We wrote an opinion piece in the Irish Independent about insolvency and how using some form of it will be required to make lasting debt solutions. It appeared in the paper at the start of the month:
Even detractors will start to sing off the Insolvency Service of Ireland hymn sheet. The change of attitude that is about to take place will be interesting to watch.
People who did nothing other than put down personal insolvency solutions claiming they don’t work will soon be converting and turning to genuflect at its altar.
Why? Because informal debt solutions alone have too many downsides, and they aren’t backed by insolvency legislation that gives defined start and end times or other set boundaries to the deals.
For the companies doing informal deals there’s the new regulatory burden, which creates more administration in the process and drives up costs, which end up heaped on the already financially pressed people who need the help.
The Central Bank authorisation process is both long and hard, and a further round of changes to requirements is due out soon. This will ensure yet more bureaucracy; it also means the people allowed to do the job don’t necessarily know the lay of the land ahead of them that they are authorised to deal with.
Another regulatory failure is in the making, this time it won’t be ‘light touch’, it will be full oversight molestation resulting in reduced access to services at higher prices.
Who suffers? The borrower in trouble mainly, as advisers become mired in a burden that is designed to keep regulators happy, not to produce better outcomes. It also means the unregulated debt advisers can prosper as they aren’t weighed down by this, something the Central Bank shows little concern about.
A downside of companies that are not regulated is that dealing with them can mean you lack recourse to the Financial Services Ombudsman if you sign up to any agreement and later change your mind.
Non-insolvency-based solutions have a higher degree of bank control. Banks prefer that, which is why we are witnessing two similar but opposing approaches when you look at the likes of AIB and Ulster Bank who inherently realise this.
AIB is doing massive write-offs while people keep homes but doing nothing on the unsecured creditor side, meaning the borrowers’ problems are far from over. Ulster Bank (and virtually every other bank) is not doing debt forgiveness.
Equally they are not doing a ‘wave of repossessions’ and of the 166 repossession orders granted out of over 4,100 court applications made by Ulster Bank, some may yet come back and this was only done due to the borrower not engaging.
The threat of repossession does tend to command attention in all but the most entrenched situations and the more hardline approach seems to be working as Ulster Bank’s ‘non-engaging borrower’ figures are down almost 60pc in the last year.
This differing approach also shows that when it comes to debt you can’t say a bank catches more resolutions with honey than vinegar. Giving away taxpayer money to borrowers has yet to be proven more effective, something AIB will eventually need to justify by comparing its results with banks who didn’t follow that course of action.
Personal insolvency deals with all debts at once and in one place, not just the mortgage. This is why the recent ‘house only’ deals will eventually require a Debt Settlement Arrangement (DSA), meaning that the supposed ‘unworkable’ insolvency solutions are ultimately used anyway to produce any finality in the mess.
Why use a mortgage deal then a DSA? At its most basic, the secured lender controls it all, gets the deal they want, then they let the unsecured creditors argue among themselves with the leftovers and it can’t be tipped over in the voting process. Simply put, banks create the most favourable outcome they can hope for. It may be the right mix as structurally a mortgage lender might get less when a third-party Personal Insolvency Practitioner (PIP) gets involved.
A personal insolvency practitioner can’t give outright favour to one creditor; a creditor on the other hand can favour themselves, so they offer higher than insolvency living expenses or interest rates below the cost of funds in order to keep the borrower on side.
In making it more attractive to deal direct, AIB and Ulster have common ground.
Voting through a PIA also requires that both secured and unsecured creditors vote in favour of the deal; this means a large mortgage can be hogtied in resolution by small creditors.
Removing the home from the equation in advance means the credit card, credit union and personal loan providers can duke it out among themselves.
So watch and wait: some branch of insolvency will, in time, be the only game in town for people struggling with debt if people want to get permanent solutions.
The best evidence of insolvency being a success is that only since its inception have all of these new deals started to occur; that isn’t coincidence. It’s evidence of the outcome a bank can expect when insolvency practitioners get involved being worse giving the banks the impetus to negotiate comprehensively.
PIPs must be paid, and because it is creditors who ultimately carry the cost, the double whammy of ‘no special treatment’ matched with ‘paying all the costs’ has gotten them to wake up. Insolvency solutions, when viewed in this light, are free to the borrower, and they will be used wholesale eventually despite the endless narrative that they ‘don’t work’.