Memorandum submitted by the Debt Managers
Standards Association (DEMSA)
1. EXECUTIVE
SUMMARY
The Debt Managers Standards Association (DEMSA)
has responded to two specific points of the select committee's
inquiry. These are:
— The provision of regulation and generic
financial advice about debt and savings.
— The role of DEMSA in promoting financial
inclusion.
In this submission, DEMSA have set out the main
guidelines which govern the debt management industry and the benefits
this brings to the quality of financial information available
to debtors. The OFT's Debt Management Guidance and their Consumer
Codes Approval Scheme are both detailed and their relevance to
regulation, information provision and inclusion highlighted.
2. INTRODUCTION
The Debt Managers Standards Association welcomes
the opportunity to respond to the Treasury Select Committee's
inquiry into Financial Inclusion. As a responsible trade association
we are aware, not only of the need for a range of good quality
debt advice services but also of the enormous impact that financial
exclusion can have on individuals and society at large.
This submission responds to two specific points
of inquiry set out by the Committee:
— The provision of regulation and generic
financial advice about debt and savings.
— The role of DEMSA in promoting financial
inclusion.
3. BACKGROUND
The number of people in the UK with serious
debt problems is increasing with household debt growing at the
rate of £1 million every four minutes.[92]
It has now broken though the £1 trillion barrier which equates
to approximately £17,000 for every man, woman and child.
Failure to effectively manage personal debts
can have a devastating impact on the life of an individual, their
partner and family. The need to provide practical help and guidance
to individuals in financial difficulties is growing daily more
crucial.
Through Debt Management Companies (DMCs) the
sector is able to negotiate with creditors on behalf of consumers
and set up payment plans that usually involve lower monthly repayments
and a concession on interest and charges. Currently, around two
million people a year are phoning DMCs for advice.[93]
Voluntary organisations, including the Citizens
Advice Bureau, the Consumer Credit Counselling Service and Pay
Plan, are working hard to meet demand for their services. However,
despite their best efforts the National Debtline estimates that
these voluntary organisations are "only reaching a third
of calls before they ring out".[94]
Debt Management Companies should not be viewed
as being in competition with the voluntary sector. There are fundamental
differences between DMCs and the voluntary sector in terms of
funding, availability of service and the nature of the service
provided which separate the two and allow consumers a choice in
where and when they get their advice from. Unlike the voluntary
sector which receives a proportion of their funding from credit
companies, DMCs are truly independent and self-funding. Many DMCs
offer free advice to those phoning their helplines with fewer
than 10% of callers subsequently entering a debt management programme
for which they are charged an agreed monthly management fee.
Distinctions can be drawn between the types
of debt problems individuals seeking advice may have. For example,
some cases involve underlying poverty where debt is part of a
range of issues that can include unemployment and benefit dependency.
Often, face-to-face advice is more appropriate and beneficial
to these individuals. By contrast, other debtors simply have unmanageable
personal debt and can effectively be served without the need for
a face to face service.
To maintain choice within the debt advice sector
allows people to address their problem in the most appropriate
manner for them.
4. PROVISION
OF REGULATION
AND GENERIC
FINANCIAL ADVICE
ABOUT DEBT
AND SAVINGS.
4.1 Office of Fair Trading—Debt Management
Guidance
In December 2001, the Office of Fair Trading
issued clear guidelines to help ensure that companies offering
debt management services deal fairly and openly with consumers.
The guidelines were established following concerns about the conduct
of some debt management organisations, which were rightly brought
to the attention of the OFT by consumers, consumer bodies and
the credit industry. For this reason guidance for the sector was
identified as a priority.
The guidance sets out minimum standards that
the OFT expects of DMCs. Breaches of the guidelines can lead to
a DMC's loss of their consumer credit licence. The guidance includes
the following requirements:
— Consumers must be given adequate
information before entering into an agreement. Contracts should
specify the nature of the services provided, total cost to the
consumer, amount to be repaid and duration of the contract. Contract
terms should be fair, legible and in plain language.
