Business, Innovation & SkillsWritten evidence submitted by the Debt Managers Standards Association ( DEMSA )

1. Introduction

1.1 The Debt Managers Standards Association (DEMSA) is a trade body representing 17 private sector debt management firms in the UK, which collectively represent 80% of the private sector debt solution providers. Its goal is to promote best practice and to protect the interests of their clients and the lenders to which they owe money. Member-firms have up to 20 years experience of helping people with their debt problems.

1.2 DEMSA agrees rogue operators exist and that they tarnish the entire sector. DEMSA is committed to working with the OFT and stakeholders to help address this and to raising standards.

The OFT, as industry regulator, has made some good progress, in revoking the licences of 65+ firms in the past year, as well as issuing undertakings and in updating its Debt Management Guidance. However, DEMSA strongly believes that the OFT enforcement powers are too restrictive and prevent them from swifter, and often, more appropriate enforcement action.

1.3 Consumer awareness

It is a requirement that all lenders must send any customer that goes into arrears a copy of the OFT’s arrears Information Sheet (see Annex 1). They also have to send it to any customers they issue a Default Notice to. The Information Sheet details a comprehensive range of free-to-client providers. Brands such as the Citizens Advice Bureaux are amongst the most widely known, recognised and respected in the UK. Indeed in February 2010 the National Audit Office found a 97% awareness of the Citizens Advice Bureau amongst over-indebted people. Clients are therefore aware of these options and are making an informed choice to use a private provider.

1.4 Choice

Clients actively choose to manage their debts through DEMSA-member-firms because members offer:

High quality, timely and easily accessible advice and on-going debt solution services.

A holistic approach to the client’s situation including appropriate advice and support on:

income maximisation;

budgeting;

priority lenders;

secured debt arrears; and

home repossession and assistance with legal action.

As well as renegotiation of unsecured debt repayments via the appropriate debt solution, many firms also provide budgeting support, access to banking facilities and money saving help.

A high level of dedicated and personalised support and service throughout the life of their debt solution.

The collection of a single payment and prompt distribution to their lenders.

Education and empowerment to make informed choices.

An intermediary between them and their lenders, negotiating affordable arrangements, ceasing lender contact or keeping it to a minimum.

1.5 There is no doubt that people with debt problems are at a vulnerable time in their lives and may be desperate to find a solution. Rogue operators can and do exploit this.

1.6 However, not everybody with a debt problem sees themselves as being in need of charity. Many are working professionals who have good financial awareness but have over-committed themselves or suffered a temporary change in circumstances or a life change event. They make an informed choice to pay a fee for a professional service that provides them with value for money.

1.7 No debt advice is “free”. Either taxpayers, lenders or clients are funding it. DEMSA believes that free-to-client debt advice is fundamentally important for the most vulnerable of individuals and wholly supports the vital role of the Citizens Advice Bureaux (CAB) and all other similar debt advice agencies. Indeed some DEMSA members provide assistance and financial support to their local CAB.

1.8 As we have seen with recent changes to Legal Aid funding, free-to-client services must be focused on those most in need. In fact Legal Aid is no longer available as a matter of course for those with debt problems. A good analogy is the National Health Service. It is provided to all and is free at the point of use. However, some consumers choose to use private providers (usually for the choice and speed they afford) – choosing to pay for a service that they clearly value.

1.9 DEMSA sees the service its members provide as being complementary to those services offered through the likes of the CAB. As such DEMSA is already working hard to build partnerships with free-to-client providers and other key stakeholders. Every provider, however funded, has a duty of care to its clients and should be held accountable for the advice it gives and the services provided.

2. Background to DEMSA

2.1 DEMSA was founded in 2000 and now has 17 member-firms employing over 2,000 staff.

Although DEMSA itself covers only the activities of firms offering Debt Management Plans (DMPs), Individual Voluntary Arrangements (IVAs) and self-managed plans – many firms offer advice and access to the full spectrum of debt solutions – including bankruptcy, Administration Orders, Debt Relief Orders, and in Scotland, Debt Arrangement Schemes, Trust Deeds and LILA.

