House of Commons - Debt Management - Business, Innovation and Skills Committee

Debt Management - Business, Innovation and Skills Committee Contents

4 Debt Advice

Introduction

96. According to the Government there are in excess of a million consumers each year seeking advice on how best to deal with the financial difficulties they face.[123] These consumers access that advice through a wide variety of providers but two distinct approaches are available, the free to client debt advice and paid-for debt management:

Free to client debt advice

i. Charities: for example the Money Advice Trust (MAT) which runs the National Debtline, and Citizens Advice (and their local bureaux). Some of these charities receive central government and/or local authority funding. For example MAT operates a funding model in which a tenth of its income is "self-generated" and the remainder is funded 70% by private sector voluntary contributions and 30% by central government contributions. Funding ratios vary significantly across organisations; some charities, particularly local ones, may receive a majority of their funding from government via their local authority. Charities which operate this model tend to provide holistic debt advice, and often very detailed support to individuals, for example by explaining options, ways of negotiating with creditors, writing letters to creditors, helping clients create personal budgets) but they do not provide formal debt management plans[124] or individual voluntary arrangements (IVAs).[125]

ii. Direct government advice: from the housing or welfare department of a local authority.

iii. Fair share advice: this model is operated by Consumer Credit Counselling Service (CCCS) and Payplan. They provide debt management plans, individual voluntary arrangements (IVAs) and other formal debt solutions to individuals. These plans, and the associated debt advice, is free to the individual at every stage. Funding is received from creditors on a pro-rata basis according to the amount of debt repaid through these formal plans.

Paid-for debt management

iv. Commercial debt management companies: provide formal debt management solutions such as debt management plans and individual voluntary arrangements (IVAs). They charge their clients through upfront fees and ongoing management charges. Such companies include Gregory Pennington, MoneyPlus Group, Debt Advisory Line, ClearDebt and Baines & Ernst. It is this form of debt advice that is of particular concern to us as we highlighted in the introduction.

Commercial Debt Management Companies

97. It was estimated in a review of the sector by the OFT that commercial debt management companies (DMCs) make £250 million a year from over-indebted clients.[126] Following our call for evidence on consumer credit and debt management we received many submissions criticising DMCs. Which? accused the industry of "mis-selling, cold-calling, mis-leading advertisements and inflated claims".[127]

98. Joanna Elson from the Money Advice Trust argued that one of the problems with DMCs was the speed with which they assessed debtors circumstances which ran the risk of delivering inappropriate solutions:

If you look at some of the advertising out there, you will see on these websites a 30-second debt test that will tell you whether you are eligible for a Government-backed IVA—surprise, surprise, you are, and then you are down this route. We take 15 minutes at National Debtline to work through with people, and we do not believe you can do it in less than that. We are forever trying to keep the times down because we want to be efficient, but we do not believe you can in all conscience give people a proper solution and work through their problems in 30 seconds. I think that is indicative of the problems that we have.[128]

99. Further concerns of what was happening in the industry were highlighted by a study of debt management plans (DMPs) by R3, the insolvency trade body. Their research of those debtors on DMPs found that 10% of individuals in a fee-charging DMP were not told that they would be charged until after their plan began.[129]

100. As explained in the introductory chapter, DMCs are currently regulated in a similar way to payday lenders—through the OFT. The OFT licenses companies, produces Debt Management Guidance and monitors companies' compliance to the guidance. In doing this the OFT has come across many examples of bad practices such as firms sending out misleading mailings to consumers, using 'look-alike' websites to mislead consumers into believing that they were charity-based sources of free debt advice, and being engaged in cold calling.

101. Between April 2008 and June 2010 the OFT undertook 37 formal actions against debt management companies. However despite these actions the OFT did not believe the industry was responding appropriately to concerns and so launched an in-depth review "into the sector as a whole".[130] The OFT review of DMCs was published in September 2010. It found that 129 of 172 commercial debt management companies were not complying with OFT industry guidelines. OFT told us:

Frankly we would be the first to say how very, very disappointed we were to discover how little credence seemed to be given to the guidance. But what did we do? We took rigorous enforcement action[...]; I think something like 53 companies exited the market immediately following that as a result of the work that we were doing.[131]

The next step is the revised version of the Debt Management Guidance, which will come out in the new year, which will very explicitly pick up on some of the concerns that we identified with the review. That will set a new and even higher standard that we will expect people to comply with. If we find evidence that businesses do not comply in any significant way with that guidance, we will take enforcement action against them.[132]

102. However the Debt Managers Standards Association (DEMSA), an industry trade body representing 18 DMCs,[133] argued a lot had been done to improve standards:

All our members are independently audited every year, and we have a schedule of other monitoring of their compliance, which includes quarterly web sweeps and desktop analysis of all advertising, and a consumer satisfaction survey where we aim to sample 10% of the total consumer base held by our members; that is done on a monthly basis. We have mystery shopping: we employ independent mystery shoppers to shop at the companies. We have a complaints-handling procedure and we have a beefed-up compliance and disciplinary panel under the chairmanship of [...] a retired High Court judge.[134]

We remain to be convinced.

