Business, Innovation & SkillsWritten evidence submitted by the Consumer Credit Counselling Service

Key Recommendations

The Government should protect and promote the provision of free debt advice, especially through strategic partnerships such as the one between CCCS and Citizens Advice (see points 3.5 & 3.6).

There needs to be much tighter control of the commercial sector, through tougher licensing (6.5), regulation – especially of fees – (5.5), and increased transparency (4.2 & 7.7).

The Government should look at the success of the CCCS token payments scheme to help provide a breathing space for debtors experiencing a temporary income shock (9.1 & 9.2), particularly in light of the high number of financially vulnerable people.1

The Government should encourage search engine providers like Google to make sure that people can easily pick out debt advice services that are free and impartial (4.3).

1. Introduction

1.1 This is the formal response of the Consumer Credit Counselling Service (CCCS) to the Business, Innovation and Skills Committee Inquiry into Debt Management. CCCS would be happy to provide further clarification on any aspect of this response, and willing to give oral evidence to the Committee if required.

1.2 CCCS is the UK’s leading debt charity. It speaks with authority as the UK’s largest provider of independent debt advice, and the country’s only major charitable provider of non-statutory debt management plans (DMPs), responsible for more than 30% of plans in the UK.

1.3 In 2010, CCCS helped over 400,000 people deal with their personal debt problems. In 2009 we helped half a million people, or nearly 2,000 people every day. The charity currently manages the repayment of almost £3.6 billion of unsecured debt. Our 800 full time staff deliver a unique telephone based service, providing high quality support to clients from ten centres in England, Scotland, Wales and Northern Ireland.

1.4 CCCS introduced DMPs to Britain in 1993 as a charitable response to a major social need. We remain the main provider, currently administering over 115,000 plans – estimated to be about one third of the total. Over the last 18 years, they have become an essential component of UK debt advice. The DMP enables those who can to repay their debt in a way that is cost-effective, flexible and fair to both the borrower and his creditors. For many, it provides a vital breathing space at a time of severe financial strain.

1.5 The charity’s ethos is to help the “can’t pays”, not the “won’t pays”. We always aim to help clients pay back what they owe, in a realistic timescale and manner suited to their individual situation. The advice, counselling and repayment plans that we provide are always:

Free for the client.

In the best interest of the client.

Independent and impartial.

1.6 CCCS is funded by all the major banks, credit card companies and other lenders, and receives no public monies. Creditors agree to pay what’s known as a “Fair Share Contribution” in recognition of the unique service CCCS provides to the financially vulnerable.

1.7 Fair Share funding means the creditor, rather than the debtor, pays for debt advice. The charity has repaid £1.5 billion to creditors since 1993. Only around 10% of the services we provide are eligible for Fair Share, but this is enough to enable CCCS to help the nine in ten people for whom a DMP is not best advice.

1.8 In contrast, the fee-charging model of DMP provision is based on up-front fees to the debtor for setting up a DMP and ongoing monthly fees for managing the plan. The free advice and support that CCCS provides means clients only pay what they owe and are able to repay their debts more quickly. The extra support we offer includes action for households facing bankruptcy or repossession and specialist help for vulnerable debtors, such as those with mental health problems, and the self-employed.

1.9 CCCS is geared to expand to help people as they need – the charity was able to rapidly step up its operation in response to the recession to meet a 35% increase in demand for its services.

2. Debt Management: A Distress Purchase

2.1 Individuals looking for a solution to their debts are essentially making a “distress purchase”: People contacting debt management companies (DMCs) are often over-indebted, vulnerable and desperate for help to manage their financial difficulties. Consequently, many tend to make quick decisions about complex and often unfamiliar debt solutions and tend not to shop around.2 There is almost no price sensitivity for debt management services and debtors generally go with the first company they find, regardless of their ability to provide appropriate advice.

2.2 Debt seldom comes in isolation, rather it is associated with other, often traumatic, life events such as illness, divorce or unemployment. CCCS research shows that as people become more indebted, their openness to advertising rises and their readiness to speak to creditors falls. Households in financial distress find it difficult to see why any one of their creditors should help when they have debts to multiple different lenders.