2.2 Debt Management / IVA market size and structure:

Estimated total DMPs in the UK	500,000
Estimated total DMPs managed for clients by private sector	250,000
Total number of DMPs managed by DEMSA members	205,000 (ie 41% of all DMPs are run by DEMSA members, 80% of all private DMPs)
Estimated total IVAs in the UK	155,000
Total number of IVAs managed by DEMSA members	52,000
Total number of individual debts being repaid by clients of DEMSA members	1,800,000
Total amount of debt managed by DEMSA members for clients	£4.5 billion
Total repayments made to lenders within the last 12 months	£330 million

2.3 The “average” DMP client profile for DEMSA members is as follows:

Typical client age on commencing programme	23 – 34
Male/Female split	45% / 55%
Average number of debts	7 (although some have 30+)
Total amount owed to unsecured lenders	£17,856
Average net annual income	£17,496
Homeowners	34%
Average successful DMP term	53 months

2.4 DEMSA member-firms are open long hours catering for the needs of their clients who are typically working professionals. Over the past 12 months DEMSA members have answered over 1,470,000 phone calls from people seeking debt advice. Of these that go on to take detailed debt advice 8.75% actually entered into a debt solution. Reasons why people may not enter a solution after advice has been given include:

Some people feel empowered to deal directly with their lenders.

Some just wanted some generic advice.

Others are still looking for further borrowings.

Some who called are worried about their debts but are actually meeting commitments.

Those struggling to budget – perhaps because of bank charges.

2.5 Uniquely in the debt management sector DEMSA is Code Sponsor under the OFT’s Consumer Codes Approval Scheme. DEMSA’s Code goes beyond the minimum standards laid down by the OFT’s Debt Management Guidance and other applicable industry Codes. All member-firms must abide by the Code and be independently audited on an annual basis.

2.6 Gaining OFT Approved Code status is a rigorous process. Firstly the Code itself must be developed and approved by the OFT. Each individual member must demonstrate that they meet the Code’s standards and this must be evidenced in day to day practices and through the ethos of their business. Further vetting is undertaken through mystery shopping, client satisfaction surveys, audits of websites and marketing materials.

2.7 From early 2012 the compliance audits for DEMSA member-firms will be carried out by the Institute of Chartered Accountants in England and Wales. Until that time the audits will continue to be undertaken by Compliancy Services (www.compliancy-services.co.uk) which provides similar services for many FSA-regulated firms.

2.8 Members’ auditors must also certify that clients’ funds are all held in ring-fenced client accounts.

2.9 As a condition of its Approved Code status; DEMSA must conduct monthly client satisfaction surveys. The results for the past 3 years are as follows:

	2008		2009		2010
	Number	%age	Number	%age	Number	%age
Excellent	332	59	368	58	704	53
Good	117	21	132	21	284	21
Satisfactory	45	8	58	9	162	12
Below Satisfactory	29	5	20	3	63	5
Poor	39	7	50	8	113	9
Spoiled	0	0	0	0	0	0
Totals	562	100	632	100	1326	100

2.10 As you can see in 2010 three quarter of clients felt their debt management provider was either good or excellent. By comparison in a survey of 9,000 people published by moneysavingexpert.com at the end of 2010, only 47% of people rated the main high street banks as “great”.

2.11 Whilst firms work hard to meet and exceed the expectations of their clients, clearly sometimes things can go wrong. Member-firms all have their own internal complaints procedures, but clients are additionally protected by DEMSA’s dispute resolution procedure. Details of the number of complaints made to DEMSA and their outcomes for the past three years are as follows:

	2008	2009	2010
Number of DEMSA member-firms	4	8	16
Number of Complaints Handled	4	7	44
Complaints re Service Issues	2	1	17
Complaints re plan Formulation Issues	1	3	8
Complaints re Withdrawal from a Plan	1	3	8
Complaints re Adequacy of Information Provided			11
Refunds made (£)	470	400	8557
Ex Gratia Payments Made (£)	50	125	2917

2.12 Of the 44 complaints received; 17 were deemed as justified and 27 were not upheld. 40 of the complaints were satisfactorily resolved by the individual member concerned after referral to DEMSA and in 4 cases DEMSA adjudicated in resolving the issue.

