Debt Management

DM 04

Written evidence submitted by MoneyPlan Limited

About MoneyPlan Ltd

1. MoneyPlan Ltd is a small, full-service, licensed debt management company working in East London. All customers will have had a free, face-to-face appointment at home with a qualified solicitor, experienced in debt counselling. The company only charges for Plan administration and at the industry average.

2. Key staff include a chartered banker & chartered company secretary, qualified solicitor, qualified broker and an LSE graduate in charge of customer financial administration. The Company was inspected by Trading Standards as part of the OFT Review and no problems were raised. The Company has had no customer complaints.

3. The Company takes its industry responsibilities seriously and all of its submissions were adopted by the DRF in its formal response to the latest OFT consultation.

Introduction / Summary

4. The debt management sector is in transition. Change has been driven by the OFT, encouraged by Government. The companies left standing will be only those centred on compliance, professionalism and customer service.

5. Parliament, however, needs to catch up. It’s evident from recent parliamentary debates that most MPs are not up to speed on the changes that are under way. Just as important, they also seem to be completely unaware of the systemic drawbacks affecting charities and companies in the creditor funded sector. These companies and their business model are not the panacea they’re portrayed by their supporters.

6. This submission is intended to provide the Committee and Parliament with a small practitioner’s view of some of the practical issues surrounding Policy choices and , in particular, to those choices being pursued by the Government in response to the BIS consultation:

Product mix

7. The Company endorses the Government view that the present product mix works well and that there is ‘no need for a complete overhaul.’

8. Some essential changes are needed, however, to the sale and administration of IVAs to prevent continued large-scale mis-selling and the consumer detriment caused by 1 in 3 failing. Cause, effect and remedy are covered in the submission.

Money Advice Service

9. The Company supports the existing MAS brief to provide honest, generic advice – informing choice. MAS should not, however, be a feed to specific, creditor-funded companies and charities at the expense of more effective alternatives.

Charities & Creditor funded companies

10. The Submission looks at those companies and charities, like CCCS, that MAS and other Government agencies already refer to , their true cost to the customer, true level of service provision, the effect of creditor funding on service provision, their ambition for the sector and the damage and consumer detriment, evidenced in America, that this would cause if achieved.

Parliamentary comment

11. The submission corrects some of the misleading comment made in parliament.

DMP Protocol

12. The Company supports the Government’s efforts to achieve a Debt Management Protocol. However, DMPs are popular and effective because they can be customised to reconcile the competing interests of individual debtors and creditors in many different situations. Any Protocol should facilitate that process and not seek to codify every possible permutation. In short, it should not turn a flexible , all-encompassing solution into something pseudo-statutory - losing features along the way which currently save many customers a great deal of anxiety and a great deal of money.

Submission

Product Mix - IVAs

13. Money Advice Trust and Citizens Advice are both dissatisfied with the way IVAs are marketed, advised and administered. However, their only suggested remedy is increased regulation of Insolvency Practitioners and the firms for which they work. Increased oversight would not increase the number of IPs and consequently would not address the fundamental flaws in the system which largely stem from inadequate numbers of IPs contributing only notional involvement to the process.

14. It’s commonly accepted and confirmed in the Insolvency Service statistics that 1 in 3 IVAs fail – taking the customer back to square one after often wasting thousands in front-loaded fees. The proportion of IVAs failing is only likely to increase over the next few years as IVAs are increasingly sold and signed off by Insolvency Practitioners on the basis of £100+ monthly payments. It seems inevitable that such low monthly payments will be wiped out by equally inevitable increases in priority debt payments over the next five years and the customer returned to an even worse position than they had at the outset. IVAs are a high risk product – would anyone buy a car with a 1 in 3 chance of blowing up some time in the next five years? Yet IVAs are often marketed as a form of statutory debt management plan rather than, as intended, an alternative to bankruptcy.

15. The answer to ensuring real rather than nominal professional involvement might appear to be to set a minimum ratio between Insolvency Practitioners and the number of IVAs at least notionally being supervised. This would not work – not enough Insolvency Practitioners to go round. In any event, it’s only superficially that they might appear to be the right people for the job. The insolvency practitioners’ qualification is heavily biased towards commercial / corporate practice and has little practical relevance to the complexities of customising and managing personal debt strategies. The Practice component to the qualification also ensures that it is not an easily accessible qualification. The bottom line is that the requirement for IP involvement has effectively created a closed shop delivering an inadequate service.

16. MoneyPlan believes the answer is to create and phase in a new tailored, qualification – accessible to those with the right experience and professional background. This would ensure real professional input at every stage. Misleading advertising would consequently become pointless. It would also allow and encourage small , professional firms to administer the IVA process in its entirety in-house. This, in turn, would create downward pressure on fees as IVA cases would no longer be ‘sold-on‘ to large-scale operators. It also means the customer relationship would be retained rather than transferred to companies employing unqualified staff but with an IP on the letterhead. In this connection, it is perhaps worth noting that even the CCCS only employs one Insolvency Practitioner.

