 pages in response to the call for evidence which sets out the problems we have identified in detail and our proposed solutions. You can access this response and more via the consultation responses page on our website.
Finally, a huge thank you to all the advisers who completed the survey and shared their insight for the call for evidence: you can see more results from this in our full response.
Meg is the Money Advice Trust's Policy Lead and has more than 35 years' experience in the debt advice sector. She is on the Quarterly Account editorial board and a range of other forums. View all posts from Meg van Rooyen.