Credit Unions – it’s far from good news, in fact it’s awful!

I don’t know if you saw the news today?  – How the UK’s credit union assets hit £3 billion for the first time ever?  – click here to see the news from ABCUL

Great news, eh?

Well no…

Why?

Well, today, yes the very same day that ABCUL announced this ‘great news’ about assets, a letter hit my desk from the Co-Op Bank saying that they are reducing the interest they will be paying on bank balances me as liquidator of credit unions, and indeed credit unions themselves, hold with them.

The interest rate?    O.03% on balances up £500k.  That’s right, one thirty third of one per cent in interest.

To put it bluntly, bugger all on balances most credit unions might be holding with the Co-Op Bank…about one fiftieth of the inflation rate.

Please let me ask you something…

What’s exactly is the point of credit unions putting their savers’ money with the Co-Op?

Why do they do it?

The vast bulk of the £1.23 billion in credit union saver deposits – the ‘good news’ is its ‘s by 7.8% over the previous year –  yes, one and a quarter billion pounds, a lot of money, and counting! – is earning nothing for savers, not after the credit union costs.

I tell you what the point of credit unions putting their savers’ money with the Co-Op and them paying nothing in interest is…

The Co-Op is bust…

And if it goes under – and it is a shambles – the FSCS also goes under, its pocket is simply not big enough to cope with the Co-Op’s failure.

Put another way, all you savers in credit unions are propping up a bust bank because (1) Co-Operatives are incapable of surviving in this country today in the way they used to be able to, and management are incapable of turning the Co-Op Bank around, it’s a shambles internally; (2) The FSCS cannot pay out if the Co-Op goes bust – we’re talking about a bail-in, rather than bail out (a bail out, some government organisation pays you back all your money: a bail in, you do not get all your money back, you have to write some of it off, you might be told that the £1,00 you had with so and so bank is no only £500.

If Co-Op goes bust, there will be a run on all of the banks.  Co-Op is propped up by credit union savers’ and other ‘soft’ money – if you’re a saver in a credit union, have you really asked where the credit union puts your money?  Hopefully time will paper over the cracks at the Co-Op…- but will it, and why haven’t you been told that your money is at risk, why are you being told that credit unions are a good place for you to put your money safely?

Thanks to all you savers, old and new, you are propping up a bust bank that we cannot afford for it to fail because the system can’t cope with it doing so!

Oh, did no one, not ABCUL, not any credit union, tell you why you’re being encouraged in?

It’s a huge game of pass the parcel!

If you are a saver, you are playing the game, the problem is you’ve no chance of winning a prize, because the music will never stop when you’re holding the parcel.   Instead you’ll be left holding all the wrapping paper for which you will have paid handsomely, and you’ll not get your money back because you will be bailed in…

Still happy with the advice you got to ‘save’ with that credit union?

Will you be suing the advisor for bad advice, like the PPI sellers of yesteryear?

BEWARE! – What you’re not being told could be more important than what you’ve been told (2)

This is the second in what is likely to be a series of articles over the poor advice that my fellow insolvency practitioners are giving out.

In my last article – click here to read it – I talked about how owners of small companies that had no, or very few assets, were being talked into paying for liquidations they neither needed nor were obliged to carry out.  Today, I’m going to be talking about personal insolvencies, specifically a process called an ‘individual voluntary arrangement’ or IVA.

Take a look on the web and you’ll see numerous references to how easy IVAs are to both get into and live through; how they’re great because they’ll write off most of your unsecured debts; how you’ll protect your home; how they will leave you with money in your pocket every month; how they are somehow better and softer than bankruptcy.  It all sounds too good to be true…

And it often is.

You see, what they don’t tell you is that one third of all IVAs fail.  This is not anecdotal evidence, it’s hard evidence gathered by the government – click here to see the figures.  Look at figure 2.

OK, so one third of IVAs fail. Big deal, that’s not so bad, is it?

