Regulatory guidance on expectations for protecting debtor interests

David Holland, Chief Inspector

17 October 2024

Introduction

In light of recent research commissioned by the Insolvency Service (IS) regarding take-on procedures in a small sample of terminated Individual Voluntary Arrangements (IVAs) in the IVA market, this reminder guidance outlines key expectations for Insolvency Practitioners (IPs) to ensure that all debtors are treated fairly, transparently, and in accordance with professional standards. IPs should ensure they have robust procedures to protect debtor interests and ensure compliance with the revised Statement of Insolvency Practice (SIP) 3.1.

This guidance details the measures IPs should take to address debtor concerns, enhance case handling, and promote consistent standards across all cases.

Key regulatory expectations and measures for IPs:

1. Addressing debtor concerns

IPs may experience an increase in queries and complaints from debtors. IPs must ensure that any debtor who raises concerns about their IVA is promptly and appropriately addressed. This involves:

Ensuring a clear complaints process: Debtors must have access to an easily understandable and transparent process for raising concerns, with timelines for investigation and resolution clearly communicated.
Providing a clear review and advice: Where debtors express confusion or uncertainty about their IVA, IPs should evidence the process undertaken; address concerns raised; where necessary evidence a review of the initial debt advice; consider the current appropriateness of all appropriate solutions; and ensure the debtor understands all available options.
Follow-up and transparency: IPs must keep a record of all complaints or concerns raised and ensure there is appropriate follow-up, with written communication provided to the debtor detailing any changes or actions taken. Complaints should be reviewed routinely to test the effectiveness of the complaints process and ensure the themes of complaints feedback to enhance the firm’s policies and procedures.

2. Accuracy in financial assessments

It is important that income and expenditure assessments are carried out accurately to ensure that the IVA is sustainable. To mitigate this risk:

Comprehensive financial assessments: IPs must ensure that all income and expenditure data is accurately recorded and reflect the debtor’s true financial situation. This includes appropriately cross-checking income sources, expenses and liabilities before any IVA proposal is submitted. Future budgets should fully utilise the Standard Financial Statement tool to evidence that the IVA repayments are sustainable.
Regular reviews: The same principles should apply to ensure that procedures capture cases where the debtor’s circumstances are likely to change. This ensures that contributions remain fair and sustainable. Regular reviews of the whole process should be undertaken, and results used to enhance the firm’s process.

3. Offering the most suitable debt solutions

Full consideration of alternatives: IPs must assess the full range of debt solutions before recommending an IVA, ensuring that options like Debt Relief Orders (DROs), Debt Management Plans (DMPs) and Bankruptcy are evaluated based on the debtor’s circumstances and have procedures to ensure that appropriate advice, which meets the standards set out in SIP 3.1, is given in each and every case.
Documentation of decisions: IPs are required to document the debtor’s rationale for selecting an IVA over other options, providing clear evidence that the debtor was presented with, and understood, alternative solutions before committing to an IVA. A key part of this in the volume sector is being able to record and review the advice given. This must be undertaken and available in each case, and there should be robust systems to evidence this process and that there is an appropriate quality assurance review in place to test that the procedures are being followed.

4. Ensuring understanding and transparency

Clear explanation of terms: Debtors must receive clear, plain-language explanations of IVA terms, including fees, duration and consequences of failure. This should be provided in both verbal and written formats to ensure comprehension.
Evidence of understanding: Before the debtor signs up for an IVA, IPs must ensure there is appropriate evidence to confirm the debtor’s understanding of why they have chosen an IVA and that they understand the terms and conditions. IPs should use this opportunity to answer any final questions or concerns.

5. Compliance with SIP 3.1

With the revised SIP 3.1 effective from 1 March 2023, IPs must ensure compliance by:

Implementing updated policies and procedures: IPs’ procedures must align with the revised SIP 3.1, particularly around debtor advice, disclosure and documentation. This includes ensuring that staff are trained in the new standards and that these standards are embedded into daily operations. Where advice is given by different parties, IPs must be aware of the due diligence required not only to ensure that remedial action is taken but that any concerns are promptly addressed to prevent reoccurrence.
Monitoring and auditing: Internal auditing procedures must be established to regularly monitor compliance with SIP 3.1. Audits should focus on the accuracy of advice provided, the suitability and debtor understanding of the debt solution chosen, and adherence to transparency requirements.

6. Training and development for staff

Ongoing training programmes: IP firms must implement continuous professional development programmes for all staff involved in debtor-facing roles. This includes ensuring staff are familiar with the changes in debt solution frameworks, particularly the updated SIP 3.1, and are able to deliver accurate, compliant advice that compares with standards across the debt advice sector.
Vulnerable debtor support: IPs should ensure their staff are trained in identifying and appropriately supporting vulnerable debtors, who may need additional assistance or advice. The effectiveness of the policies and procedures in this area should be regularly reviewed and evidenced with the appropriate documentation.

7. Enhanced procedures for case reviews

IPs should take this opportunity to review both pending and existing IVA cases to ensure they are compliant with regulatory expectations:

Case portfolio reviews: IPs should carry out a comprehensive review of their existing IVA case portfolio to assess whether any cases show signs of poor take on procedures, such as inaccurate financial assessments or unsuitable debt solutions. Adjustments should be made where necessary.
Regular debtor check-ins: IPs should maintain regular contact with debtors throughout the IVA period to ensure any changes in circumstances are promptly addressed. IPs should ensure that debtors know how to make contact and raise concerns.

8. Collaboration with creditors and other regulators

Creditor engagement: IPs must work closely with creditors to ensure prompt responses to IVA proposals and foster collaboration that supports fair outcomes for all parties.
Regulatory cooperation: IPs should actively engage with other regulators, including the FCA and industry bodies such as the Insolvency Service and the IPA, to stay informed of regulatory changes to assist in implementation for their firms.

Conclusion

IPs should always seek to make any necessary improvements to standards within the IVA market and ensure debtor interests are protected. By taking account of the measures outlined in this guidance, IPs can seek to demonstrate their commitment to compliance, transparency and the fair treatment of all debtors. Ensuring consistent application of any revised procedures and the highest standards in advice will not only enhance the reputation of IPs but also maintain confidence in the IVA framework.

Ongoing considerations: The IPA will continue to regulate its IPs in accordance with current standards and advocate for further changes where necessary. This will help to underpin consumer protection and regulatory effectiveness.

Addressing SIP 3.1 requirements: An ongoing issue which has been identified by the IPA is regarding concerns around an IP’s ability to provide complete call recordings and documentation. This is an important requirement under SIP 3.1 and under Regulation 13 of The Insolvency Practitioners (Amendment) Regulations 2015. The IPA expects any deficiency to be addressed immediately and firms’ processes for retention of call recordings to be kept under review.