ASA Adjudication on Hermes Financial Solutions Ltd

Ad

A direct mailing from DebtDr, a debt advisor, claimed "STOP! ARE YOU STRUGGLING TO MEET YOUR MONTHLY IVA PAYMENTS? YOU MAY NOT HAVE BEEN GIVEN THE FULL PICTURE We believe you have made an Individual Voluntary Arrangement (IVA) to clear your debts, and we are concerned you may not have been given the full picture. Many Debt Advisers [sic] automatically suggest an IVA because it is the easiest and most profitable solution for them, not because it’s best for you. They hardly ever explain that there may be other solutions to your debt problems that will probably cost you less. For example did they tell you that: Some 60% of IVA’s fail, because they are not always the right solution. Many people find they can’t afford the monthly payments. Four years after an IVA is set-up, your creditors can come back to you and make further claims if your situation has improved. For example if your house has increased in value, or you have a better job. Failure to make payments - even in the last year - under an IVA cancels the agreement, and puts you back to square one. You WILL still owe ALL the money, including fees to the debt company ...".

Issue

Debt Free Direct Ltd complained that:

1. the claim "Some 60% of IVA's fail" was inaccurate;

2. the claim "Four years after an IVA is set-up, your creditors can come back to you and make further claims if your situation has improved" was misleading and likely to cause undue anxiety to recipients, because the level of payment made under an IVA was reviewed annually by a supervisor and

3. the claim "Failure to make payments - even in the last year - under an IVA cancels the agreement, and puts you back to square one. You WILL still owe ALL the money, including fees to the debt company" was misleading and likely to cause undue anxiety to recipients, because debt supervisors would generally work with debtors who could not make payments near the end of an IVA to avoid the failure of the agreement.

CAP Code (Edition 11)

Response

1. DebtDr said research commissioned by the Insolvency Service showed that, of around 65,000 IVAs started between 1987 and 2002, 37% had been completed, 23% had failed and 40% were ongoing. They said, if the same proportion (23%) of ongoing IVAs failed, the total failure rate would be 33%.

They said the statistics from the Insolvency Service did not include the number of people who applied for an IVA who were unable to meet the requirement for a regular monthly payment or the number of people who had their IVA applications rejected at proposal stage.

They said they had estimated the figure of 60% based on the number of failed IVAs, the predicted number of ongoing IVAs that would fail and the number of unsuccessful applicants for IVAs.

2. DebtDr said it was common for the Insolvency Practitioner supervising the IVA to maximise the return to the creditors. They sent excerpts from two IVA agreements. In the first, the debtor agreed to pay 60% of any overtime, commission, bonuses or other payments he received in addition to his basic salary into the IVA. In the second, the debtor agreed to re-mortgage his house in the final year of the IVA.

They acknowledged that those terms were set out in the initial IVA agreement but said, in their experience, many debtors did not realise that payments could increase over the course of an IVA. Although they believed the claim was not shocking or inaccurate, they regretted any fear or distress caused to recipients.

3. DebtDr said, following the breach of an IVA, the Insolvency Practitioner could instruct the debtor to remedy the breach if it was capable of being remedied. He could also either terminate the arrangement, present a petition for the debtors bankruptcy, vary the terms of the IVA or take no action.

They explained that, if the Insolvency Practitioner petitioned for bankruptcy and the debtor was subsequently declared bankrupt, the original debts would then be due. However, they pointed out that the debt would be offset by any money collected over the course of the IVA.

Assessment

1. Upheld

The ASA considered that, because DebtDr had not provided documentary evidence that showed 60% of IVAs failed, they had not substantiated the claim.

On this point, the ad breached CAP Code clauses 3.1 (Substantiation) and 7.1 (Truthfulness).

2. Upheld

We considered that readers were likely to understand the claim "Four years after an IVA is set-up, your creditors can come back to you and make further claims if your situation has improved" to mean that creditors were likely to change the terms of an IVA after four years to make further demands on debtors.

We noted some IVAs could contain clauses that increased the rate of payment over time. We considered that, because such clauses were written at the start of the IVA, not introduced after the IVA had begun, the implication that creditors could revise the terms of the IVA after four years was misleading.

We noted the mailing had been sent to people who had recently entered into IVAs and considered that, because it exaggerated the risks involved in an IVA, it was likely to cause unwarranted distress to recipients.

On this point, the ad breached CAP Code clauses 3.1 (Substantiation), 7.1 (Truthfulness), 9.1 (Fear and distress) and 53.2 (Financial products).

3. Upheld

We considered that the claim implied that, in the event of the cancellation of an IVA, any money that had already been paid into the IVA would not count towards the debt paid off and that, if a debtor did not make payments, the only outcome would be the cancellation of the IVA.

We noted that, if payments were missed, an IVA could be cancelled, but that that was one of several possible outcomes. We considered that the implication that failure to make payments would result in the IVA being automatically cancelled was misleading.

We noted that, if an IVA was cancelled and the debtor subsequently became bankrupt, payments made over the course of the IVA would be offset against the total debt owed. We therefore considered that the implication that money paid into a cancelled IVA would always be lost and would not count towards the debt paid off was misleading.

We noted the mailing had been sent to people who had recently entered into IVAs and considered that, because it exaggerated the risks involved in an IVA, it was likely to cause unwarranted distress to recipients.

On this point, the ad breached CAP Code clauses 3.1 (Substantiation), 7.1 (Truthfulness), 9.1 (Fear and distress) and 53.2 (Financial products).

Action

We told DebtDr to ensure that they had documentary evidence to support any claims made and that they did not exaggerate the risks involved in entering an IVA in future mailings.

Adjudication of the ASA Council (Non-broadcast)