3. The Importance of Free Advice

3.1 CCCS welcomes the Government’s intention to ensure greater public awareness of impartial free debt advice sources [Summary of responses, 5.38]. People in financial difficulty need to “have access to the appropriate debt advice and assistance that they need, at the time they need it”.

3.2 While lender signposting and referral is the most effective3 means of encouraging debtors to seek early support, much stronger action is required to ensure that the wider public know the options available to them and get the most appropriate and sustainable solution(s) for their circumstances.

3.3 We believe the promotion of free debt services should be a key activity of the newly created Money Advice Service (MAS), which is responsible for coordinating debt advice to better serve those in financial difficulty.

3.4 CCCS is in ongoing discussions with MAS: we are keen to see a more efficient mix of delivery channels (online, telephone and face-to-face), better partnership working and greater promotion of the free sector as the best place to go for financial recovery. A key benefit of the holistic service CCCS provides is that clients pay less and are able to repay their debts more quickly (cf 5.3 and Appendix A).

The need for greater partnership working

3.5 CCCS has the capacity to help many more people by telephone or online. Our unique online debt counselling service, Debt Remedy, now delivers the most appropriate solution to almost half our clients, and effectively has limitless potential. Not only are the cost implications of moving to other channels significant (average cost of a face-to-face session is £265; telephone £51; online £3),4 it is increasingly what people prefer. The cost savings CCCS has made has enabled the charity to develop new partnerships to help more people struggling with unmanageable debt.

3.6 CCCS has recently started a strategic partnership with Citizens Advice. The partnership enables clients of 80 participating bureaux to benefit from our unrivalled systems of help and support when making repayments to creditors through a DMP. It means bureaux get a share of the monies CCCS receives from lenders, while staff are freed to concentrate on more vulnerable people who need extended support. Our longstanding partnerships with the Money Advice Trust (National Debtline) and the Limavady Community Development Initiative have provided an important source of sustainable funding for these two organisations.

3.7 The CCCS-Citizens Advice strategic partnership aims to increase capacity in the free sector while raising awareness of CCCS so we can help more people. It demonstrates how two agencies working together can direct people to the most appropriate advice for them, ensuring that the most expensive form of delivery – face-to-face advice – is kept for the people who need it most – the most vulnerable. No-one should have to turn to the fee charging debt management sector for lack of available free advice.

4. The Problem With Commercial Debt Firms: Misleading Advertising

4.1 Too many households are poorly served by the current debt landscape. In its 2010 probe of commercial debt firms, the OFT identifies misleading advertising as “the most significant area of noncompliance” with its guidance.5 The review highlights that many firms continue to claim their services are free when they are not.

4.2 People in debt trouble need better protection, in particular from the often relentless advertising from DMCs on daytime television. Regulators need to ensure that breaches of the rules are met with a tough response. CCCS believes that firms should be obliged to state the level of fees under a smarter, more transparent advertising regime. At the same time, DMCs should be required to inform potential clients of the availability of free services.

4.3 People now look to Google as the first port of call for information on how to solve their debt problems. However, its method of selling adverts for keyword searches continues to give firms with big advertising budgets a significant advantage over charities like Citizens Advice and CCCS. The unwarranted visibility of commercial firms is clearly a problem – the last thing you want when you are looking for “free debt help” is to be directed to a choice of fee chargers. The Government should encourage search engine providers to make sure that debtors can easily pick out those services that are free and impartial.

5. The Problem With Commercial Debt Firms: The Scale of Consumer Detriment

5.1 The Office of Fair Trading (OFT) estimates that DMCs make £250 million every year from already over-indebted clients.6 This constitutes the most significant detriment debtors face when free options like CCCS are readily available.

5.2 Three quarters of commercial debt firms front-load their charges.7 Customers pay several hundred pounds before receiving any advice, equivalent to two months of repayments. On top of this, monthly administration fees are typically about 17% of the debtor’s repayments.8 This pricing structure guarantees quick profits for firms and reduces the capacity of borrowers to pay back their debts.

5.3 Clients of fee chargers pay more and it takes longer to pay down their debts. For example, for a debt of £30,000,9 a client of a typical debt management company 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 is free (see Appendix A).

5.4 However, in practice, few DMPs run for their full term. This accentuates the impact of fees and increases the proportion of client payments absorbed by them (and hence the cash flow benefit to the DMC of upfront payment).