Well yes, it is.  You see not all IVAs are the same – some are income based, some are ‘one-off’ settlements.  Under a ‘one-off’ settlement type of IVA, money from an inheritance, windfall, gift from family or friends, or the sale of assets is paid into the IVA in a lump and then paid out to the unsecured creditors in full and final settlement of their debts.  The point is this money is certain – it’s probably already sitting there in a solicitor’s or the Insolvency Practitioner’s bank account held on trust pending the creditors’ agreement to the IVA – the success of the IVA is assured.  So if we knock out of the equation the one-off settlement IVAs, the true failure rate for income based IVAs must be higher than a third… let’s be conservative and say it’s 40%-45%.

Do you hear IPs telling people coming to them looking for an income based IVA that the process they are about to go into is about as likely to fail as it is to succeed?  No, I don’t.  Do they warn people of the impact on them of the IVA failing?  If you’re lucky, it’s skated over, after all it’s never going to happen is it? – you have every intention of fulfilling your part of the bargain.

So now we know the IVA has about 50-50 chance of failing as succeeding, but what is the impact of it doing so?

Let’s go back to some basics.  Back in 1986, IVAs were invented as a softer alternative to bankruptcy for sole traders, i.e. business owners.  They weren’t invented to deal with what they have turned out to be used mainly for – hundreds of thousands of consumers who have unsecured credit card and loan debts they could never pay.  So with something like 50,000 a year IVAs being put in place, rather than the handful expected, the insolvency governing bodies got together with the banks and agreed a standard form of IVA for such consumer debtors.

It’s called the ‘IVA Protocol’ – here’s a link to the government’s website linking to its various versions over time – and in a number of ways every version of it is truly horrible.  It’s clear the banks had the whip hand in the negotiations as it’s very much written in the banks’ favour.

So what does it say about failure?  Well, if you miss just 3 income contributions into the IVA over the 5 year period of the IVA – 5 years is the standard duration – the Insolvency Practitioner can petition for your bankruptcy.  It’s at his discretion, you cannot stop him. With many IVAs failing in years 2,3, even 4 or 5 of the IVA, all you’ve done while you’ve been paying into the IVA is throw good money after bad.  And what’s worse, the longer you stay in the IVA, the bigger a chance you’re giving a trustee in bankruptcy of taking your home off you! (house prices tend to go up, your mortgage will have either stayed the same or gone down, so after a time you’ve probably got equity you didn’t have previously that the trustee can get his hands on).

I have a good number of other issues with the IVA Protocol, but what really concerns me is that not once have I ever had someone who’s subject to one of these things come to me ever fully understand what they had got themselves into.  They simply got sold a story that it was the panacea to all their financial woes.  Not once has any Insolvency Practitioner fully explain the ‘what ifs’ satisfactorily so the person fully understood everything they needed to know before taking the plunge.  And that’s inexcusable.

I recognise that no one has a crystal ball that tells them what’s going to happen over the 5 year period of an IVA covered by the IVA Protocol … that people tend to be optimistic as to the future and hate taking a pessimistic view of what might happen … that people who are desperate will cling to any lifeline… but there is never any excuse from any insolvency practitioner for not being entirely honest with the facts and open as to the implications of a 50-50 gamble going the wrong way.  And that’s why I have a problem with my fellow IP’s advice.

BEWARE! – What you're not being told could be more important than what you've been told (2)

This is the second in what is likely to be a series of articles over the poor advice that my fellow insolvency practitioners are giving out.

In my last article – click here to read it – I talked about how owners of small companies that had no, or very few assets, were being talked into paying for liquidations they neither needed nor were obliged to carry out.  Today, I’m going to be talking about personal insolvencies, specifically a process called an ‘individual voluntary arrangement’ or IVA.

Take a look on the web and you’ll see numerous references to how easy IVAs are to both get into and live through; how they’re great because they’ll write off most of your unsecured debts; how you’ll protect your home; how they will leave you with money in your pocket every month; how they are somehow better and softer than bankruptcy.  It all sounds too good to be true…

And it often is.

You see, what they don’t tell you is that one third of all IVAs fail.  This is not anecdotal evidence, it’s hard evidence gathered by the government – click here to see the figures.  Look at figure 2.

OK, so one third of IVAs fail. Big deal, that’s not so bad, is it?

