Business, Innovation & SkillsWritten evidence submitted by Credit Action

Background

Credit Action is a national money education charity (registered Charity in England & Wales No. 1106941) established in 1994.

In January 2009 we also created our dedicated Welsh arm, Credit Action Cymru.

We offer a range of resources, tools and training to help everybody handle their money well, and to inform consumers so that they can make informed decisions about their personal finances.

Credit Action operates at a national level through advocacy, collaboration and partnerships with various groups and companies as well as at a local level through a variety of targeted projects, with a particular emphasis on those most vulnerable to financial difficulties and over-indebtedness. Through its work Credit Action reaches over 650,000 UK citizens every year.

We try and help as many people as possible avoid the pain of debt. However we recognise many contacting us will be in trouble already, so we work in partnership with the major debt counselling charity the Consumer Credit Counselling Service (Registered Charity No. 1016630).

Summary

Credit Action welcomes the opportunity to contribute to the Business, Innovation and Skills Select Committee’s inquiry on Debt Management. As an organisation with considerable experience of supporting consumers in dealing with debt, we take a keen interest in Government policy in this area, and originally responded to the Consumer Credit and Personal Insolvency Review in December 2010.

Credit Action is pleased with certain aspects of the Government’s Response on Personal Insolvency, which was provided in the July 2011 document entitled Consumer Credit and Personal Insolvency Review: Summary of Responses on Consumer Credit and Formal Response on Personal Insolvency. However, in our view there is still additional action that can be taken in order to provide further support to consumers.

In particular, Credit Action believes that the success of any attempt to address consumer debt will be underpinned by the financial capability of consumers themselves, and that financial education therefore needs to be integrated into any debt strategy as systematically as possible. From the perspective of insolvency specifically, we feel that the debtor education courses which form a compulsory part of the bankruptcy discharge procedure in the United States provide a useful model. Our submission makes reference to various evaluation studies which have examined the effectiveness of such courses, and we believe that there is a strong case for implementing a similar scheme in the UK.

We also recognise that it is vital to have a debt management sector that operates effectively and serves the interests of consumers. In our view, free debt advice providers are absolutely fundamental to this, and we hope that if the Money Advice Service takes on a co-ordinating role then it will execute this in a manner which offers appropriate support to such free providers.

However, we also believe consumers in the debt management sector are in an almost uniquely vulnerable position, and that this has implications for the way in which the market operates. These are outlined in our submission, and we suggest that there are two areas in which some form of Government intervention may be warranted as a result. The first of these is in relation to advertising, and we urge Government to do as much as possible to enhance the visibility of free providers. The second concerns the potential for consumer detriment that is created by the presence of fee-charging companies, and we suggest that Government should look seriously at the possibility of introducing a cap on fees.

Introduction

1. Credit Action welcomes the opportunity to contribute to the inquiry on Debt Management being undertaken by the Business, Innovation and Skills Select Committee. Credit Action provides a range of educational programmes and guidance materials to help people to avoid falling into unmanageable debt, or to resolve their problems if they do. We also work closely with our sister charity the Consumer Credit Counselling Service, a leading provider of free debt advice. We therefore have considerable experience of the issues faced by those in debt, and an understanding of the landscape of the debt management sector.

2. Having originally submitted a response to the Review of Consumer Credit and Personal Insolvency in December 2010, we maintain a keen interest in the Government’s proposals in this area. We are pleased by certain aspects of the Government’s Response on Personal Insolvency, such as the recognition that there is a need for greater public awareness of impartial free debt advice sources (paragraph 5.38). However, we also feel that additional action can be taken to further support consumers, which we outline in this submission.