2.13 As well as DEMSA’s in-house dispute resolution process clients of course have the right to take complaints to the Financial Ombudsman Service. In total DEMSA members had 68 complaints referred to the FOS scheme in 2010 of which 12 were upheld and 56 rejected by the Ombudsman.

2.14 DEMSA has an independent Compliance and Discipline Panel which meets to investigate any suspected breach of DEMSA’s Code. The Panel is chaired by retired High Court Judge Sir Harry Ognall DL. Other panel members include: Richard Wharton, director and general secretary of DEMSA; Caroline Siarkiewicz, executive director of the Institute of Money Advisers; Patricia Harter of West Yorkshire Trading Standards and Michael Fox a Deputy Lieutenant of West Yorkshire.

2.15 As part of its work to raise standards in the sector, DEMSA has partnered with the Institute of Money Advisers and Staffordshire University to develop a new qualification for debt advisers. The qualification is similar in scope and equal in standards to one developed by the IMA for the free-to-client sector. The 16 week course will be piloted by staff from member-firms in early 2012. The qualification is NVQ Level 4, equivalent to first year degree and will include Continuous Professional Development (CPD).

2.16 Members invest significantly in the training and development of their staff and have robust systems to provide accurate and timely information to their clients and their lenders. For example members have been recognised as “Investors in People” and achieved the Financial Services Skills Council’s “Training Excellence” status.

3. Working For Higher Standards Via Self Regulation

3.1 DEMSA is fully committed to working with the OFT to promote and maintain high standards. DEMSA works to identify existing and emerging poor practices and actively reports rogue firms. In some cases member-firms have provided the OFT with evidence and witness statements.

3.2 DEMSA members meet formally with the OFT quarterly and have built a trusted partnership over many years; this enables a two way flow of information, guidance and advice.

3.3 Many of the “rogue” firms purporting to be debt managers are small, with just a handful of clients. Many are unlicensed “lead generators”. In some instances their websites come and go in a matter of days.

3.4 Naturally, DEMSA contributed fully to the OFT’s consultation on its new Debt Management Guidance – in particular suggesting higher standards and tighter wording to remove potential ambiguity. DEMSA is especially concerned about the legal restraints within which the OFT has to work which mean that it often takes months (in some cases over a year) to revoke the licence of a “rogue” firm, particularly as firms use the appeal process. A more appropriate approach maybe akin to food standards – where restaurant inspectors find bad practice; they can shut a business until they are satisfied that appropriate standards have been met.

3.5 DEMSA is also working with the Insolvency Service to help it develop the proposed DM Protocol, which could bring many advantages to the sector as well as certainty to the consumer. However, our concern is this will be based upon goodwill alone and not all firms; nor lenders, will choose to adopt it. We do, however, fully support this initiative and anything else that helps to raise standards and address poor practice.

3.6 DEMSA also takes an active role in contributing to industry developments by being involved in all stakeholder groups and appropriate committees.

3.7 DEMSA and its members have positive and constructive relationship with lenders. DEMSA believes strongly that lenders should be encouraged to favour debt management firms that are members of trade associations. At present lenders feel that current Guidance and Codes dictate that they must deal with any appointed third party representative – which simply allows misbehaving firms to continue providing poor service – with no requirement or, even incentive, to raise their standards.

3.8 As you know, the Money Advice Service (MAS) has been conducting a review of the debt advice sector. DEMSA and its members have been fully engaged with this review and have contributed to interviews, workshops and the sharing of data. Michael Land, DEMSA’s chairman is also sitting on the MAS’ project Steering Group.

3.9 DEMSA would fully endorse tougher and swifter enforcement action from the OFT. In addition the new financial regulator, the Financial Conduct Authority (FCA), will have a key role to play in enforcement.

3.10 DEMSA fully supports the benefits that statutory regulation can bring and would encourage the Government to consider this option - should the new DM Guidance, DM Protocol and the formation of the FCA not bring about the necessary improvements intended.

