Figures published today by the Insolvency Service show that personal insolvencies in England and Wales decreased in the third quarter of this year to 24,837, a reduction of 4.6% on the same period 12 months ago and back to the levels seen in late 2013. This figure comprises 4,886 bankruptcies, 6,808 debt relief orders (DROs), and 13,143 Individual Voluntary Arrangements (IVAs). Company liquidations in the third quarter of this year were also down 3.2% on the previous quarter at 3,368 and also down 11.7% on the same quarter in 2013 and the lowest quarterly total since the start of 2008.
Bev Budsworth, managing director of The Debt Advisor, commented: “Today’s decrease in the figures and in particular, the number of IVAs is obviously a good thing. However, looking at the total for first three quarters of this year, the number of IVAs has increased by over 10% on the corresponding quarters in 2013. I believe that this is mainly due mainly to the Financial Conduct Authority (FCA) assuming regulation of informal debt solutions and requiring much more evidence that customers are in the most appropriate solution to get them debt free in a reasonable period of time – Treating Customers Fairly (TCF) principles.
“As a result, I believe that we will continue to see a relatively high level of IVAs over the coming quarters as more and more people are moved on to IVAs from debt management plans. This is actually good news as it means people’s circumstances are being continually monitored to ensure that they are accessing the right debt repayment plans.
“I believe that, in the past, far too many people have been placed on long-term debt management plans with little or no ability to ever settle the debt. To me, this goes against the very ethos of treating a customer ‘fairly’ – these people’s situations should be continually reviewed so they can be placed on a more appropriate plan, which could include an IVA, bankruptcy or even refinancing.
“Although very strict, the FCA regulations around TCF are necessary to ensure that people in debt are treated fairly and honestly and are given the right advice at the right time. The industry is making real progress in this area to ensure that TCF is at the core of everything it does.”
Rate rise
Today’s figures come at a time when many economic analysts are warning of a potential slowdown in the economic recovery, with EY Item Club last week forecasting that the UK economy will grow by 2.4% in 2015, which is well below the 3.1% growth expected for this year. Coupled with inflation at 1.2% – the lowest rate for five years – many analysts are worried about the risk of possible deflation and the effect that might have on economic growth.
Bev continued: “Families are still under real financial pressure at the moment, which is echoed in today’s figures. Possible deflation might sound like just the tonic but this comes with its own set of problems, not least a potential impact on economic growth.
“Much more encouraging for debt-ridden families struggling to pay the bills and keep a roof over their heads, will be the news that the Bank of England has recommended that interest rates should remain low for the time being, providing a welcome respite for people who are worried about meeting their mortgage commitments.
“Aside from the obvious misery that problem debt causes, it also hits the taxpayer hard at a time when we can all least afford it. Earlier this month, debt charity, StepChange, reported that that problem debt is costing the British economy over £8 billion a year due to the strain it puts on public services and estimated that the government could save itself £3 billion a year if it offered these people adequate help. It’s clear that these people need access to help from the free or the paid-for debt sectors and need to be treated with the dignity that they deserve.”
‘Bankruptcy tourism’
The rate of bankruptcies has also seen a continued drop in today’s figures, but Bev warns that the so-called ‘bankruptcy tourism’, which has been widely discussed by analysts such as Grant Thornton, remains a trend.
She explained: “Our relatively soft-touch regime in the UK where someone can be discharged from bankruptcy within a year is proving to be more and more appealing to Europeans. Notably so with the Irish and the Germans who have stricter domestic bankruptcy systems than we do in the UK and where it can take between three and seven years to be discharged.
“Due to EU regulations around insolvency proceedings, a debtor can apply for bankruptcy anywhere in the EU and therefore select their preferred bankruptcy regime, as long as they can demonstrate that their preferred country is their Centre of Main Interest (COMI).
“Checks are in place and have become more rigorous in recent years, mainly due to foreign creditors being unhappy that their debtors were able to successfully wipe away financial commitments by gaining bankruptcy in the UK. However, if the trend continues, the UK bankruptcy court may well become a popular feature on the tourist map!”