Well yes, it is.  You see not all IVAs are the same – some are income based, some are ‘one-off’ settlements.  Under a ‘one-off’ settlement type of IVA, money from an inheritance, windfall, gift from family or friends, or the sale of assets is paid into the IVA in a lump and then paid out to the unsecured creditors in full and final settlement of their debts.  The point is this money is certain – it’s probably already sitting there in a solicitor’s or the Insolvency Practitioner’s bank account held on trust pending the creditors’ agreement to the IVA – the success of the IVA is assured.  So if we knock out of the equation the one-off settlement IVAs, the true failure rate for income based IVAs must be higher than a third… let’s be conservative and say it’s 40%-45%.

Do you hear IPs telling people coming to them looking for an income based IVA that the process they are about to go into is about as likely to fail as it is to succeed?  No, I don’t.  Do they warn people of the impact on them of the IVA failing?  If you’re lucky, it’s skated over, after all it’s never going to happen is it? – you have every intention of fulfilling your part of the bargain.

So now we know the IVA has about 50-50 chance of failing as succeeding, but what is the impact of it doing so?

Let’s go back to some basics.  Back in 1986, IVAs were invented as a softer alternative to bankruptcy for sole traders, i.e. business owners.  They weren’t invented to deal with what they have turned out to be used mainly for – hundreds of thousands of consumers who have unsecured credit card and loan debts they could never pay.  So with something like 50,000 a year IVAs being put in place, rather than the handful expected, the insolvency governing bodies got together with the banks and agreed a standard form of IVA for such consumer debtors.

It’s called the ‘IVA Protocol’ – here’s a link to the government’s website linking to its various versions over time – and in a number of ways every version of it is truly horrible.  It’s clear the banks had the whip hand in the negotiations as it’s very much written in the banks’ favour.

So what does it say about failure?  Well, if you miss just 3 income contributions into the IVA over the 5 year period of the IVA – 5 years is the standard duration – the Insolvency Practitioner can petition for your bankruptcy.  It’s at his discretion, you cannot stop him. With many IVAs failing in years 2,3, even 4 or 5 of the IVA, all you’ve done while you’ve been paying into the IVA is throw good money after bad.  And what’s worse, the longer you stay in the IVA, the bigger a chance you’re giving a trustee in bankruptcy of taking your home off you! (house prices tend to go up, your mortgage will have either stayed the same or gone down, so after a time you’ve probably got equity you didn’t have previously that the trustee can get his hands on).

I have a good number of other issues with the IVA Protocol, but what really concerns me is that not once have I ever had someone who’s subject to one of these things come to me ever fully understand what they had got themselves into.  They simply got sold a story that it was the panacea to all their financial woes.  Not once has any Insolvency Practitioner fully explain the ‘what ifs’ satisfactorily so the person fully understood everything they needed to know before taking the plunge.  And that’s inexcusable.

I recognise that no one has a crystal ball that tells them what’s going to happen over the 5 year period of an IVA covered by the IVA Protocol … that people tend to be optimistic as to the future and hate taking a pessimistic view of what might happen … that people who are desperate will cling to any lifeline… but there is never any excuse from any insolvency practitioner for not being entirely honest with the facts and open as to the implications of a 50-50 gamble going the wrong way.  And that’s why I have a problem with my fellow IP’s advice.

Just set up a new business? Read this if you want it to be a success!

As an insolvency practitioner, I have met met hundreds of new business owners…wouldn’t it be great if you could learn what I’ve learnt from all those meetings?

Well you can!  Here’s an article just for you…

So you want to set up in business, do you?

Or you’ve recently started trading but not doing as well as you hoped?

Would you like to know how to avoid going under? How to give it the best chance of being a success?

You see, there’s a big problem with small businesses.  And that is when most people go into business, they only look at the positives such as what they’ll do when things really take off.  Things like what new car they’ll buy, how they’ll spend their increased free time, how they’ll manage all that profitable work? ….
… They build the business on two things:

(i) what they think they know; and

(ii) what they hope.

They don’t go out of their way to find out what they don’t know or to plan for things not going quite to plan.