4. Why Do Customers Pay for Debt Advice?

4.1 There are a number of reasons why clients chose to use a DEMSA member:

Many clients are working professionals with good incomes who have simply borrowed too much money, or suffered a change in circumstances so they can no longer service their debt at the level previously agreed. However, they don’t see themselves as in need of charity.

Some clients prefer the “anonymity” of telephone based advice and actively avoid face-to-face. Often they feel ashamed of their debts.

Generally, people with problem debt struggle with it for many months; often they reach a crisis point which triggers them to reach out for advice. Rather than wait (the National Audit Office found waiting times of four – six weeks and that some providers had closed their waiting lists) for an appointment with a free-to-client provider some customers choose to pay for immediate help and support. Typically DEMSA member-firms are able to offer immediate advice and support at times that fit in with the needs and requirements of clients.

DEMSA members have invested significantly in training, systems and processes that enable them to handle a high volume of calls and support an efficient “journey” for the customer.

DEMSA members offer a high level of customer service. Clients may not want (or in some cases be able to) manage their debts themselves especially as, on average, clients have seven debts often with seven separate lenders (some have more than 30 unsecured debts). Crucially many clients say they have experienced pressure from lenders or debt collectors – often for an extended period of time – and it is the intermediary support that they are seeking to reduce or remove this stress. Clients appreciate that DEMSA members are active in negotiating directly with lenders on their behalf and do so for the life of their plan.

Struggling with debt is known to be stressful and the link to mental health problems is now well understood. Once a DMP is up and running a client can, in effect, get on with their life – focusing instead on their work and their family.

It’s worth noting that DMPs are a “pay as you go solution”. Once a client feels able to resume direct dealings with their lenders or when their circumstances improve; they can leave their Plan without penalty.

Therefore, the success of a DMP should be judged against the client feeling they have regained control of their finances rather than just completion of the plan.

4.2 All DEMSA member-firms are required to provide transparent information pre-contractually – ensuring the indivudual understands the contract and makes an informed choice before committing to any payment and becoming a customer. Furthermore, each member-firm provides a 14 day cooling off period – seven days longer than required by law.

4.3 In the Citizens Advice Bureaux’s (CAB) Super Complaint (March 2011), it suggested that debt management firms charge “up-front fees”. The OFT found that DEMSA members do not charge “upfront fees” – that is they don’t charge customers anything before they have fully understood the service to be provided and committed to it.

4.4 Similarly, the CAB also suggested in the Super Complaint that debt management firms cold call prospective clients. Again the OFT found that reputable firms such as DEMSA members do not “cold call” consumers.

4.5 DEMSA’s remit, under guidance from the OFT, does not extend to controlling the fees charged by its members. However, typical fees for a DMP are as follows:

The customer makes an initial payment equivalent to between one and three month’s disposable income (their disposable income is assessed – after completion of a full income and expenditure analysis – to be surplus to what is needed for day-to-day living expenses and priority bills (see 5)

Each month when the firm collects the payment from clients it will also deduct a fee (typically 17.5%) before sending the payment onto lenders.

4.6 DEMSA would support the provision of price and service comparison tables to help consumers make informed choices. The MAS would be well placed to provide these.

4.7 Its worth noting that the fees charged by DEMSA members for formal insolvency solutions such as IVAs are broadly equivalent to those charged by free-to-client sectors. Even in the free-to-client sector these fees are payable by the consumer. Administration Orders have a 10% charge for payment distribution charged by the Court Service.

4.8 Member-firms that are Competent Authorities for Debt Relief Orders do not charge fees to their client to provide this solution.

5. How a Debt Management Plan Works

5.1 A debt management plan is an informal arrangement, not a formal Insolvency Solution.

5.2 It is one of the few debt solutions where a client sets out to repay all that they owe (ie if a DMP runs to term the lender will be repaid in full). Many clients choose a DMP (even when another solution may seem more suitable) because they feel an obligation to repay all that they have borrowed, wish to avoid jeopardising their home, or because they need help to manage their debts through a shorter term change in personal circumstances.

