Business, Innovation & SkillsWritten evidence submitted by the British Bankers’ Association (BBA)

1. The BBA is the leading association for the UK banking and financial services sector, speaking for 201 banking members from 50 countries on the full range of UK and international banking issues and engaging with 55 associated professional firms. Collectively providing the full range of services, our member banks make up the world's largest international banking centre, operating some 150 million accounts for UK customers and contributing £50 billion annually to UK economic growth.

Executive Summary

2. This submission outlines a number of issues identified by BBA members with regard to the current Debt Management landscape and offers practical steps which could be taken, during the current programme of institutional reform, to improve the debt management landscape for the benefit of consumers, creditors and the wider economy.

The issues:

The debt remedy regime is fragmented, with numerous remedies administered by a number of different Government bodies, including the Insolvency Service, Ministry of Justice (MoJ) / HM Courts Service (HMCS) and the Office of Fair Trading (OFT).

The current regime generates unnecessary costs and bureaucracy for creditors and regulators. These impact on the public purse through duplicated statutory procedures and administrations, and on the wider UK economy by excluding consumers from normal economic activity.

Due to uncertainty and inconsistency in the debt management process, creditors must compete to collect and therefore concentrate resources on collection rather than early intervention and rehabilitation.

Consumers can be overwhelmed by the myriad of sources of advice and resolution available. Many offer a valuable service, but poor practices and exploitation of vulnerable consumers is evident.

Creditors do not enjoy a level playing field. Debts are regarded with different levels of priority and not all creditors contribute fairly and proportionately towards the funding of advice and debt management.

The solutions:

The Money Advice Service (MAS) should collect and analyse comprehensive data on the quantity, quality and performance of debt advice and remedies so that resources can be directed to where they are most effective.

The MAS should create and host a single debt-advice gateway for consumers seeking help, advice and rehabilitation.

More interventionist regulatory action should be taken against unscrupulous debt management practices, such as withholding payments; flipping customers to different remedies; levying disproportionate upfront fees.

All debt management services should be funded on a polluter-pays basis across all creditors—financial and non-financial.

All unsecured creditors should have an equal footing and thus share a common interest in the consumer’s debt remedy and rehabilitation.

In the longer term, a simplified governance model should be established, with a single regulatory body responsible for administering all formal and informal debt remedies.

A simplified governance model should rationalise and simplify the formal and informal debt remedies available.

The Current Debt Management Landscape

Background

3. Personal debt in the UK stands at nearly £1.5 trillion1 of which around 85% is made up of mortgage borrowing. However, the government’s figures show that in 2009–102 88% of households in Britain were either not in debt or had debts which were manageable.

4. Nevertheless, the fee-charging debt advice sector has grown rapidly in the last decade and by the end of 2010 there may have been as many as 562,000 fee-charging plans in operation (compared to around 220,000 in the free advice sector) with fees paid for debt management services reaching within the region of £250 million.3

5. One of the unintended consequences of the increasing commercialisation of the debt market, by the growing number of debt management and claims management companies, is the “moral hazard” of creating a culture where repayment of debts is optional. Credit has long been provided on the assumption that the repayment of debts is a moral obligation, which is prioritised over many other forms of spending. Where this breaks down and borrowers do not repay, the consequences are ultimately passed on to other borrowers in the form of more expensive and less accessible credit.

6. Effective debt management enables an efficient functioning credit market, which is crucial for a prosperous economy. It is essential that the needs of both debtors, for effective debt relief, and of creditors, for the best possible returns, are addressed. Under current arrangements, neither objective is being met.

7. The current debt remedy regime is fragmented, with numerous debt remedies administered by a number of different Government bodies, including the Insolvency Service, Ministry of Justice (MoJ)/HM Courts Service (HMCS) and the Office of Fair Trading (OFT). At present, there are a number of debt remedy procedures, ranging from informal arrangements such as token payment plans and Debt Management Plans (DMPs); to formal insolvency procedures such as Individual Voluntary Arrangements (IVAs), Debt Relief Orders (DROs) and bankruptcy; as well as formal court-based remedies such as Administration Orders and Charging Orders.

