Challenges and changes in personal insolvency: An interview with David Rankin

10 November 2023

In four decades in the insolvency profession, David Rankin has seen a lot of trends and changes. In this blog, he tells us more about how the world of personal insolvency has changed during his working life, which began in 1983, and has seen him work at a senior level in both corporate and personal insolvency at national and boutique firms, as well as helping shape R3’s personal insolvency policy work as a member of our Personal Insolvency Committee.

What are the current trends you are seeing in personal insolvency?

Personal insolvency numbers have fallen this year, and there are various reasons for that. High on the list is the fact that waiting times are longer and this is because charities and free-to-consumer debt advice services have seen cutbacks in funding. The number of people seeking debt advice has actually gone up, but the availability of that advice has reduced. I’ve also seen a knock-on effect of this in the commercial sector; enquiries are higher than ever.

The FCA’s initiative on referral fees may also start to impact the numbers on the last quarter of this year. While at Creditfix we believe introducing a ban on referral charges was a positive step, it may have the unintended consequence of limiting the number of organisations offering advice and may affect the overall volume of advice available, at a time when people need it the most.

The biggest single factor behind the fall in personal insolvency numbers is the drop in people entering an IVA. Insolvency Service statistics shown that IVA volumes fell by 35% in Q3 of this year compared to the same quarter last year and I think this is due to financial uncertainty – people are hesitant to make a five-year commitment given the cost of living crisis, and various other factors like low consumer confidence.

But as ever we’re missing a key piece of the picture here because there are no published statistics on the number of people entering into informal debt solutions like debt management plans, so it’s difficult to gauge the real size of the overall personal debt problem in the UK.

How did the pandemic affect personal insolvency?

Ironically, during COVID, things held up well. Support such as the Government's furlough scheme helped minimise the number of IVA failures and reduced the number of people entering into the process in the first place enormously.

Many people were able to save money during the pandemic because they couldn’t go out. They weren’t driving their cars or paying for fuel. They weren’t dining out, there were no cinema trips, no sports events, no concerts to attend, and because of the furlough scheme, a lot of people were getting most of their wages but had nothing to spend it on. As a result, many people were able to maintain their existing debt solutions or even decided that they didn't need one because they felt confident they could manage their finances.

How has the cost-of-living crisis impacted personal insolvency?

I think it’s impacted people’s finances much more than COVID. While inflation is starting to fall, it is still high compared to the past couple of decades and credit card spending has increased. There’s also volatility in the energy markets, and prices at the pumps are creeping back up.

A lot of people have compared the current situation to the 2008 financial crash, but I believe the cost-of-living crisis is going to have a more profound impact. The financial crash was a short, sharp shock, and though its ripple effects lasted for a while, things settled down relatively quickly.

This was partly because of the drastic cuts in interest rates that occurred in response to the crash. In contrast, the current situation is characterised by month-after-month price increases, while wages aren't keeping pace. This is having a much more fundamental and long-lasting impact on people's lives.

There's no real respite from the current challenging situation, and this will likely keep consumer confidence low. More people are seeking debt advice, but they just aren’t confident that they will be able to commit to a formal solution at this moment in time.

What do you think is currently the most common factor behind personal insolvency?

I think the biggest factor is the impact of rising interest rates. Until recently, the number of homeowners seeking our services has been low, but we are now receiving more homeowner enquiries because of rising mortgage rates.

Many homeowners who, in the past, could rely on sufficient equity to secure another loan or remortgage when interest rates were stable are finding it challenging. People are considering extended mortgages which could lead to a looming debt problem in the future.

Tenants are also feeling the knock-on effect of these interest rate hikes in the form of rent increases, so the impact is being felt across the board.

What advice would you give to someone who is facing financial difficulties?

When you start feeling financial pressure, don’t ignore it. Seek advice, whether from a commercial organisation or a charity as early as you can. It's an easy thing to say, but the key is getting advice early because this can prevent the situation from spiralling out of control.

It’s important to remember that picking up the phone and talking to someone about your problems doesn’t mean you have to enter a formal solution. About 93% of people we speak to at Creditfix don't actually end up in a formal solution with us. We offer immediate help and advice, which in some cases just means clarifying their situation and helping them re-budget. In other cases, we may refer them elsewhere, to FCA-registered advisors for advice on  debt management plans or DROs, or for sources of help with benefits they may be entitled to.. Our initial conversations are not about convincing someone to enter into an IVA; they're about raising awareness and encouraging people to seek help as early as possible.

Can you talk a bit about the stigma attached to seeking financial help?

Many people may experience embarrassment and a sense of shame when seeking debt advice, but it's crucial for them to understand that they are not alone in facing such challenges.

One trend that hasn’t gone away is the stigma around bankruptcy. If you mention bankruptcy, most people's immediate reaction is negative and it’s difficult to relay that in some cases, it might be the best solution. As long as you meet the criteria and can pay the £680 fee, bankruptcy is a valid option for resolving debt. The fee, however, is an issue, as is the process to entering a bankruptcy in the first place.

Is the process to entering a bankruptcy something you’d like to see addressed in the upcoming personal insolvency framework review?

Filling in the bankruptcy forms online can be intimidating because of the level of detail involved, and it can deter people from going through with it, so I think it something should be done to make it easier for people to get help in filling out these forms.

I am also concerned that that there is no obligation to seek advice before entering a bankruptcy. With IVAs, IPs are required to advise people about the process and present them with all other options. We need to explain each choice thoroughly and let them make their own decision. Similarly, with DROs, individuals must consult with an authorised intermediary to complete the form, pay the £90 fee, and submit the application.

However, for bankruptcy, individuals can complete a form online without speaking to anyone, and they may unknowingly be entering into a solution that isn’t quite right for them. I would like to see this addressed in the upcoming review.

Is there anything else you'd like to see from the review?

I believe there should be more freedom of movement for individuals already in a formal insolvency process. Individuals in an IVA may find that their circumstances change and they become eligible for a DRO, but under the current framework, you can't apply for a DRO while still in an IVA. This contrasts with bankruptcy, which you can initiate while in an IVA, and I’d like to see this inconsistency addressed.

I'd also like to see a change related to the Statutory Debt Repayment Plan (SDRP). I believe a statutory debt management plan should be incorporated as part of the Insolvency Act, similar to the Debt Arrangement Scheme in Scotland, under the oversight of the Insolvency Service rather than the Treasury. Anyone entering into a debt management plan is unable to pay their debts as and when they fall due, which is an age old definition of insolvency so it makes sense for it to fall within the remit of the insolvency service.

This way, there would be a suite of solutions for managing personal insolvency, and a more unified approach overseen by one government body that can see the whole picture and make policy decisions based on all the data, rather than having two separate departments involved.

How have you adapted to the ever-changing personal insolvency landscape?

We’ve changed our fee structure for IVAs. Traditionally, IVAs had a fee model based on a percentage of realisations with disbursements to third parties paid separately, but from 2017 we shifted to a fixed fee model. We did this because we recognised that the work involved in a consumer IVA didn't significantly vary from one case to another and it shouldn't depend on what someone can afford to pay.

We also committed to paying dividends from the third month of an IVA, a pledge that became gradually adopted by others in the sector. This model has improved returns to creditors, boosted confidence in the process, and reduced failure rates.