Leading providers of IVAs agree to 20% cut in fees

Leading providers of individual voluntary arrangements (IVAs) will today accept a 20 per cent cut in the fees they earn when setting up many of the debt management plans they create on behalf of borrowers.

The deal has been brokered by The Insolvency Exchange, an intermediary that works with both IVA providers and creditors such as banks, and is involved in around 70 per cent of all IVAs agreed in the UK.

The agreement follows concern among lenders about the cost of IVAs, where the providers are paid fees by the debtors' creditors. Increasing consumer debt over the past five years has resulted in a rapid rise in the number of borrowers entering into IVAs, which fall short of bankruptcy, after finding themselves unable to stay on top of their debts.

However, lenders have become frustrated about the cost of each IVA, which is typically around £7,500. In particular, most of the fee has usually been paid upfront by the lenders, even though many borrowers subsequently default on their contracts and end up being declared bankrupt.

As a result, lenders have become increasingly reluctant to enter into IVAs, depriving providers of fee income and forcing many borrowers into bankruptcy.

Under today's deal, The Insolvency Exchange has promised to streamline the processing of IVAs, so that providers work with one system across the company's range of lending clients, which include the HBOS group and HSBC Bank.

In return for simpler administration, IVA providers have agreed to accept less of their fees upfront in those cases where Insolvency Exchange lenders represent the majority of the borrower's creditors. Fee levels will also fall, reducing the cost of an IVA to lenders by an average of a fifth.

The agreement will not apply to all IVAs, because it cannot be applied in cases where the Insolvency Exchange represents only a minority of lenders. However, IVA providers said they hoped to come to similar arrangements with other groups of lenders.

"There has been a stand-off between lenders and IVA providers which has meant borrowers getting caught in the middle," said John Fairhurst, the managing director of one provider, Payplan. "Whilst a reduction in the fees we charge is not ideal, the commitment to a more appropriate processing system is very welcome, particularly if it is adopted across the industry."

Mark Hover, the head of the Insolvency Exchange, added: "This is an example of how the market can effectively address the issues that have resulted from the recent growth [in IVAs] without the need for additional regulation."

Today's agreement comes two months after an industry summit held between IVA providers and lenders at which the British Bankers Association attempted to broker a deal between the two sides.

However, IVA providers rejected demands from several banks that they cut their fees by as much as 40 per cent.

The total number of IVAs agreed each quarter has risen from around 2,000 to 13,000 since 2004, spawning a small industry of debt management firms. However, the value of many IVA providers has been knocked this year by lenders' increasing reluctance to agree to the packages.