Experian Sheds New Light on the Dramatic Rise in UK Insolvencies

Richard Fiddis, Managing Director, UK, Ireland and Northern Europe at global information solutions company Experian®, spoke out today against the rising tide of Insolvencies and, in particular, Individual Voluntary Arrangements (IVAs), which he believes are damaging consumers’ financial futures and having a significant and detrimental impact on the UK’s credit industry.

Speaking to an audience of 300 senior executives and managers from the financial services, telecommunications, automotive, retail and mail order industries at the annual Experian Conference, Fiddis praised the efforts of the credit industry to promote responsible lending.

“Impairments are a major issue for the UK financial services industry today, fuelled by the recent unprecedented rise in personal insolvency levels – particularly IVAs,” said Fiddis.

“Insolvencies rose by two-thirds in the second quarter of this year, while IVAs, which make up almost half the total, soared by over 150 per cent. Our research shows that there are marked differences in the numbers and growth of IVAs and bankruptcies in different parts of the country and we have to ask ourselves why this is. There is evidence that consumers are being encouraged into IVAs without fully understanding the long-term consequences.”

Experian’s analysis of IVAs in England and Wales shows that there is disproportionate representation among young families with children, living in mid-market terraced and semi-detached properties in Council Tax bands A and B. The M4 corridor appears to be the major hotspot for IVAs, whereas bankruptcies are most prevalent in the South West, in areas of extreme poverty.

There is also a growing trend among women to opt for IVAs. Whereas a few years ago, both bankruptcy and IVAs were dominated by men, they are now much more evenly spread, with women responsible for 46% of IVAs and 44% of personal bankruptcies.

“One of the most striking differences between those opting for bankruptcy and those for an IVA is illustrated by socio-economic analysis,” continues Fiddis. “Experian’s Mosaic consumer segmentation system shows that people in the ‘Happy Families’ group, comprising largely young families, are more than 60% more likely to be tempted by an IVA.”

Looking more deeply into this group, those in the ‘Fledgling Nurseries’ category – as the name implies, families with young children – and ‘Middle Rung Families’ – those making their way up the corporate ladder – are both twice as likely to go for an IVA than they are to opt for bankruptcy, the latter particularly because they believe that no-one will find out about an IVA.

Bankruptcy is more likely to be chosen by the lowest income groups, where assets are minimal and they have least to lose – for example, because they live in rented accommodation and their income is predominantly derived from welfare benefits. The higher socio-economic groups, such as ‘Symbols of Success’ and ‘Suburban Comfort’ have a much lower incidence of insolvencies overall, as might be expected, and are, in general, more likely to opt for IVAs. There is evidence to suggest that elderly ‘Golden Empty Nesters’ may opt for IVAs because, in this group, there is still a strong stigma attached to bankruptcy.

“Since the Enterprise Act, the stigma of bankruptcy amongst the general population has greatly diminished,” says Fiddis. “In some respects, this is a good thing, as it encourages risk taking and entrepreneurism. However, bankruptcy is now increasingly being seen as an ‘easy’ way out of debt, particularly among the young, who often don’t consider the longer term consequences – or are misled into believing that there are none.

“These people tend to be the least financially sophisticated and unfortunately often believe an apparently helpful ‘adviser’ who wrongly tells them that an IVA won’t appear on their credit report or make it more difficult to obtain credit in future, that many of their debts will be wiped out and that they don’t have to tell their employer. What they don’t realise is that the IVA will appear on their credit report for six years and that it is just as likely that they will struggle to get credit in the future as if they had opted for bankruptcy.

“While it is easy to point to the Enterprise Act as the main reason for rising insolvencies, there are, perhaps, more direct causes. One of the main factors is the growth of disreputable, fee-charging debt management companies in some parts of the country, who prey on desperate and vulnerable people, giving unregulated advice that often fails to protect the consumer and makes it impossible for lenders to recover their debts. We would be the first to contrast these companies with the responsible and excellent work of organisations such as Citizens Advice, the Consumer Credit Counselling Service, National Debt Line and the Insolvency Service itself in providing fair and considered advice to consumers with financial problems.

“However, the amount of advertising, both press and Internet, undertaken by unscrupulous debt advisory companies has noticeably increased and millions of pounds are now being spent by a growing number of firms promoting IVAs as the ‘easy’ way out of debt.

“The fact that so many representatives of the financial services industry are attending the Experian Conference at which many of the issues surrounding personal insolvency are being discussed, demonstrates how seriously the industry takes the issue. It is also a clear indication of the industry’s determination to work together through the many initiatives underway, such as greater data sharing, to tackle indebtedness and help consumers manage their borrowings more responsibly.”