FEES

103. We questioned the industry on their charges—what they were on average and what they were spent on. Richard Wharton from DEMSA, said that there was an initial up-front fee, usually between one and two months' cost of the initial disposable income, and then there was an ongoing management fee, of around 15% to 17.5% per month of the monthly payments. Chris Davis from MoneyPlus Group explained that for that price, DMCs would distribute payments to creditors and negotiate with creditors to try and freeze interest and stop the late payment charges.[135] Furthermore, Mr Davis explained that consolidating a consumer's debts was not a straightforward process:

We are seeing that our average consumer has seven debts. They may well be in arrears and in default with every single one of those creditors, so they will be getting letters, telephone calls, text messages and potentially visits. Our aim is to try and take the stress and pressure off the consumer's shoulders, and I think it is very difficult to actually put a value on that.[136]

104. While Consumer Credit Counselling Service (CCCS) acknowledged that DMCs provided a valid service, it highlighted the fact that clients of fee chargers paid more under commercial debt management plans (DMPs) and therefore took longer to pay down their debts.[137] CCCS gave the example that for a debt of £30,000, a client of a typical DMC would pay almost £6,000 extra in fees; over and above loan repayments. This would extend the plan by approximately 18 months compared with a CCCS DMP, which was free.[138] Joanna Elson from the Money Advice Trust explained concerns:

We—and, I am sure, the other advice providers here—have people coming to us who have tried to put things right, responded to one of these adverts and winded up in a worse situation than when they started.[139]

105. Which?'s worry was that DMCs were 'front loading' fees which could lead to mis-selling. It explained that because fees were front-loaded, the DMCs recouped a large chunk of money in the first few months of the DMP thereby still making a substantial profit from borrowers even if the plan failed. For example a DMC might set monthly repayments at a higher level than a borrower could afford thereby maximising its own gains and increasing the risk of the repayment plan failing. If the plan failed the DMC could then charge the borrower for moving them onto an IVA.[140]

106. We asked the Minister if he was concerned by the fee charging companies and he told us:

There is some evidence that there is some abuse of upfront fees. However, we should not totally dismiss the paid for sector. They have a role to play.[141]

He believed that further regulation was not needed, that the OFT's guidance and enforcement regime was handling the industry appropriately, and that the OFT's approach was "the best way to drive out the people who are abusing upfront fees".[142]

107. While we acknowledge that the OFT has provided guidance on up-front fees we do not believe that the Minister's assertion that such guidance will drive out the abuse of such fees goes far enough. We recommend the phasing out of up-front fees and look to the Department to set out how this will be brought forward.

TRANSPARENCY

108. Dr Gathergood, an economist from the University of Nottingham, explained that part of the problem with DMCs was a lack of transparency in the industry:

Competition will be effective only if consumers have some basis on which to choose between competing firms. The absence of that information makes it very difficult for consumers to make a choice. The single, simplest, lowest cost thing that the private sector debt management industry could do is publish more data on the quality of its products and the outcome for consumers who take up their schemes.[143]

109. Dr Gathergood contrasted the requirement for lenders to advertise the APR of their products with the absence of any equivalent requirement for DMCs to provide information on their costs. He argued that "if consumers could see some kind of statistic on that, they might have some idea as to whether it is worth paying for the product".[144] The OFT agreed that more transparency was needed:

I think the key thing is that the individual consumer should be able to see what they are paying and what they are getting for it, and should be able to compare what they are getting from one company to another.[145]

110. We conclude that greater transparency in the commercial debt advice market, including a requirement that companies publish figures on the cost of their debt advice and their outcomes, would benefit the consumer and benefit the market. Such information could lead to a comparison website to help consumers chose whether a commercial debt management company is worth paying for as opposed to going to a free debt adviser. We recommend that the Government consider this in its discussions with the industry and introduce the necessary regulations if this is not achieved through voluntary agreements.

VOLUNTARY CODES OF PRACTICE

111. One of the solutions proposed by Government to improve the industry has been for a stronger industry code of practice—a 'debt management protocol'. However, that was not seen as a credible solution by Citizens Advice:

The solution proposed is to develop a self regulatory protocol, just focusing on the debt management area. There are nearly 4,000 people with licences to undertake debt management at the moment, and only 17 are in the leading self regulatory membership body, so it is hardly going to touch the sides in that market.[146]

112. Delroy Corinaldi from Consumer Credit Counselling Service (CCCS) was concerned by the lack of sanctions against those that broke the codes:

It was only last week or the week before that one of [the trade associations] identified a fee charger that is masquerading as a free-to-client debt adviser, and what they then did, which they saw as a success, was to make it public that they had actually put a fine against them and were trying to clean up their act. Well, who is the firm? They did not identify it. How much money did they make out of clients while they were masquerading as a free-to-client provider? They did not state that. I think there is a lot more that can be done. [...] It is quite likely that they are still walking around with an OFT logo on their website saying that they are OFT approved. A lot more needs to be done to clean up this sector, and it needs to be done pretty soon.[147]

113. Payplan supported these views and argued that:

Our view is that trade body activities have been useful, but we need to go further. We need to have a truly vigorous, independent audit of debt management providers, not just to check they have been through all the processes and mentioned all the pros and cons, but to ensure that that advice is truly balanced. I do not think we are there yet.[148]

114. We are sceptical of voluntary codes of practice in the debt management industry given the absence of proper sanctions against companies which either do not abide by the Code or are not members of trade associations. If self regulation is to be credible, the Government's proposals for a strong code will need to deliver effective enforcement, address the problems of excessive management fees and provide a simple mechanism for comparing paid-for advice and the availability of alternative free debt advice. These issues need urgent attention and we recommend that in its response, the Government sets out the detailed timetable for reform, how these issues will be addressed and when the new, strengthened code will be introduced.