Money Advice Service

17. The Money Advice Service announced in July that it will "perform a central role in the co-ordination of debt advice across the UK from April 2012". It has also told the Advertising Standards Authority in the course of an adjudication that it "did not recommend firms" and "would not recommend a particular provider". Notwithstanding this, the MAS site currently provides a direct link to CCCS and, like many MPs, makes no distinction between the level of service provision in the charity sector and that provided by commercial companies. In short, it is not comparing like with like. Neither MAS nor the 10-minute bills going through Parliament look beyond whether or not a fee is charged in coming to a conclusion on value. It is a wholly inadequate approach which will hopefully be overtaken by the Committee’s enquiry. In MoneyPlan’s view, any meaningful comparative study should look at the following areas in respect of all service providers – charitable, creditor funded and commercial:

Charities & Creditor funded companies

Level of Service

18. Citizens Advice, AgeUK and many other charities provide what at best could be described as "assisted" debt management. The customer is left to organise all creditor payments themselves through their own account i.e. to marry creditor payment dates with, typically, continuously changing collectors and, in addition, deal direct with phone calls and letters from collectors often unaware of any creditor agreement. So payment management skills are still needed and direct creditor and collector contact will persist and have to be responded to if it’s not to escalate. CAB itself is aware the service is inadequate and is piloting a tie-up with CCCS. (Payplan withdrew from the tendering process, however, and issued a Press release stating : "having carefully reviewed the tender specification, we concluded that in our view the process was potentially flawed and may not necessarily be in the best interests of the client and felt that the practicalities of the service may also not be effective.")The current arrangement with CCCS generates approx £700,000 DMP commission for Money Advice Trust.

19. Now that there is an open service tie-up between CAB and CCCS it becomes even more important to understand how the CCCS funding mechanism impacts customer service and product advice and how that will now affect CAB customers. CCCS itself is paid on the same basis as a debt collection agency. When it comes to IVA advice, for example, it’s clear that the qualifying criteria adopted (average debt: £55000, average monthly payment: £360) are very different from those companies not funded by the creditors. It is not proactive when it comes to controlling debt collection activity and instead just issues a self-help guide to its customers on how to cope and respond. Short settlements are never negotiated directly with creditors. Mis-sold PPI is never reclaimed to reduce balances. Finally, CCCS doesn’t advertise. It may be because 60% of CCCS customers are referred by their bank and advertising might undermine the bank’s timing of those referrals. Y Fovargue MP said when introducing her 10-minute bill that the lack of advertising reflected the lack of money available. This seems unlikely. CCCS has £20m in the bank and generates a surplus of £4-5m a year.

Direct & Indirect Fees

20. CAB outsources IVA provision and the customer is charged normal commercial rates. PayPlan also charges normal commercial rates for its in-house IVA provision but still continues to say they’re free on its website. CCCS has set up a separate subsidiary which also charges normal commercial rates. No charity offers free IVAs.

21. The monthly payment on a debt management Plan is the same in both the commercial and charity sector - with or without fees included. Only the repayment term may differ. However, the overall repayment term is not just affected by fees. In fact, it’s more likely to be determined by the effectiveness of the service provider in helping with PPI claims, short settlement negotiation and, especially, getting interest and charges frozen (quickly). A previous director of AdviceUK has confirmed creditor statistics showing that commercial companies are much more effective in this area.

22. Under the so-called ‘fair share’ system, the service provider’s interests are aligned with the creditor rather than the customer – the very reason why the FSA is forcing IFAs to start charging fees and stop taking commission. If debt management regulation is moved to the FSA or its successor, continued direct payment by creditors will be short-lived. Charging the customer is transparent, fair and unambiguous.

23. Finally, the Ministry of Justice noted in its Consultation that in the CCCS ‘fair share’ model of funding, "it is not clear that all creditors consider their debt to be settled when the fair share contribution is applied and that some may pursue the debtor for the fee element". I.e. is the Plan fee-free or fee deferred?

Compliance

24. The latest OFT Guidelines are due out before the end of the year. In addition, the Advertising Standards Authority can now also adjudicate on Web content. In that context, those charities and creditor-funded companies that currently pretend IVAs are free and make no reference to the FOS etc will have to change their attitude to regulation.