A ban on upfront fees

5.5 Upfront fees support a business model which has pernicious consequences for people in financial distress. There is an urgent need for government and regulators to work together to ban upfront fees in the debt management sector. The Government should also look at the case for capping monthly fees in the sector.

6. Regulation, Enforcement and the Need for Tougher Licensing

6.1 The OFT requires all DMP operators to provide advice in the best interests of consumers. However, its 2010 inquiry into the debt management industry found that in general, firms provide consumers with “very poor” advice.10 Of the OFT’s 148 visits to debt management firms, just 12 complied with OFT guidelines and the Consumer Credit Act.

6.2 Many operators have for too long simply ignored the regulator’s minimum standards for fair practice as set out in its debt management guidance. Sixty-one firms have faced licensing action by the OFT since its 2010 review, but stronger licensing and enforcement measures are required.

6.3 DMCs operate in what the OFT deems a “high risk area” for vulnerable consumers, who suffer significant and long term damage when things go wrong. Under section 25 of the Consumer Credit Act 1974, the OFT has a duty to ensure that only those who are fit and competent are given and retain a licence. There is an ongoing duty to monitor licencees’ fitness throughout the life of the licence.

6.4 New provisions introduced by the Consumer Credit Act 2006 give the OFT more direction over how to assess the fitness of firms to hold a consumer credit licence.11 The regulator’s proposed revisions to its debt management guidance12 take this further, but stronger enforcement is required – while there has been some progress recently, just 14 consumer credit licences were revoked in the five years up to 2010.13

6.5 CCCS believes the OFT needs to be better resourced to properly enforce its existing guidance. This should be linked to the urgent need for more rigorous audit and compliance. We propose that DMCs who want a licence under Category D (Debt Adjusting) or Category E (Debt Counselling) should be subject to both annual application and annual audit by the OFT (or approved auditors). An uplift of the minimally low licence fee14 to circa £20,000 would cover the cost of an improved regime for firms operating in these areas.

7. Providing the Best Solution and Improving Standards of Advice

7.1 People enquiring about DMPs to a fee charging debt company are often not presented with the various debt and insolvency options available to them (OFT, Paragraph 5.8, p35). The OFT has found that:

“DMCs are not giving the advice or offering the solution that is in the best interests of the consumer, but instead that which is most profitable to them.”15

7.2 The advice provided by fee charging companies is skewed towards DMPs and Individual Voluntary Arrangements (IVAs), which support a revenue stream for the firm. As a result, large numbers of debtors end up with the wrong solution [Summary of responses, 5.9].

7.3 For instance, only one commercial debt management company provides Debt Relief Orders (DROs),16 which are a key insolvency tool to help people with few assets and low incomes.

Meanwhile, debtors who cannot support a fee-paying plan are directed to free services like CCCS or Citizens Advice. Provisions in the codes of conduct for the two main trade bodies (DEMSA and the DRF) can be read as directing unprofitable debtors to the charitable sector (see Appendix B).

Both of these examples show that DMCs are not concerned to act in people’s best interests if it costs them money or hits their bottom line.

7.4 However, CCCS is also concerned that the business model for commercial debt firms relies on cherry picking behaviour. A staggering 80% of borrowers entering an IVA have already been through other debt management arrangements.17 Inevitably there is some movement between debt solutions – for example, some CCCS clients do not stick to their DMPs for the full term, either because they enter self administration or can no longer repay. However there is little doubt that the ability of DMCs to charge a new round of fees for setting up a second plan contributes to the high incidence of so-called “flipping”.

7.5 Some fee charging DMCs are looking at ways to improve their funding model. However, while superficially attractive, extending the CCCS fair share funding model to the fee chargers puts at risk the full range of debt solutions that clients need.

7.6 For profit companies would continue to target their advice to debt solutions that improve their balance sheet—while charities like CCCS who serve all debtors will be put at risk. Only one in ten people who contact CCCS goes onto a debt management plan, other clients receive welfare benefit checks, token payments or debt solutions like DROs, none of which forms the basis of the funding we receive. We know that cherry-picking already goes on, but moving to this model would incentivise the behaviour on an industrial scale as it would be necessary for funding and vital for market position. Instead of building on what works, any new developments in this area could reduce the solutions available to clients and detract from the holistic service many of us are trying to provide.