Yet it’s often what they don’t know or haven’t thought about that will eventually kill the business.  And with it, destroy their hopes and dreams, and often their own and their family’s finances.

The bad news is that’s how it turns out for the 4 out of 10 new start-ups – yes, 40% of new businesses fail within the first 2 years!

That’s almost as many businesses fail as are still alive within just 2 years.  But it doesn’t end there – of the survivors, most then go on to fail within the next 3 years.  Only one in ten are still around by year 5.

The point is you will fail if you follow the course most new business owners do. Yet with so many not making it, there’s an abundance of experiences out there that you can learn from. And it’s free to do so!  Here they are…

The business was started for the wrong reason

Some businesses are set up and then run more like a hobby than a business.  I call these ‘lifestyle businesses’ – they tend to merely exist, either doing poorly or at least not doing spectacularly, until something happens later to cause the wheels to come off…

It scares me that right now many small businesses being set up out of necessity – because there are no jobs around – rather than by someone who has identified a profitable opportunity.

Why have you set up?

I can do it all myself!

In his book, the E-myth, Michael Gerber spoke of the 3 skill-sets needed by business owners today – entrepreneurial, managerial and technical.  No one I know has all three, in the right degrees.  Businesses that don’t have and won’t buy in all three skill-sets lack the cutting edge to succeed in today’s harsh business environment.  Seeking help from outside the business to plug skills gaps is a show of real strength, not of weakness…

Read the book, plug the gaps!

Not enough money

It always costs more to set up a business than you expected and then survive the inevitable troughs later on.  At this time when the banks are selective as to whom they lend to and seem to fail to support customers when they most need them, it’s not a good idea to rely on credit lines over which you don’t have full control.

Have you taken a good amount of time to assess how much money you will need, where you can get it from and how you’d cope with what might happen when business dips?
Poor financial skills

It is vital that you understand how the business works financially.  If you don’t, it won’t be long before you won’t have a business because you don’t properly understand the machine that brings in the cash it needs works.  Also, if you’ve got weak financial skills, you probably don’t have a strong profit motive.  Sure, you love what you do, but you’ll return to stereotype ‘manager’ or technician’ – see above – roles when things get tough, and when you do, you’ll dig the business into an even bigger hole rather than solve its problems.

Do you understand exactly how how the business ticks financially?  Do you understand the figures?  Think about going to college to learn management and accounting if you don’t.  Don’t try to abdicate responsibility for your business’s finances to an accountant – sure it’s ok to hand the processing to him, but not responsibility.
The location, the product or service is all wrong

Quite simply, the business opportunity was not fully explored, optimism blinded reality… there are many businesses in our High Streets which have got the location, product or service wrong.  I stand there and think ‘just what is the owner thinking?  It just doesn’t stand a chance!’

Have you allowed your heart to overrule your head?
No planning

Have you heard the saying ‘to fail to plan is to plan to fail’.   Have you planned for what is going to happen?  And what might happen? – you see the unexpected does happen, increasingly so today!

A lot of the things that cause businesses to fail can be anticipated, plans can be formulated to avoid failure.

Have you spent enough time thinking about what is going to happen and how you’d deal with what might happen?

Poor trading levels

Where a business suffers poor trading levels, often their owners cut costs to manage their cash flows – they do this because it’s often the easiest decision and produces short term cash benefits.  However, if this is all you do, you’re merely storing up much more serious problems into the medium term.  It’s simply not possible to cut yourself to greatness!…

If things don’t work out in terms of sales levels, what’s your plan? How certain are your planned sales figures?
Poor marketing

Many businesses wait for sales to find them, because ‘that’s what you’ve always done’.  If you have worked for someone and have now gone to work for yourself, this could be a big problem for you.  I often can’t ‘find’ any presence anywhere of such businesses – there is no website, no sales force – and if I can’t find you, how can you expect would-be customers to find you?

What’s your marketing plan?  Have you written it down? Do you follow it up?
Failing to set and follow a clear strategy for success

Without a formal plan, businesses develop haphazardly.  And one day you’ll scratch your head and wonder just how the business got to where it is now – it will then be slowly strangled, by ‘unfair’ relationships with a major customer, by your banking constraints, or something other you could have anticipated, …

What’s your strategy?  have you written it down?  Do you act on it?
Business model with high fixed costs

An inflexible business model with high fixed costs may work in boom times, but it will cause significant problems in the inevitable times of bust.

