Charitable competition may undermine IVA fees

It is a wonderful phenomenon that capitalism can create a new market from the very people who have failed to control their own finances.

No doubt many a New Year Resolution was made to curb spending.

Most, however, will probably go the way of all such resolutions – which will in turn drive the demand for individual voluntary arrangements (IVAs).

Applications for IVAs – under which consumers can clear an agreed level of debt, usually over five years – are expected to soar as the credit card bills roll in later this month in the wake of Christmas.

This week Grant Thornton, the financial consultancy, has predicted that almost 30,000 consumers in England and Wales are likely to become insolvent in the first quarter. A third will result from excessive spending over Christmas.

Glad tidings for the handful of companies on Aim that specialise in IVAs. Investors who backed Debt Free Direct, Accuma and Debt Matters two years ago have doubled their money. But the favourable winds that have driven the shares upwards faltered towards the end of last year.

Remarks from Michael Geoghegan, chief executive of HSBC, were partly responsible. Last month -– unveiling the bank’s third-quarter trading statement, which revealed that personal unsecured debt continued to be a concern – Mr Geoghegan repeated his worries that IVA specialists were encouraging people to file for bankruptcy or restructuring. It is difficult to sympathise with banks that have lent too much money to customers who are unable to pay them back. But even the banks have differing views on IVAs.

Sir Fred Goodwin, chief executive of Royal Bank of Scotland, said last month that IVAs – if used properly – could work to everyone’s advantage.

There is little doubt that the IVA industry is here to stay. The question is whether the momentum of the past couple of years can continue.

The main IVA practitioners have agreed with the banks to set up a new industry code of practice aimed at driving up standards.

A voluntary set of guidelines is being drawn up for a proposed code of practice, similar to that of the banking industry. The code will regulate how responsible debt practitioners market and advertise their services. It will also cover the quality of advice given to IVA candidates, as well as transparency of fees.

Such a code shows how the IVA practitioners are learning to live in harmony with the banks, rather as Help hire and other traffic accident management companies made peace with the insurance industry a few years ago. But it also suggests that some of the zing will go from the IVA sector.

Further damping the commercial side of the market will be the arrival in April of a competitor with a difference. CCCSVA is wholly owned by the Consumer Credit Counselling Service, a registered charity that until now has stuck to Debt Management Plans and passed any IVA candidates on to third parties.

Malcolm Hurlston, the founder, says that last year £150m was funnelled back to the banks through the charity and claims that the banks cannot wait for its IVA service to begin. He believes that – given the number of callers to the charity – the new IVA service will be handling up to 5,000 cases in its first full year of operations in 2008.

It might be just another competitor in a market that is still growing strongly – and it might not succeed. But if Mr Hurlston’s venture is successful, the downward pressure on the fees charged by commercial operations will be hard to avoid.

Noah’s drought

The failure of Noah, the Chinese producer and distributor of electronic learning products, to float on Aim highlights once again the need for the Stock Exchange to attract overseas investors as well as overseas companies to the junior market.

Concerns over the quality of companies seeking to join Aim do not apply in this case – the company has sales and operating profits and is growing rapidly. That is reflected in the fact that Evolution China was able to find willing investors in London and Hong Kong.

But the syndicate that organised the roadshows in North America ran up against a brick wall.

There are several possible reasons why American investors stayed clear of Noah. It is not only in London that Chinese flotations have wobbled – witness Bodisen Biotech, the organic fertiliser group listed on both Aim and the American Stock Exchange. Timing a flotation in the run-up to Christmas cannot have helped.

The most likely cause is that the company was greatly overvalued. If it had planned for a market capitalisation of £50m instead of £100m and stuck to raising the money in London, it may well have got away. But whether that would have been good for Aim is another matter entirely.