Over the last decade, creditors have raised increasing concerns about the level of fees insolvency practitioners charged for Individual Voluntary Arrangements (IVAs).
Many creditors felt unhappy that insolvency practitioners recovered their costs within the first 20 months of the arrangement, despite the likelihood of consumer default being highest between 18 and 24 months. As a result, creditors often found themselves not receiving any dividends at all.
“In some cases fees associated with the arrangement were almost 50% of the total monies to be paid back.”
This issue crystallised in 2018 when the UK Government’s Insolvency Service undertook a review of IVA fee structures. As a result, later in 2018 volume IVA providers tabled a fixed fee structure designed to satisfy the requirements of both regulators and creditors.
Following discussions between creditors and creditor service agents, it was agreed that the fixed fee per arrangement would be set at £3,650. As well as this, it was agreed that Category 1 disbursements would not be charged at all and that the fixed fee would include the Insolvency Practitioner’s Nominee and Supervisor costs.
With the new fee structure creditors can receive dividend payments sooner, from as early as 3 months after the IVA has been accepted. Many of the IVA providers who have introduced the fixed fee claim have already found that this has resulted in a significant increase in dividends paid to creditors.
Are fixed fees the beginning of the end?
Can insolvency practitioners successfully manage an IVA for up to 72 months, meeting all regulatory requirements, and still make a profit? The use of the Fixed Fee was a hot topic discussed and debated at the recent IPA Personal Insolvency Conference, held in November 2019 in Manchester and attended by a significant number of IPs from around the UK, as well as creditor service agents and other industry stakeholders.
The honest answer is no and, in the best case, maybe.
For small insolvency practices, the requirement to meet a substantial number of regulatory responsibilities requires a significant level of manual involvement. This results in longer processing times and a higher cost of qualified staff, making the commercial model almost impossible. If corners are cut, getting it wrong could result in the loss of their licence to practice.
It’s only when companies see significant quantities of IVAs that they can start to benefit from economies of scale which make the fixed fee model sustainable for their business. The fixed fee, in its current form, only really works for volume IVA providers, resulting in different tiers of fee structure in the insolvency industry.
Fighting back with cutting-edge technology
Stakeholders across the debt industry agree that the fixed fee model offers transparency to both regulators and creditors. As well as this, it provides fee consistency across IVAs, irrespective of the level of contributions being paid by consumers – but how do organisations make it work for all parties?
Insolvency firms that embrace automation technology will benefit from greater profit margins from fixed fees, as well as delivering a superior level of customer service by ensuring consumers successfully exit their IVA and that creditors recover the money they are owed, a win for all stakeholders.
Cerebreon’s advanced technology gives insolvency practitioners across the market the opportunity to drive efficiency savings whilst maintaining regulatory compliance. Cerebreon’s technology replaces repetitive administrative functions, increases data accuracy and allows staff to focus more on human value roles, like providing advice and support to consumers.
The fixed fee model is great for consumers and forced the debt industry to fundamentally rethink how it worked in order to deliver repeatable and profitable business. The only way that both big and small organisations can succeed is by taking advantage of sophisticated technology.
What happens if technology isn’t utilised or is simply ignored by insolvency firms? IVAs will quickly become loss making, a situation which will cause significant concern for regulators and the UK and Irish Governments, increasing the risk of further insolvency firms failing. No-one wants to see another large provider collapsing.