5.3 As with all debt solutions the process starts with gaining a holistic understanding of the client’s circumstance – in particular their income (maximising and reviewing benefit entitlement), essential expenditure (including arrears on priority debts) and unsecured debt commitments. This enables best advice to be given – although that’s not to say that a customer always accepts the recommendation.

5.4 Income over and above that required for day to day expenses and essential living commitments is defined as “disposable income” and it is this amount that is offered, typically on a pro-rata basis, to the unsecured lenders. Generally DEMSA members have very strong relationships with lenders – which know their offers will be fair and based on accurate customer information – so the acceptance rates of offers is usually in excess of 95%.

5.5 DEMSA members actively negotiate with lenders on behalf of clients. Lenders are encouraged to freeze interest and charges, although not all will provide this concession. This is often critical for the success of a DMP. If interest and charges are not reduced or frozen; the debt may continue to grow, making it impossible to repay.

5.6 A DMP has benefits to both the client and their lenders. For the client their finances are put back on a sustainable footing and the pressure from lenders is reduced. For the lender the debt management firm provides them with regular contact, key information on their customers’ circumstances and a regular repayment to their account. DEMSA member-firms collect payments from their clients at a frequency that fits with their earnings and distributes this money to their lenders. Client money paid to DEMSA member-firms is always ring-fenced, in a client account, away from company funds. Some member-firms have invested in sophisticated IT links with lenders.

5.7 Many clients choose a DMP specifically (even if it is not the “best advice” for them) because it is not formal insolvency. Lawyers, police officers, bank staff, prison officers, company directors and members of the armed forces may, for example, find an IVA or bankruptcy is either unacceptable or damages their career prospects.

5.8 The informal nature of DMPs are a key strength. Many clients use them as temporary stopgaps to cover a period of illness or unemployment or a change in personal circumstances such as relationship breakdown, and then re-commence contractual repayments once their income recovers. Others use a DMP as “breathing space” which enables them to regain control of their finances (and often their lives) and rebuild their confidence (research shows this typically takes nine months). A client leaving a debt management plan before it runs to term is therefore not necessarily a failure.

Percentage of total DMP clients that end their plan each month	2.6%
Of these:
Completes programme and leave debt free	15%
Settles directly with lenders (for example family provide funds to clear debts)	5%
Client is empowered to deal direct with lenders themselves	17%
Due to a change in client’s circumstances or lack of lender concessions client changes to another solution	29%
Circumstances improve/stop paying/won’t pay	20%
Move to another provider	10%
Other (including deceased)	4%

As you can see one in five people who leave a DMP do so debt free.

5.9 In June 2009 the Money Advice Trust (MAT) charity published research conducted on its behalf by the Personal Finance Research Centre (PFRC) at Bristol University. It interviewed a number of clients of private providers (not necessarily DEMSA members) about their experiences.

The research found that clients of fee charging debt management providers were more likely to be unhappy with the service provided if their firm was NOT a trade body member (p70)

5.10 Selected client “verbatims” from the MAT/PFRC research:

“I didn’t go to them for advice, for them to tell me what I should be doing. I went to them for them to take it on and deal with it.” (Male, 40)

“After you spoke to them you felt a little bit of relief because this could be a solution...they weren’t like ‘you shouldn’t have got yourself into that kind of trouble, you shouldn’t have done that’, you know what I mean, they were saying, ‘we understand, this is what we can do for you’.” (Male, 50)

“The biggest thing they said to me was you haven’t got to answer the phone [to lenders]…letters, just pass them on.” (Female, 40s)

“I mean they went through everything, the smallest detail, do you know what I mean. Like I mean some people might be on medication and have to pay for the prescription so they went through all that and said, you know, ‘what do you pay out every month?’ They didn’t leave you so you were scrimping and saving but you weren’t splashing out on lavish things, they made it comfortable for you to live.” (Female, 50s)

“…we went from £750 or something like that that we had to pay out each month in debt, it dropped to something like £325 which was below half, plus the interest ended as well, which was fantastic.” (Male, 40s)

“I think it is because you think somebody is dealing with your finances you think well there’s got to be a charge, you know, people are not going to do it for nothing I suppose.” (Woman, 30s)

