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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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