8. Over indebted consumers are faced with a multitude of free or fee charging choices for advice and resolution. Many are reputable, but some are not and debt advice is sought at a very distressing time for the individual. Whilst reputable sources of free debt advice exist; all have limited resources. This can lead to over subscription (eg anecdotal examples of 12 week waiting lists at Citizens Advice Bureaux) or a lack of sufficient marketing and promotion to compete with the brand awareness created by the heavy marketing of fee-charging advisors.

Debt Advice

9. Whether advice is free or fee-based its quality and consistency is variable. When debtors with similar financial circumstances seek help they can be given different advice and solutions depending on which organisation they have approached, which agency, branch or bureau of the same organisation they have used and even which advisor they have seen. This situation is exacerbated within the commercial debt management sector, given the large number of Debt Management Companies and 3rd party intermediaries which exist.

10. For creditors, this inconsistency manifests in receiving information and proposals (of variable quality and accuracy) from advisors, using different systems and formats; applying different interpretations to evidence and conveying different expectations of what the appropriate solution should be for the customer’s circumstances. It is hard for creditors to model recovery rates in an environment where a debt advisor does not automatically advise the best course of action for the consumer.

11. Funding of free debt advice is another area where inconsistency of approach and inefficient use of resources has an impact. Not all creditors, who may benefit from the provision of appropriate debt advice, currently contribute towards the costs of that advice. Although transfer of responsibility for coordinating debt advice to the Money Advice Service is likely to result in all FSMA regulated financial creditors being levied to support debt advice, this will not capture all unsecured credit providers and will not tackle the obligations that non-financial creditors, such as central and local government, telecoms and utilities providers, should have to meet a proportionate share of the costs.

12. For those who currently contribute voluntarily to the provision of free debt advice the benefits, although real are not quantifiable. The performance of advice agencies is not measured by outcomes and there is little evidence available to demonstrate value for money or efficient deployment of resources.

The remedies

13. We currently have a range of informal, formal and court-based remedies to over indebtedness. Each has its own merits, but remedies can often be applied to inappropriate circumstances and collectively they contribute to the complexity and inconsistency of the current landscape. At present no single stakeholder in debt management has a complete picture of the consumer and creditor experience. For instance, data is not consistently collected or interrogated on the performance of DMPs and no single resource exists to capture, analyse and compare the success or failure of different remedies or the movement of consumers from one remedy to another, or into and out of the debt-cycle.

14. Debt Management Plans (DMPs) are by far the most prevalent repayment remedy, with an estimated 120,000 established in 2010 alone. DMPs are designed to be used by customers who find themselves in financial difficulties due to a fall in available income. Its aim is to allow customers to avoid a more formal debt solution and either to move back towards normal full repayment in the short term or to pay off outstanding debts in full over a longer more manageable period. However, the experience of creditors and DMP providers suggests that the majority of DMPs are broken and that breakage usually occurs within the first two years of the plan. It is therefore evident that a DMP is not the appropriate solution for most consumers.

15. At least 75% of all DMPs are set up and run by commercial debt management companies who will usually charge both upfront fees and an ongoing management fee for the plan. These fees are paid by the indebted customer and do not contribute to the debt repayment. In most cases the debt management company will cover its costs and generate the majority of its income from the initial set up fees, which are typically the first three months of repayments, but can be up to six months of the customer’s contributions. It is therefore arguable that the commercial DMP provider has no interest in whether the plan succeeds or not and little incentive to support the customer after the initial fees are paid.

16. Front-loading charges may minimise the debt management provider’s risk but it does not necessarily deal with the consumer’s difficulties fully and impairs the creditor’s recovery models. Understanding the impact on the creditor is important, as it makes it harder for them to manage their capital efficiently and can have a detrimental effect on lending to the economy.

