Uncertainty hits UK debt management firms hard

British debt management firms were rocked again today amid fresh signs of a tougher line on personal debt among creditors.

Shares in Debtmatters tumbled 65% today as the firm said "hardening creditor attitudes" had hit fees from individual voluntary arrangements (IVAs), which allow debt-laden consumers to clear agreed levels of debt without going into bankruptcy.

The company, which is also under pressure from increased competition in the sector, said it may not be able to run its IVA business at a profit if lower fees became the norm.

Fellow IVA provider Debt Free Direct's shares fell 29% while Debts.co.uk tumbled 20% on the news.

Debtmatters said: "IVA case acquisition costs have risen sharply in the face of rising competition, and IVA conversion rates have worsened due to hardening creditor attitudes which have impacted on margins."

After a boom in IVAs in recent years, lenders are now taking a tougher line as personal debt spirals, arguing that they are often not in the consumer's best interest. The change of attitude has in turn knocked investor confidence in the sector's shares.

Debt management firms have been in talks with the British Bankers Association and the Insolvency Service over setting IVA fees, although no firm conclusions have been made so far.

Debtmatters has suspended all advertising relating to its IVA business in the light of the current uncertainty.

It effectively put itself up for sale today after appointing financial services firm Charles Stanley to carry out a strategic review which will consider "a full range of options both in relation to the IVA business itself and the wider group".

The debt management market is already consolidating as firms struggle to cope with a tougher trading environment. In June, Debt Free Direct bought smaller rival Clear Start for £10.9m (€15.6m) as it sought to boost size and scale in an increasingly competitive market.

Despite the recent uncertainty over the sector, analysts said long-term prospects for debt management firms were brighter, with individual debt levels rising to around £1.3 trillion (€1.86 trillion) in the UK.

Seymour Pierce's Gerald Farr said: "The current turmoil in the credit markets has already seen increases in mortgage interest rates, has caused lenders to tighten credit policies and has led one credit card company to send out letters to its customers reducing their credit limits.

"At the same time, house price growth is slowing, fuel prices are increasing and wage inflation remains low."