19. Annex for Individual Voluntary Arrangements (IVA's)

It has become increasingly common for debt managers, giving best advice to consumers, to offer IVA’s, and this Annex is intended to broaden the Code to address this.

The DEMSA Code of Conduct in this instance seeks to address issues which arise prior to formal contract and approval of IVA’s by the Court and aims to encourage the highest standards in the industry and to provide a high level of protection to the consumer.

An IVA is a formal scheme whereby debtors propose a full or partial repayment of their debts to Creditors, generally through an authorized Insolvency Practitioner.  Creditors vote on whether to accept the proposal and, assuming the required majority is achieved, the scheme is binding. The scheme is approved by the Court, who appoint a Supervisor to administer the arrangement, in accordance with Insolvency Act 1986.

This Annex should be read in conjunction with the Code but where the requirements of the Code do not apply to the operation of IVA’s, as governed by the Insolvency Act 1986, may in that instance be disregarded.  The clauses of the Code, however, which must at all times be observed by members when setting up an IVA are:-

6, 9, 13 (paragraphs 1,3,4,5,6,7), 15 (where applicable and not governed under the Insolvency Act 1986). 

To be read in conjunction with Clause 7 of the Code

When advertising; marketing and giving pre-contractual advice on IVA’s DEMSA members must never

• Use statements such as "free of charge"; "at no cost to you because your creditors cover the costs" because they imply all money paid by the consumer goes towards paying off their debt, whereas a proportion of the initial payments (sometimes up to the first two years payments) is paid towards the practitioner’s fees.

• Claim consumers will be debt free in five years, without explaining that although they become debt free, the effect on their credit rating will last for six years.

• Use statements such as "up to 90% of your debt may be written off" when in reality the figure is nearer 60 – 70%.

• Claim they can guarantee a favourable outcome to negotiations with creditors, or that "creditors are happy to help" where in the case of an IVA, at least 75% of creditors by value need to accept the proposal for the arrangement to be accepted.

If listing benefits of an IVA’s other than stating its purpose for debt reduction, DEMSA members must not:

• Imply that fees are paid by the creditor or that the consumer does not pay any fees.

• Fail to point out that the consumer's credit rating will be affected for six years and not just for the period of the IVA, which is generally 5 years;

• Fail to inform a home owner seeking an IVA that they may be required to re – mortgage their property during the term or obtain a remortgage to realise the equity to pay off some or all of their debt.

When providing pre-contractual advice and information the consumer must always be given advice that is in their best interests and should include:

• a clear explanation of all available options open to them, such as bankruptcy, debt management plans.

• awareness of the requirements and procedures involved in an IVA proposal.

• a clear explanation about the fee payable to the nominee and supervisor of the IVA out of any repayments made.

• Awareness of the implications of entering an IVA, namely:

• if they are a homeowner with sufficient equity they may be required  to remortgage their home to release the equity to repay
• some or all of the remaining debt
• if the IVA failed, this could lead to bankruptcy.
• their credit rating would be affected for six years.
• that the decision to accept an IVA proposal is entirely in the hands of creditors.

In addition to Clause 5 of the Code regarding compliance with the OFT Debt Management Guidance, DEMSA members providing advice and assistance with IVA's should abide by and keep up to date with all industry standards, guidelines and protocols.

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