The newly established Debt Management Protocol is expected to cause an uplift in the volume of people being entered into Individual Voluntary Arrangements, say experts in the debt solutions industry.
The protocol will prevent unscrupulous commercial debt management companies from putting clients into debt management plans which carry high fees and will instead force them to give the correct advice on day one which is often that the consumer should enter into an IVA or bankruptcy.
But, Dave Parker director of NTF Financial Solutions, said the increase in IVA volumes will also be driven by another factor, a practice known in the industry as “flipping”.
He said: “Flipping is the unethical practice of selling a debt management plan to a consumer who needs an IVA or bankruptcy order to receive high fees for a period of, for example, six months after which time the company will flip them over into an IVA and receive a further referral fee from an insolvency practitioner.”
What is expected to happen, prior to the implementation of the protocol, is the en masse flipping of consumers in debt management plans who should have been offered a different solution, before they face a penalty for incorrect advice.
The Office of Fair Trading has to until its hand over to the Financial Conduct Authority in April 2014 to review the books of commercial debt management companies to assess whether the plans had been issued correctly or whether alternative solutions should have been offered.
Parker said: “Over the next 12 months we expect to see a mad dash as debt management firms try and replace consumers into IVAs or transfer them into secured loans, avenues which should have been explored at the initial customer review.”
Lee Birkett, managing director of eMoneyGroup, said: “The protocol and the fall out will only bear positive fruits for consumers.”
Parker said that the Office of Fair Trading is expected to get on board with the new protocol and when this happens any company which has consumers on its books that are in debt management plans when they shouldn’t be will face penalties such as loss of licence.