Tell me all about your fixed costs…
Finally, knowledge without action is pointless, it won’t change the outcome, so now go and do something about it!
Paul Brindley FCA, Licensed insolvency practitioner
Midlands Business Recovery

Why do a third of all IVAs fail?

Here’s a copy of a press release from the Insolvency Service, lifting the lid on IVA failure rates.

Take a little time to read it…

 

STATISTICS RELEASE:

 

INDIVIDUAL VOLUNTARY ARRANGEMENTS: OUTCOME STATUS OF NEW CASES REGISTERED BETWEEN 1990 AND 2012, ENGLAND AND WALES

 

Statistics showing the outcome status of Individual Voluntary Arrangements (IVAs) registered between 1990 and 2012 in England and Wales are published today (11 December) by the Insolvency Service. These statistics, recording the status as at September 2013, are shown in Figure 1 below and Table 1 at the end of the main Release. 

 

Figure 1. Individual Voluntary Arrangements by year of registration and outcome status as at September 2013, England & Wales

 


 

                                                                                                                                         Number of registrations

 

 


 

Source: Insolvency Service, September 2013.
1
Numbers are exclusive of IVA registrations that are subsequently revoked or suspended (see Note 7).

 

 

The number of new IVAs registered each year has increased substantially over the period covered, from fewer than 10,000 annually up to 2003, to a peak of over 50,000 in 2010. The upward trend in registrations was particularly steep between the years 2004 and 2006, where there was a more than four-fold increase from 10,725 registrations in 2004 to 44,084 in 2006. The numbers dipped in 2007 and again in 2008, then increased to reach a level of 44,000 to 50,000 per year between 2009 and 2012.

 

The trend in IVA registrations during the period from 2004 onwards is broadly in line with the pattern for total individual insolvencies (although bankruptcy orders continued to rise to a peak in 2009, and the introduction of debt relief orders has impacted total numbers from 2009 onwards). The rapid increases in new individual insolvency cases from 2004, in particular, are considered to be related to households taking on higher levels of debt from the early 2000s, as well as more general economic factors. Figure 4 at the end of this release shows trends in each type of individual insolvency since 1990.

 

For IVAs themselves, the rapid increase from 2004 to 2006 coincided with a number of firms setting up as volume providers of IVAs, with attendant advertising of the service on offer.  Commentators have suggested that the subsequent reduction in new registrations for 2007 and 2008 may be related to fewer cases being approved by creditors where the dividend on offer was below a specified level.  In response to concerns raised, the Insolvency Service led the development of a voluntary agreement aimed at encouraging best practice and streamlining the process for straightforward consumer IVAs. This “IVA Protocol” has been in effect since February 2008 and was updated in January 2013 (see Note 2).

 

The number of IVAs registered each year that have failed and resulted in the arrangement being terminated (by September 2013) has broadly followed the trend in overall registrations described above. It should be noted, however, that the final numbers for the most recent years are not yet known, as a large proportion of IVAs are still ongoing (see Note 8).

 

In percentage terms, the trend in IVAs which have failed is shown at Figure 2 below.

 

Figure 2. Percentage of Individual Voluntary Arrangements resulting in termination as at September 2013, by year of registration, England and Wales1

 


 

                                                                                                                  Percentage of registrations terminated

 

 


 

Source: Insolvency Service, September 2013
1
The lighter shaded bars, from 2005 onwards, represent years where the number of IVAs still ongoing exceeds 5% of registrations for that year. The percentage of terminations is expected to increase for the shaded period, particularly for the most recent years, as ongoing IVAs either terminate or complete going forward; therefore trends should be interpreted with caution

 

 

Between the years 1990 and 2002, inclusive, the percentage of IVAs registered each year that eventually resulted in termination remained fairly steady at around 30% (the lowest figure in this period being 28% for 2001 registrations and the highest 33% for 1995 registrations). The percentage of terminations has since followed a generally upward trend from 30% for 2002 to the level for 2007 registrations, which currently stands at 38%. As at September 2013, nearly one third (33%) of IVAs registered in 2007 were still ongoing (Table 1 below), so the percentage of terminations is likely to increase going forward.  It is not possible to make direct comparisons between termination rates for IVAs registered after 2008, and those registered before, as over half of IVAs are still ongoing for more recent registrations.