17. There are three main formal insolvency procedures for consumers in England and Wales. Individual Voluntary Arrangements (IVAs), Debt Relief Orders (DROs) and Bankruptcy. DROs and Bankruptcy are appropriate devices for writing off debt when there is no real prospect of recovery and IVAs offer a form of debt repayment plan, more structured than a DMP, with an element of debt forgiveness in return for a proportion of the customer’s equity. An IVA can be a useful insolvency tool and its use, when appropriate, is welcomed by creditors and insolvency practitioners. Stakeholders however are rightly concerned when an IVA is incorrectly identified as the appropriate tool or when an arrangement is only established after the customer is “flipped” from an informal plan and hit with a second round of set up and management fees.

18. It is clear that a debt remedy cannot exist to cater for every single incidence or situation but it should be possible to create a small number of debt remedies for particular generic situations that are flexible enough to deal with each specific individual’s circumstances.

Regulatory barriers

19. As the regulatory authority for the Consumer Credit Act, the OFT assumes responsibility for the regulation of debt management providers and for the actions of licensed creditors in dealing with customers in financial difficulties and their advisors. The OFT requires that creditors treat all third party customer representatives equally and so does not allow creditors to offer more favourable terms to the most reputable free or fee-based advisors or to decline to do business with debt management providers that the creditor knows or suspects of treating customers in a manner contrary to the customer’s best interests.

20. Although the OFT has taken decisive action against licensed debt management providers who it has found to be non-compliant with its debt management guidance (including revoking the licenses of 35 providers earlier this year). BBA members believe creditors are in an ideal position to identify disreputable providers and could achieve a significantly positive shift to the market if allowed to prevent unscrupulous businesses from exploiting vulnerable consumers.

The current approach to collections

21. Inconsistencies in the quality and outcomes of advice and debt remedy create uncertainties for creditors in anticipating the likelihood of successful debt management and rehabilitation and therefore the likely level of loss and recovery. As a result creditors compete to collect and some are therefore inclined to demand what they can, when they can rather than to take a more holistic and long term view.

22. Creditors’ resources are therefore more focused on collections activity following arrears and default and less attention is paid to proactive and preventative intervention (although this is improving through the industry’s voluntary Lending Code). As each creditor will expect other creditors to also be competing to collect from the customer, this creates a self-perpetuating cycle and is not conducive to a more considered and supportive plan of managed debt repayment.

A better way forward

23. It would be in the interests of consumers, creditors, advice agencies, reputable debt management providers and the government for a better, more sustainable debt management landscape to be created. Although the government declined, in its response to the BIS review of credit and debt, to countenance significant action, the BBA believes that a number of coordinated measures are possible which would collectively address the issues identified above and create significant benefits for consumers, creditors and regulators.

Use the Money Advice Service to improve debt advice

24. In July the government announced that the MAS would assume responsibility for coordinating debt advice. MAS will invite tenders for the delivery of free debt advice services and is seeking to develop a sustainable funding model, which is likely in part or whole to raise funds via a levy on FSMA regulated firms. It is also likely to use its dedicated website to provide debt advice information and tools.

25. However, we believe there are potential opportunities for MAS to use its powers and influence to affect the wider landscape of debt advice and debt management. If raising funds through an industry levy MAS will have a statutory obligation to get value for money and to demonstrate that value. In offering tenders for debt advice it could therefore oblige debt advice agencies to be resource efficient and to evidence their use of funds to achieve outcomes-based performance.

26. A more efficient and results-led approach to debt advice should make more efficient use of alternative channels of advice (for instance internet and telephone provision) and should ensure a more standardised approach to providing advice, where common processes, systems and calculations are used and debtors with similar circumstances receive similar help and similar remedies.

27. We believe MAS should take a broader view of debt management, than simply those agencies it will fund to provide advice and it should act as a repository for the collection of data on all aspects of debt management. This would include how advice is used and what works and what doesn’t (in terms of both advice and remedy). Not only would this allow the MAS to direct resources to where they are most needed and effective, it could also assist in shifting the wider debt management market towards those practices which are shown to be most beneficial to consumers, advisors and creditors.