CLIENT ACCOUNTS

115. DEMSA has acknowledged that there is more work for the industry to do on one specific area - that of client accounts. Richard Warton DEMSA's Director told us:

I think there is one area where I would perhaps agree further emphasis needs to be put, and that is actually the protection of clients' account moneys held by companies. In DEMSA, we insist on a certificate from the company's auditors every year to certify that the clients' accounts have been handled in a proper manner.[149]

116. However, there was disagreement within the industry on how this should be done. Another industry trade association, the Debt Resolution Forum (DRF) representing 28 DMCs,[150] described DESMA's audit as "inadequate" and stated that it had made representations to the OFT on this matter. The DRF highlighted the insolvencies of two companies, Debt Doctor and Apex as examples of where "a more stringent audit of the client account" would have given an early alert to problems which would have averted "the very large amounts of money that have been lost by clients".[151] Melanie Taylor from Gregory Pennington, a DMC, went further and argued for compulsory insurance to cover funds that are in the client accounts.[152]

117. Effective auditing of Debt Management Companies' client accounts should be established as a matter of urgency. We recommend that the Government include this in any discussion it has about the industrys' proposals for self regulation, together with the establishment of an industry guarantee fund to protect the consumer in the event of company failure or fraud.

INTERNET SEARCHES

118. The proliferation of DMCs on web searches at the cost of free debt advice was highlighted to us. CCCS said:

If you go to Google, for example, and put in "National Debtline", you will be swamped by fee chargers who are trying to get in on that sector.[153]

119. In the backbench debate in the House in December 2011, Yvonne Fovargue MP also brought up this point

We need to look at Google. When someone googles "citizens advice debt advice", they get the debt management companies, not Citizens Advice, because those companies can afford to pay for the ranking.[154]

120. Martin Lewis suggested how this could be dealt with so that consumers could recognise the difference between the bodies advertising and what they were providing:

It seems to me you could have different categories and different stamps that you could call yourself. When some companies say they are free but then charge fortunes on the back end, they are free at the point of delivery only. A little bit of categorised regulation that says you have to use the right terminology would be very useful, and not particularly expensive to do.[155]

121. We questioned the Minister on what could be done and he recognised that internet searches "can create some real problems." He hoped that "search engines would exercise some corporate social responsibility in this area".[156] The Minister informed us that the OFT had looked at all forms of social media over the summer and had revised its guidance on advertising in the industry. The guidance now states:

Licensees who advertise or sell online or by email must comply with the Electronic Commerce Directive, and before using internet-based and social media marketing, licensees should consider whether they can exercise adequate control over its content. The OFT considers that search engine sponsored links and online messaging forums which limit the number of characters are unlikely to be an appropriate means of providing balanced and adequate information.[157]

He also said that Citizens Advice was now working with Google on the matter.[158]

122. It was reported that the Government is considering action to enforce where products are listed on internet search engines in another sphere—that of internet piracy. The government wants search engines such as Google to push unlawful sites down search result listings.[159] If the Government is prepared to take action in this arena, it should seriously consider doing so also with debt advice.

123. We do not believe the Minister's reliance on internet search providers 'corporate social responsibility' to provide an adequate solution to the problem of commercial debt management companies dominating searches for debt advice to the detriment of free debt advice services. The Government must act on this now so that free debt advice is clearly shown as an available option for debt advice. In this respect, we encourage the Government to consider the feasibility of a traffic light system which would help consumers recognise more trustworthy sources of information.

123 Consumer credit and personal insolvency review: summary of responses on consumer credit and formal response on personal insolvency BIS and HM Treasury para 5.14 Back

124 Debt Management Plans (DMPs): are formal but non-statutory repayment plans agreed between debtors and creditors, often by a third party (who may or may not take a fee).DMPs are not binding on creditors or debtors.Some may involve a degree of debt write-off Back

125 Individual Voluntary Arrangements (IVAs): were introduced in 1986 and are a binding statutory contract between debtors and creditors.It is usually a five year repayment plan involving some debt write off. Once approved by creditors, the IVA will be supervised by an Insolvency Practitioner Back

126 OFT: Debt Management Guidance Compliance Review September 2010 p 4 Back

127 Ev 171 Back

128 Q 35 Back

129 Ev 161 Back

130 OFT: Debt Management Guidance Compliance Review September 2010 p 5 Back

131 Q 206 Back

132 Qq206 and 207 Back

133 DEMSA website: Members http://www.demsa.co.uk/members/ Back

134 Q 135 Back