“I thought it was quite fair actually, you know, they are a business its not like they’re in it for the fun…it was just so easy and I don’t mind paying them £57 like I say because I didn’t have the worry…most of the time it just wasn’t even in my mind, it was gone at the beginning of the month, the money had gone, you know.” (Male, 40s)

“It was like a relief in one way because you know then that every month your lenders were getting something. Whereas before it was oh God I can’t pay them this month, I’ll pay these then I’ll wait while next month and pay them, do you know what I mean, you’d got peace of mind knowing it was being paid.” (Female, 50s, paid off debts)

“…it made me feel secure. And it made me feel that I could actually start moving forward because I’d got that sorted at least.” (Female, 50s)

5.11 Every DEMSA member-firm displays details of the Insolvency Service’s guide “In Debt? Dealing with your lenders” – this is requirement of the Code and DM Guidance. In addition many firms provide additional free help, advice and resources for people with debt problems – to enable them to self manage their finances - for example one member runs the self help website (almost 10,000 consumers used this service last year).

5.12 Not everybody who calls a DEMSA member-firm can be provided with a debt solution. For example if clients are insolvent but don’t qualify for a DRO and can’t raise the fees to go bankrupt (typically £700) then an appropriate debt solution may not be available.

6. Quality of Advice and Service

6.1 DEMSA member-firms are required to ensure that all advice and any recommended solution is in the best interests of their client. This is a fundamental tenet of both DEMSA’s Code of Conduct and the OFT DM guidance.

Most members offer clients a wide range of debt solutions. These include:

In England and Wales: Debt Management Plan (DMP), Individual Voluntary Arrangement (IVA), bankruptcy, Debt Relief Order, Administration Order.

In Scotland: Debt Arrangement Scheme (DAS), Trust Deed, Sequestration (bankruptcy) and Low Income, Low Asset (LILA).

6.2 Many member-firms also offer clients a wide range of other help, support and advice including:

Income maximisation – firms will work with clients to establish if they are receiving all the benefits they are entitled to.

Help with secured debts such as mortgages – including arranging for affordable repayment of arrears, the prevention of repossession or eviction.

Advocacy – some firms provide advice and support for their clients if they are involved in Court action.

Money Saving – some members help clients to reduce their outgoings by helping them find a cheaper energy tariffs.

6.3 DEMSA members employ significant numbers of staff to provide ongoing customer service to clients. This includes answering client’s queries, dealing with all correspondence from lenders, negotiating repayment, interest and charges concessions and ensuring that they are renewed upon expiry. They also conduct regular reviews of the client’s financial position; to ensure payment levels continue to support sustainability and to review if an alternative solution may have become more appropriate. Typically clients will speak to their relationship manager once a month (over 10,000,000 calls a year in total). Some firms also provide online tools and services to help customers view and manage their debt management plans.

6.4 Every month DEMSA members collect and distribute some 1.6m payments to lenders from their clients. Clients appreciate the flexibility of making single payments to their provider which then handles the distribution to their lenders. This is managed to fit in with the client’s earning pattern.

7. The Range and Appropriateness of Debt Solutions

7.1 DEMSA believes that there is a good range of debt solutions available to suit most clients and their circumstances. Whilst some solutions may appear to overlap and the “boundaries” between them can seem hazy this generally works well and ensures clients can move between solutions as and when appropriate.

7.2 Having said that there are areas that improvements could be made. For example:

IVAs—the voting powers of lenders, when collectively combined through voting agents, has the ability to prevent access to this solution or impose unreasonably restrictive requirements on consumers.

Bankruptcy—the cost of accessing this solution, circa £700, is often beyond reach for those that most need it.

Debt Relief Order—the low debt and asset value prevents many consumers from accessing this solution, but high bankruptcy fees can leave consumers unable to use this either, leaving them with no choice.

Regulated DMPs—the Ministry of Justice consulted on the enactment of the legislation contained within the Tribunal, Courts and Enforcement Act 2007 and were unable to reach a conclusive outcome as to whether this solution might benefit the consumer and raise standards within the sector. We understand this view was formed as a result of the Plan being regulated, not the firm, therefore not adequately removing the potential for abuse.

11 November 2011