25. More problematic, in this company’s view, is the use of Group licences and how individual compliance can realistically be monitored when large scale umbrella organisations operate under another large scale umbrella organisation. One recent example is Christians Against Poverty ( CAP). It’s an organisation with 160 branches. They expressly state that they don’t help anyone who is self-employed as virtually all the customer’s income must be paid into a CAP account . CAP then pays all routine and priority debts with this money as well as the pro-rata payments to unsecured creditors in the DMP. This unusual policy creates a dependency on an organisation with a ‘mission’ and is a hidden barrier to customers cancelling. Contrary to the OFT Guidelines, their complaints procedure makes no mention of the Financial Ombudsman Service.

26. CAP operated under a group licence through AdviceUK until early September 2011when they lost their membership. Chief Executive of AdviceUK, Steve Johnson, said at the time that advisors are not allowed to "offer or impose their values" on their clients. "We don’t feel that praying as part of the advice process is compatible with our membership criteria. Advice should be impartial and offered with no strings attached. At the end of the day, praying is not advice. We don’t feel it is compatible with what is regarded throughout the advice sector as normal practice."

Parliamentary Comment

The introduction of two 10-minute rule bills and a short debate in July produced a number of statements which appear to coalesce round just one or two issues:

27. It was stated in Parliament that the ‘fair share’ model employed by CCCS aligned the interests of the service provider with the debtor and should be encouraged. Clearly, when the service provider’s income comes exclusively from the creditor on exactly the same basis as a debt collection agency, the service provider’s interests are aligned with the creditor and not the debtor. The principle involved is underlined by the FSA now forcing all IFAs to start charging fees to their customers instead of taking commission on the products sold. Fees are transparent and unambiguous. It was also stated that the fair share ‘model enables charities such as CCCS to help 9 out of 10 people lacking the means to repay their debt’. Regrettably , CCCS’ own statistics show that of the 418,000 people that contacted them for help in 2010, just 28,419 went on to start a debt management plan (i.e. 6.7%).

28. A ban on front-loaded fees was suggested in Parliament. This idea was also the subject of a super-complaint by CAB to the OFT. The issue was researched and carefully considered by the OFT. It was then rejected.

29. A ban on the sale of consumer data to debt management companies was suggested, in Parliament, to prevent cold calling. MoneyPlan doesn’t engage in cold calling. It should perhaps be pointed out, however, that the sale and packaging of much of the data bought by others is produced by the Registry Trust (a NFP set up by Malcolm Hurlston of the CCCS) on the basis of information originating from the Ministry of Justice re CCJs etc. and to which it returns much of the proceeds.

30. Banks, it was said in Parliament, should be stopped from referring customers to debt management companies. This does happen and is probably wrong – not least because the customer may well feel intimidated or that they have no choice if they are to stop the bank escalating collection activity. In this connection, however, it should be noted that 60% of all CCCS customers are referred by their bank.

31. It was stated in Parliament when introducing one of the 10-minute bills that free advice providers could not expect recommendations as people don’t talk to each other about debt. That is not MoneyPlan’s experience. Approx a third of all new business to MoneyPlan is a result of personal recommendation from existing customers and is likely to be the same for other similar companies.

32. A cap on fees to restrict advertising spend and an ambition that Britain should follow the ‘success’ of the American model was put forward by CCCS in their response to the OFT consultation and to the BIS call for evidence. In MoneyPlan’s opinion, there would be two key consequences of following the CCCS policy:

33. CCCS has the money but chooses not to advertise. Consequently, if private companies are stopped from advertising, it would simply mean far fewer people getting advice before the bank’s collection activities had run their course or the customer had succumbed to a consolidation loan – ruling out, permanently, many of their options.

34. Fee capping in America was not a success. When commercial companies deserted the industry, the banks took the opportunity to reduce their support and the CCCS in America is now dependent on State grants and fees charged customers. In the last figures seen by MoneyPlan for the CCCS accounts in Orange County, California, creditor contributions were $399,642, fees charged customers were $579,753 and grants were $448,829.

Debt Management Protocol or Statutory Debt Management Plan?

35. Although CAB and the CCCS have now linked up, they have differing views on statutory debt management plans. The response from the CCCS when no consensus could be reached was basically a sigh of relief. In June 2010, the Chairman wrote in the Consolidated Financial Statement: "to regulate plans in general would certainly have put at severe risk the service we offer, which is based on goodwill and informal agreements which bring the best out of lenders and motivate people in debt. It was fortunate when in 2010 the Government decided not to take it forward after pressure from both Bankers and ourselves."

36. MoneyPlan agrees with the CCCS on this. It is the co-operative and flexible nature of DMPs that has made them so successful for so many people in so many different circumstances. The experience of IVAs should be a lesson in what happens when all flexibility is lost and individuals are forced into the straight-jacket of a statutory system

37. Although this Company has never had any difficulty in setting up sensible Plans, there can be no objection to the Government’s wish to see all parties agree on a Protocol – providing it does not negotiate away many of the best features of the present system or become pseudo-statutory in its employment.

11 November 2011