7.7 CCCS agrees with the Government that not enough is known about the industry [Summary of responses, 5.44]. DMCs should be much more transparent. The charity publishes an annual yearbook including information on the number and types of debt solution recommended to clients, the number of DMPs setup, and the average payments made by clients on DMPs.18 A requirement for commercial firms to publish this type of data would demonstrate the impact and extent of cherry picking behaviour. Further, the Insolvency Service should publish breakage rates for IVAs to show if they are being offered inappropriately.

7.8 Pledges made by DEMSA and the DRF to improve standards among their members have to be seen in light of the “very poor” standards19 that are the norm among for-profit providers. Training cannot be piecemeal – the OFT’s exposure of the breadth of shoddy advice reinforces the need for a national qualification that enables people to see that a consistent set of standards are being met. This should be based on the Ofqual accredited diploma in money and debt advice that staff at CCCS undertake, a year-long course that offers the most specific, relevant training for debt advisers.

7.9 While the OFT’s work to drive up standards among the largest DMCs is welcome, CCCS is concerned about the regulator lending its credibility to members of the main trade bodies through its Consumer Codes Approval Scheme.

A recent case illustrates one of our key concerns: In November 2011, DEMSA imposed sanctions on a member for masquerading as a free advice provider20—however, the trade body refuses to say which firm broke its rules, acting in the interests of its member, not the consumer. Meanwhile, “Member X” continues to brand itself with the OFT-approved code logo, with consumers none the wiser.

Perversely, a charity like CCCS cannot sign up to an OFT-approved code, and therefore cannot brand itself with the OFT logo.

8. Statutory Repayment Plans and the DMP Protocol

8.1 The Government has proposed a DMP Protocol setting out what all parties can expect from a DMP. The hope is this will ensure that debtors are treated more consistently, both by creditors and by fee-charging DMP providers.

Cross-industry meetings are taking place, with CCCS arguing that both creditors and debt management companies should agree to meet a set of stringent obligations. This includes creditors signing up to token payments solutions (see section 9, below).

8.2 However, in the absence of a sufficiently strong commitment to the Protocol from DMP providers, who continue to deliver unfair outcomes for clients, the introduction of a statutory plan may become necessary. Our strong view is that this needs to be limited to authorised not-for-profit operators, as the TCE Act 2007 provides [Summary of responses, 5.39].

9. A Breathing Space Solution

9.1 The most pressing problem for about 30% of the clients counselled by CCCS is that there is no immediate answer to their debt problems – none of the existing solutions is appropriate. However, in many cases, for example where there is a serious reduction in income caused by redundancy, the client has good reason to believe that their situation will sooner or later improve.

9.2 To help these clients, CCCS in 2010 piloted a scheme to see if the opportunity to make “token” payments to lenders for six months would buy the time they needed to sort out their affairs. The scheme was a success, proving an important stop-gap measure: in almost all instances, lenders stopped adding interest and charges or contacting clients – in effect, introducing a non-statutory moratorium [Summary of responses, 5.48] for clients on a CCCS token payments solution.

CCCS expects to roll out a full token payments scheme – with regular reviews and longer term plans – by the second half of 2012. We want creditors signing up to the DMP Protocol to commit to accepting token payments, provided appropriate safeguards are in place.

9.3 Our experience with token payments underlines the need to consider on a wider scale how this most vulnerable client group can best be helped. It may be useful to look at remedies available in other countries, for example the French “retablissement personnel” aimed at debtors for whom even partial repayment is not possible.

APPENDIX A

Repayment of £30,000 at £300 per month under a DMP

Fee-charging debt management company

CCCS

Client debt

£30,000

£30,000

Monthly repayment

£300

£300

Upfront fees

£600

-

Monthly fees

£45

-

Term of DMP

9 years, 9–10 months (117–118 months)

8 years, 4 months (100 months)

Total repaid (including fees)

£35,894

£30,000

Notes:

1. Fee charging company assumed to charge start-up fee equivalent to two months’ payments and ongoing monthly fee equivalent to 15% of payments.