 

Looking instead at, for instance, the percentage of IVAs that failed within a year of registration, comparisons can be made on a more consistent basis between registration years.

 

The overall percentage of IVAs registered between 2002 and 2006, which eventually resulted in termination, was 36%.  Around 6% of IVAs registered in these years were terminated within one year, 17% within two years. Almost half, therefore, of all eventual terminations took place within the first two years (though many IVAs for 2005 and 2006 are still ongoing).

 

 

 

Figure 3. Percentage of Individual Voluntary Arrangements resulting in termination as at September 2013, by year of registration and time elapsed between registration and termination, England and Wales1

 


 

Percentage of registrations terminated within time period

 

 


 

Source: Insolvency Service, September 2013
1 Data for 2009 and 2010 registrations are not available because of unreliable data (see Note 6).

 

For IVAs registered in 2007, 21% terminated within the first two years, higher than for the 2002-2006 average. For IVAs registered in 2008, the percentage terminating within a year was higher than for 2007 registrations, but the high percentage of IVAs still ongoing as at September 2013, and policy changes since their registration, means that it is still too early to predict whether the overall termination rate will be higher for 2008 registrations than for 2007 registrations.

 

A discontinuity in the data means that data for 2009 and 2010 are unavailable (see Note 6).  For IVAs registered in 2011, around 4% and 11% had terminated within the first one and two years respectively; much lower rates than for 2008 and earlier years. A similar pattern can be seen for IVAs registered in 2012, though data are only available for one year.

 

 

 

Table 1: Individual Voluntary Arrangements by year of registration and outcome status as at September 2013, England & Wales1 2

 


 

 


 

Source: Insolvency Service, September 2013
1
For years where there are still cases ongoing, the percentages of completed and terminated cases will change and trends should, therefore, be interpreted with caution (see Note 8).
2 Registrations in 2013 will be included after the year end.
3 Numbers are exclusive of IVA registrations that are subsequently revoked or suspended (see Note 7).

 

 

Figure 4. Individual insolvencies, 1990 to 2012, England & Wales

 


 

                                                                                                              Number of new cases

 

There are several key points:

  1. More people are going into IVA;
  2. More people are failing to complete their IVA in accordance with its terms, meaning all they’ve done by going into IVA is waste money, time and effort;
  3. The figures for more recent years haven’t really improved even though the graphs suggest they have – there are large number of IVAs in limbo, where the debtor isn’t complying with the IVA terms but the Supervisor isn’t under any obligation to terminate the IVA, at least not yet.  This will come out when we see the next lot of figures from the Insolvency Service.

So why do IVAs fail?

There are a good many reasons:

  1. Most IVAs are for 5 years, a long time, an awful lot can happen in that time family, job and health-wise;
  2. The choice of debt solution was wrong in the first place.  Many people go into IVA because they see it as the honourable thing, not because it’s the best thing for them and their family.  Pride and emotion get in the way of them taking the best solution;
  3. Creditors impose some pretty testing requirements on debtors – an IVA is not an easy option, it’s going to hurt, and for a good while. There’ll be nothing left in the pot to deal with life’s emergencies or vagaries;
  4. People tend to be over-optimistic as to what they can do to get themselves out of their difficulties, it’s a human trait.  They prefer optimistism to realism.
  5. Many will have received bad advice from their chosen debt adviser, after all they could be driven by their own personal financial interest – they’ll often receive a bonus from signing you up

If you’re contemplating an IVA it’s vital that you take advice from a professional who’s going to give you it straight.  Beware ‘IVA salesmen’, they peddle misery.   And once you have taken the right advice, sit with your family and explain exactly why you are following the route you propose and how it compares with all other routes.

Doing that is tough, but vital.