28. In addition, the BBA believes that the MAS should act as a gateway for consumers into debt advice and debt management. Currently consumers can be overwhelmed by the number of agencies or firms which offer free and fee-based debt advice and debt solutions. However, if the MAS, as a recognised independent body, with marketing and branding expertise, were to promote itself as the portal into reputable advice and support it could benefit all stakeholders.

29. A single portal through which all free sources of internet, phone and face-to-face information and debt advice are accessed would simplify the current process and be the focus of promotion and awareness-raising by stakeholders in the debt environment. The portal would offer advice and support across the life-cycle—in essence an expansion of MAS’ current role—and it could reduce the risk of stigma associated with being a pure debt management source of advice. The portal could filter enquirers towards the most appropriate types and channels of information, thus using resources more efficiently, and could also act as the starting point for any subsequent debt management and rehabilitation activity.

Allow creditors to avoid unscrupulous debt management providers

30. Creditors, consumer advocates and commentators all share concerns about practices employed by some licensed debt management companies. These practices include withholding payments from creditors in the hope of later offering a low full and final repayment; flipping customers from one inappropriate remedy to another, and levying disproportionate upfront fees which act as a disincentive to an ongoing supportive relationship.

31. Under current regulatory guidance, creditors have no option but to consider an approach from a 3^rd party mandated by a consumer to act on their behalf, even if the creditor suspects that the 3rd party will not be compliant with its obligations to the consumer. This allows bad practices to continue and we believe creditors should be given the regulatory protection to decline to deal with unscrupulous debt management providers, whilst offering consumers alternative and more appropriate support.

32. We further believe that accurate and complete collection of data (by MAS—as outlined above) on the remedies provided to consumers and their outcomes would allow a regulator to take a more proactive and intrusive approach to the activities of debt management providers, both exposing and mitigating bad practices as they emerge.

Create a level playing-field for creditors

33. The BBA is a strong believer in the “polluter-pays” model of funding debt management. This means that the owners of each debt held by the consumer, whether financial or non-financial, public or private should contribute towards the costs of advising and supporting the consumer; administrating and collecting repayment and/or insolvency, and rehabilitating the consumer back into the mainstream.

34. At present, we have some form of “polluter-pays” model through the Fairshare approach used by both Payplan and the Consumer Credit Counselling Service (CCCS). However, not all creditors take part and some of those that do place a cap on their commitment. We believe that to develop a more consistent and efficient debt management process there needs to be a common commitment from all financial and non-financial creditors to transparently and proportionately contribute towards a debt management business model which incorporates a “polluter-pays” approach whilst allowing participants to compete.

Simplify debt governance and remedies over the longer term

35. To address the fragmented governance regime will take time, but it should be reviewed and streamlined to create a more efficient, responsive and dynamic mechanism for regulating the market. A single body responsible for legislating and administering all formal, statutory and court-based debt remedies would improve the efficiency and simplicity of the debt management framework and make it easier to mould as future needs emerge.

36. This single regulatory body might then enshrine good practice, outlaw unscrupulous activities and require common standards and a common approach from all advisors and creditors in one suitable regulatory form.

37. Additionally, using data collected and analysed to fully understand the market, it would be possible to rationalise and re-engineer the range of formal and informal debt remedies into a dynamic, streamlined and complimentary suite, within which a consumer could move during their period of debt repayment as and when their financial circumstances dictate.

Conclusion

38. The BBA believes that creditors, consumer advocates and regulators share a common goal of creating a more consistent, effective and efficient debt management landscape. Although the government has indicated that it sees no strong evidence to justify an urgent restructuring of the framework but instead proposes a series of minor initiatives, we believe that a more holistic and comprehensive set of measures are appropriate and achievable.

14 November 2011