2. Term assumes full repayment of £30,000 loan principal based on total monthly payment (including any fees) of £300 per month.

3. Term assumes monthly fees deducted. Allowing for up-front fees of two months’ gross payments adds a further two months to the DMP term for the fee-charging company.

APPENDIX B

TRADE BODY CODES

According to Clause 13 of the DEMSA code on Client Interests: “Members must demonstrate that they act solely in their clients’ best interests. In doing so they must help clients to clear their debts as quickly and efficiently as possible, and must not use high pressure selling tactics.” However, Clause 17 on Extreme Hardship Cases states: “Where it appears that applicants are unable to pay any management fees due to the severity of their financial position, members should, where appropriate recommend such clients to non profit advice centres.”

Similarly, Section B of the DRF code states: “DRF members approach debt resolution on the basis of identifying the solution and the outcome which is most compatible with the financial and personal position of the debtor, while taking into account the interests of the creditors of the debtor and demonstrating to them that the proposal made on behalf of the debtor is reasonable in the circumstances and is achievable.” However, Clause 8 of Section D on Debtor vulnerability states: “DRF members support debtors where appropriate and possible, recognising the vulnerability of many debtors. DRF members refer cases where none of the debt resolution solutions appear to be suitable in the debtor’s circumstances to suitable alternative agencies (eg in the not for profit sector).”

These clauses appear to be an admission that the main interest of DRF and DEMSA members is in clients capable of sustaining a DMP or IVA (and therefore provide them with an income stream), with the charitable sector expected to handle all other clients.

14 November 2011

1 “Debt and Household Incomes”, CCCS-commissioned report, July 2011
http://www.cccs.co.uk/Portals/0/Documents/media/reports/additionalreports/Report_Debt_and_household_incomes.pdf

2 “Debt Management guidance compliance review”, Office of Fair Trading, September 2010
http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/OFT1274.pdf

3 Around 60% of referrals to CCCS’s helpline were from creditors in 2010, with relatives and friends the next biggest source.

4 “Helping Over-indebted Consumers”, National Audit Office, p6
http://www.nao.org.uk//idoc.ashx?docId=12b77c4c-2069-4242-8d5e-e1fcb9797d96&version=-1

5 “Debt Management guidance compliance review”, Office of Fair Trading, September 2010, p7.

6 ibid, p4.

7 ibid, p9.

8 “An Independent Review of the fee-charging debt management industry”, Sharon Collard, Personal Finance Research Centre, University of Bristol, June 2009
http://www.infohub.moneyadvicetrust.org/content_files/files/mat_report_final_v4.pdf

9 The average debt for a CCCS client is around £24,000. A client of a typical fee charger would pay £4,235 extra in fees over the repayment term and take 18 months longer than with CCCS.

10 OFT, p9.

11 “Debt Management Guidance”, OFT, paragraph 1.10, p4
http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/oft366.pdf

12 “Debt management (and credit repair services) guidance – a consultation”, OFT, June 2011
http://www.oft.gov.uk/shared_oft/consultations/OFT1338con.pdf

13 Hansard, HC Deb, 3 February 2011, c955W
http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm110203/text/110203w0004.htm#11020337005064

14 “Fees, refunds and payments for credit licences”, OFT. Available at
http://www.oft.gov.uk/OFTwork/credit-licensing/fees-refunds-payments/

15 “Debt Management guidance compliance review”, OFT, p9.

16 The Insolvency Service lists details of competent authorities for DROs:
http://webarchive.nationalarchives.gov.uk/+/http://www.insolvency.gov.uk/bankruptcy/DRO/auth.htm

17 “Reasons to avoid debt management firms”, Which?
http://www.which.co.uk/money/credit-cards-and-loans/guides/how-to-deal-with-debt/reasons-to-avoid-debt-management-firms/

18 CCCS Statistical Yearbook 2010, CCCS
http://www.cccs.co.uk/Portals/0/Documents/media/reports/statisticsyearbooks/stats-yearbook-2010.pdf

19 “Debt Management guidance compliance review”, OFT, p9.

20 “DEMSA imposes sanctions on member”, Credit Today, 8 November 2011
http://www.credittoday.co.uk/article/11208/online-news/demsa-imposes-sanctions-on-member

Prepared 29th February 2012