3. In our view there are a number of key issues which, if addressed, would contribute to improved outcomes for consumers. Firstly, we believe that introducing some form of financial education element to both formal and informal debt resolution procedures, along the lines of debtor education courses that are a mandatory part of bankruptcy discharge in the United States, would enhance the rehabilitation process. Secondly, we feel that free debt advice agencies are at a significant competitive disadvantage compared to commercial fee-charging firms, particularly with regard to advertising which is especially important within the sector. Therefore, Government needs to be continually aware of the need to promote free agencies, and should view commitments made in the Response on Personal Insolvency as a beginning rather than a final settlement. Finally, we believe that the presence of commercial debt management companies in the sector can potentially cause significant consumer detriment, and that serious consideration should therefore be given to the introduction of a cap on fees in this market. We focus this submission on a discussion of these issues and the broader debates they touch on.

Debtor Education Courses

4. In our experience, financial education is crucial to enabling people to avoid the problems caused by unmanageable debt. If consumers have the financial capability necessary to handle their money effectively, utilise credit in a responsible manner, and deal with debt issues proactively, it is likely to reduce the chance that they will encounter serious financial difficulties. Whilst the Government’s Response on Personal Insolvency does not focus significantly on financial education, in our view it is a key aspect of addressing the issue of consumer debt, as the success of any policy response will be fundamentally contingent on the financial capability of consumers themselves.

5. We therefore feel that the Government should seek to integrate financial education as systematically as possible into any strategy for supporting consumers in dealing with debt. Important steps have undoubtedly been taken in recent years with respect to consumer financial education, such as the establishment of the Money Advice Service, but we believe that more can still be done. Considering insolvency specifically, evidence suggests that this may be a moment when people are particularly receptive to changing their behaviour, and that providing appropriate education at this point has the potential to make a positive difference to the way they handle money going forward, thereby helping them to avoid similar problems in the future. The US model of debtor education courses is especially informative in this respect.

6. Financial education has been part of the insolvency process in the United States since 2005, when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. One of the provisions of this Act stipulates that anyone who files for Chapter 7 or Chapter 13 bankruptcy will be required to complete a two hour financial education course before their debts are discharged. This can be conducted face-to-face, by telephone, or online. There is a certain amount of evaluation evidence which attests to the effectiveness of these programmes, and we believe that there is a case for considering the implementation of a similar scheme in the UK as part of the rehabilitation process.

7. A number of studies have looked into the impact of debtor education. While it is admittedly difficult to assess this over the long-term as the policy is still a relatively recent one, the data that does exist suggests that in general this is a constructive process that participants feel has a positive effect. Some of the key findings are as follows:

There is virtual unanimity amongst debtors in favour of the view that their ability to manage their finances improved as a result of undertaking a money education course. One study conducted for the US Department of Justice said that this applied to 97% of participants they questioned,1 whilst another by the University of Illinois put this at 98.3%.2

The University of Illinois also undertook a behavioural analysis as part of its research, and found that during the education process debtors were at a “teachable moment” when they would be open to new information and to changing existing behaviours.

The US Department of Justice’s evaluation stated that as a result of the education course, 44% of participants reported that they intended to adopt at least one financial practice that they had not planned to before, or that they planned to adopt a practice sooner than they expected. Three months later, 22% of participants reported that they had actually followed through on this.

Research that was published in University of Iowa College of Law journal last year suggested that 33.3% of debtors said that the financial education course they received would have helped them avoid bankruptcy, and 72% said the course would help them avoid difficulties in the future.3

8. Some evaluation studies do point to areas in which the design of debtor education could be improved (for example, the aforementioned University of Iowa College of Law paper suggested that US courses needed to move away from a “one-size-fits-all” approach). However, the impression given by the research that we have encountered is that in general debtor education does have a constructive impact on participants.

