The next 12-18 months are likely to bring a raft of claims against the debt advisory sector, according to Nik Carle, specialist professional liability lawyer at Browne Jacobson. He is warning that insured insolvency practitioners (IPs), the established 'professionals' in this line of business, can expect to find themselves dragged into the fray as members of the public who were mis-sold debt solutions such as Individual Voluntary Arrangements (IVAs) step up complaints.
For some time now, there has been growing unease about debt 'factories' failing to provide best advice to those in acute financial difficulties. This adverse press has even spread recently to the activities of well-respected 'not-for-profit' organisations like the Consumer Credit Counselling Service ('CCCS'), which was recently linked with the provision of inappropriate debt advice to clients, for financial returns.
Nik Carle said: "Forecasts for the number of people declaring themselves insolvent have shot up to 120,000 of late and the recommending of IVAs is potentially another mis-selling scandal on the brink of breaking through. Citizens Advice dealt with 60 serious such cases in the last quarter of 2007 alone".
IVAs allow people with debts to agree a five year deal of fixed repayments with their creditors. IVA companies, many of them advertising on the television and the internet, promise to reduce the level of debt to be repaid, sometimes by as much as 70 per cent.
Insured IPs have needed to be careful, explains Carle. Some have been looking to unregulated salesmen for a throughput of work. There is an independent duty on IPs to check that IVAs are indeed an appropriate option. "They are the safety net, if you like, for the client and they should operate as a safeguard against over-zealous selling of particular debt solutions without sufficient regard to suitability.'
"It will be interesting to see whether general damages awards will increase in these cases, in line with Farley –v- Skinner and Hamilton-Jones –v- David & Snape, for failure to deliver 'peace of mind.' Peace of mind is the main selling mantra for the industry. Despite assurances to the contrary, many homeowners have lost their homes, in circumstances where IVAs were supposed to protect them from repossession".
IVAs, too, have been sold by many insolvency specialists as a more attractive alternative to bankruptcy. Over their 5-year lifetime, IVAs seem to have been a great money-spinner for some in the debt advice industry, much to the chagrin of the creditor-banks. Bankruptcy, on the other hand, yields little return to advisers. For the unscrupulous in this sector, obvious incentives are there.
The banks have now signed up IVA advisers to a new Code of Conduct. This Protocol attempts to clamp down on misleading advertising and tries at last, to introduce some measure of regulation.
Consumers are also unhappy with IVAs and the debt sector. The consumer movement against bank and credit card charges, driven in large part by forums on the internet, became enormously powerful in 2007 and won refunds of hundreds of millions of pounds for its DIY cause. A high profile case brought by the OFT on this front is, of course, currently awaiting judgment in the High Court.
There are already several IVA-focused forums on the internet, which look sure to stoke up consumers in the same way. Many of these prospective claimants have little to lose by 'having a go' at advisers in the industry.
"The banks under-estimated these amateur groups to their cost. PI insurers must be careful not to make the same mistake," advises Carle.
All of this comes with confirmation from the U.S. that the FBI is investigating 14 finance companies over accounting fraud, insider trading and sub-prime mortgage mis-selling issues. 2008 seems set to witness new depths of advisor failure and fraud in these industries, warns Carle.
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