— A realistic assessment of the customer's
financial circumstances must be made before advice is given, including
verification of income and regular outgoings and any advice must
be in the best interests of consumers.
— DMCs must inform clients of the outcome
of negotiations with creditors, as well as any developments with
creditors such as the issue of default notices or the threat of
legal action.
— Advertisements and marketing must
be accurate, clear and not misleading. Any reference to "savings"
on repayments must make clear that debt rescheduling will usually
lead to an increase in the size of the sum to be repaid and potentially
affect the consumer's credit record.
— No cold calling by personal visit.
— Payments from consumers should normally
be passed on to creditors within five working days of receipt
of cleared funds.
The OFT makes it clear that:
"The OFT has no objection to DMCs charging
for, or consumers choosing to pay for, debt management services.
The consumers using these services will, however, often be vulnerable
because of the nature of their financial problems and, almost
by definition, have the least available financial resources. It
is, therefore, particularly important that the services provided
by DMCs are carried out with due care, skill and fairness."[95]
This guidance from the OFT was welcomed by DEMSA
as it provided a starting point from which to ensure the industry
was better regulated. DEMSA advocates statutory regulation of
the debt management industry believing that proper regulation
will deliver increased consumer confidence in the industry as
a legitimate source of information and method of dealing with
debt problems.
4.2 The Debt Managers Standards Association
(DEMSA)
DEMSA was established in December 2000 in order
to promote good practice in the debt management industry and to
protect the interests of the public and the lenders to whom they
owe money. Membership of DEMSA is reliant upon DMCs being able
to demonstrate that they comply with the standards set out in
the DEMSA Code of Conduct[96]
and the above OFT guidance.
The Code has been developed in consultation
with a number of DMCs and major lenders. The aim of the Code,
and that of DEMSA, is to encourage debt management companies to
provide services of the highest standards in which the public
and the credit industry can have confidence.
DEMSA strongly believes that the debt advice
sector should be governed by statutory regulations, rather than
a voluntary code, and seeks to promote this publicly.
A strong professional association helps to ensure
quality of advice. By providing a benchmark on which the public
can gauge the service with which they are being provided, the
public are more likely to access good quality services.
4.3 Office of Fair Trading—Consumer
Codes Approval Scheme (CCAS)
The OFT runs a scheme to approve and promote
voluntary consumer codes of practice that set high standards of
customer service. Only codes that are shown to protect and promote
consumers' interests beyond the basic requirements of the law
are approved and promoted by the OFT. Importantly, businesses
that operate under an OFT Approved code are able to display the
OFT Approved code logo, which helps consumers identify trustworthy
businesses to buy goods or services from.
DEMSA is the sole debt management trade association
to complete Stage One of CCAS (achieved July 2005). Only four
trade associations are currently in the position of completing
Stage One of the two stage process. DEMSA is now working towards
achieving final approval by supplying evidence to the OFT that
the code is delivering on the undertakings made at Stage One.
5. ROLE OF
DEMSA IN PROMOTING
FINANCIAL INCLUSION
DEMSA provides the DMCs with an expected level
of professional standards which the public can trust. By providing
a reputable industry as a source of advice and a solution to financial
problems which does not involve the courts, DEMSA encourages more
people to stay within mainstream financial services. DEMSA's members
offer a clear and transparent service which avoids exorbitant
interest payments and gives debtors the confidence to regain control
of their finances.
January 2006
92 http://www.moneybasics.co.uk/mb/site/resources/resources_facts_figures.html Back
93
The Daily Telegraph, 3 January 2006. Back
94
Ibid. Back
95
The full guidance is available at http://www.oft.gov.uk/NR/rdonlyres/75CD3C6E-A7C0-44AF-96FF-308E4DCD703E/0/oft366.pdf Back
96
http://www.demsa.co.uk/code.htm Back
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