9. We therefore believe there is a strong case for exploring ways in which a similar scheme could be implemented in a UK context, and that at the very least some form of preliminary pilot may be warranted. Indeed, Credit Action and the Consumer Credit Counselling Service would be prepared to participate in such a pilot if the Government were to seek partners. Whilst there would clearly need to be adjustments in the way such programmes operate to take account of the differences in insolvency and debt resolution procedures between the two countries, we feel that the core principle is one which could make a difference to debtors in the UK, and help reduce the risk that they will run into serious financial difficulties again. In particular, possessing core financial skills such as an ability to budget may be especially necessary for debtors going through a formal Individual Voluntary Arrangement or an informal Debt Management Plan, both of which require adherence to a set repayment plan over a prolonged period.

Issues within the Debt Management Sector

10. In addition to taking steps to support the financial capability of consumers, we also believe that it is vital for the Government to ensure that the debt management sector operates as effectively as possible, and that it serves the interests of those seeking help first and foremost. For us, free debt advice providers have an absolutely essential role to play in this. We note that the Government’s Response on Personal Insolvency makes clear that its intention is to give the Money Advice Service a direct role in co-ordinating debt advice services (paragraphs 5.35 – 5.36). Should this be implemented, we hope that the Money Advice Service would provide appropriate levels of support to the vital work of free providers within the sector.

11. We are pleased by the fact that the Government’s Response on Personal Insolvency recognises the importance of increasing the public awareness of impartial free debt advice sources (paragraph 5.38). However, this does highlight an important problem regarding advertising within the sector which, in our view, means that the playing field between commercial fee-charging companies and free providers is not a level one. Given that the former possess large advertising budgets that are simply unavailable to many free agencies, commercial firms are in a far stronger position to build brand recognition amongst consumers.

12. This is particularly significant within the debt management sector. In our experience, people who need help to deal with their debts are will often utilise the services of the first provider they encounter, rather than comparing between a range of agencies and selecting the one they deem most suitable (this has additional implications for consumers’ ability to drive competition, which is something we consider below). Therefore, a company which has the resources to advertise widely is likely to achieve a larger market share simply by virtue of its enhanced visibility, regardless of the quality of the services it offers.

13. We understand that this situation is to some extent the result of commercial decisions made by individual companies, but in our opinion it is a major issue within the sector that has a tangible and significant impact on the way consumers behave. We note that the Government’s Response on Personal Insolvency states that it believes “the work being done about debt advice” will ensure greater public awareness of free advice (paragraph 5.38). However, we would urge the Government not to consider this issue settled, to monitor developments carefully, and to take further action if necessary to deal with the disparity between commercial firms and free providers in this regard. Work currently being undertaken should therefore be seen as the beginning of this process, rather than its final resolution.

14. Beyond the specific issue of advertising, we also have broader concerns about the role of fee-charging companies within the sector, and would go as far as to suggest that their activities are a potential source of consumer detriment. As we have already suggested, we do not believe that consumers who seek debt advice perceive themselves as being in a market in the same way as when purchasing other goods and services. Their primary concern is often just to find help from somewhere, rather than to find help from the most cost-effective or appropriate provider for their specific circumstances. This makes them particularly vulnerable, and inhibits their ability to drive competition. We therefore feel that there is a case for additional intervention within the debt management sector through the introduction of a cap on the level of fees charged by commercial companies.

15. Given that free debt management solutions are available from certain providers, we see it as unnecessary for consumers to be placed in a position where they might have to pay excessive fees to a commercial company (the result of which could be to push them into arrears or to actually worsen their debt problem) for services which cost nothing elsewhere. Introducing a cap on fees is, in our view, crucial to preventing such situations from occurring.

16. We recognise that the Government’s preference is to pursue non-regulatory routes wherever possible, as mentioned in the Government’s Response on Personal Insolvency (for example, in paragraph 5.42 in relation to standards in the provision of Debt Management Plans). However, we would stress that consumers in the debt advice sector are in an almost uniquely vulnerable position, and that as a result this particular market does not operate in a conventional manner. Consequently, to ensure that the sector functions efficiently and that it serves the interests of consumers primarily, Government intervention in the form of a cap may ultimately be necessary.

11 November 2011