Debt Management

DM 20A

Supplementary written evidence from the Debt Resolution Forum

Response to written questions from the Business, Innovation and Skills Committee

1. [to DEMSA and DRF] What have you done since the OFT investigation to improve standards in your industry? What evidence do you have of improvements?

DRF was founded with the aim of raising standards, by a group of like minded individuals and firms that believed lip service only was being paid to this by other parts of the fee-charging debt resolution sector.

Our principal concerns were to create a set of standards that would inspire public confidence and to back these with requirements that would, in themselves, raise standards.

We therefore:

· Introduced the Certificate in Debt Resolution – an academically accredited qualification requiring 210 hours study and three written exams. DRF members client-facing staff either have to have this qualification or train to the same standard. DEMSA have begun the process of offering a version of the less-demanding Institute of Money Advisors Qualification, but do not, we believe, require it. Nearly 600 people have taken, or are taking, CertDR.

· Put in place a trusted independent professional body to monitor DRF members compliance with DRF and OFT standards. This is the Insolvency Practitioners Association (IPA), one of the bodies that is trusted by BIS to regulate licensed insolvency practitioners. A redacted report of one of IPA’s three-day visits to a DRF member accompanies these answers. DEMSA are in the process of setting up a similar arrangement with the Institute of Chartered Accountants in England and Wales.

· Put in place an independent complaints committee (see answer to Q.2, below)

Every member signs an annual declaration that they are compliant with DRF’s standards (which further require members to be compliant with OFT and other relevant standards).

DRF is working closely with the OFT to obtain accreditation under the OFT’s Consumer Codes Approval Scheme. DEMSA has this already. DRF considered it a priority to put training and monitoring in place in order to ensure consumers could trust the advice given by DRF members and that they could be assured that DRF members are meeting appropriate standards.

2. [to DEMSA and DRF] How many firms have broken your trade association codes in the last 12 months? What action have you taken against them?

DRF operates an independent complaints committee (composition and operation of which was detailed in our written evidence).

So far we have only had one complaint that has reached a formal hearing which was not upheld.

We do get informal complaints which we endeavour to resolve with the member concerned and, in most cases, the consumer achieves satisfaction.

However, in addition to this, the IPA inspection process identifies non-compliance. Where this is minor, DRF asks members to commit to correct the areas concerned and this will be specifically inspected by the IPA in a subsequent annual visit.

In the case of more serious or persistent non-compliance, DRF can ask the IPA to re-inspect the member at an earlier time (at the members cost) or could itself lay a complaint against the member, which could lead to membership being rescinded.

All upheld complaints will be publicised (including the member’s identity).

3. Last week we heard that there needed to be much more transparency in the commercial debt advice market – would you agree? Do you currently publish figures on, for example, the number of people you recommend an individual voluntary arrangement or debt relief order? If not why not?

Transparency is a serious issue, and not just in the fee charging sector.

In the last year (Q2 2010 – Q3 2011), DRF members advised on 24,281 new debt management plans (DMPs) and 6,841 IVAs.

We do not have older data, but will be collecting data quarterly, going forward. We do not require members to keep figures on solutions recommended that do not result in cases being taken forward.

However, DRF has received a substantial grant to fund research into fee-charging debt resolution procedures and their outcomes. This is being tendered for at present and will be undertaken in 2012.

DRF is concerned that the current uncertainty regarding the funding of free-to-client debt advice (and other issues) is affecting the behaviour of both free-to-client advisors and fee-charging companies and that this may not be understood by regulators or consumers.

For example, hybrid models appear to be emerging where free to client providers and charities are providing introductions to fee-charging debt managers. For example, Fee charging debt management company Baines & Ernst here

(http://www.consumeractiongroup.co.uk/forum/showthread.php?324212-Bill-to-promo)

admits that it pays referral fees to Citizen’s Advice.

A charity, Debt Advice Foundation, provides "access to free debt advice" and debt education services through a limited company that it owns, Debt Advice Foundation Limited, which has a debenture, registered at Companies House, which indicates that it refers proposals for Individual Voluntary Arrangements, in return for a referral fee to "free-to-client" provider PayPlan.

It appears that free-to-client provider CCCS advises IVAs on a very different basis to the fee-charging industry. Average debt in a CCCS IVA appeared, in 2010, to be around £55,000 – roughly 40-50% higher than would be expected across IVAs in general.

It is understood that both Money Advice Trust (MAT) and Citizen’s Advice are, in certain circumstances, paid fees by CCCS. For example, it is understood that the latest MAT accounts show £700,000 was received from CCCS and £600,000 from PayPlan.

In addition, there are questions of transparency and "level playing field" issues with the proposed new OFT debt management guidance.

For example, CCCS’s "Debt Remedy" online system appears to operate outside OFT guidance by prompting debtors to input income and expenditure figures that match creditor guidelines, rather than by putting in the debtor’s specific situation.

Further, the proposed OFT guidance requires fee-charging debt resolution companies to obtain accurate information on debtors income and expenditure but appears to exempt free-to-client companies from these strictures. Par 3.21 (a) (p.39) of the proposed OFT guidance relates to:

"failing to take reasonable steps to verify the consumer’s identity, income or outgoings".

Footnote 58 is attached to this paragraph and states:

"This is primarily aimed at commercial debt advisers and debt management companies rather than the not-for-profit advice sector. While we would expect licensees to take reasonable steps to verify income and expenditure by appropriate means, what is 'reasonable' and 'appropriate' will depend on the circumstances and the nature of the service being provided in each case".

4. What percentage of your debt management plan customers are still making their debt management plan payments after 24 months?

DRF does not collect this data.

However, anecdotally, we believe that around 50% of fee-charging debt management plans are still in force at the end of year two.

Much of the attrition in debt management plans appears to take place in the first few months, where debtors either recover from a temporary inability to cope or enter into an appropriate insolvent solution (DRO, Bankruptcy or IVA).

However, those that continue beyond the first twelve months of contributions and whose circumstances do not change have a higher probability of continuing. It appears that around 80% of those plans in force at the end of year two are still continuing at the end of year five.

5. Do you make people who contact your organisations aware of the availability of free debt advice? Should you?

DRF’s standards state:

"DRF members must provide advice which is:-

• consistent

• objective

• impartial

free at the point when they are first contacted by the debtor".

Most of the extensive advice provided by fee-charging firms is free: Only a minority of cases result in a fee-charging relationship with a debtor.

In addition, DRF’s standards state that members "must make clients aware of the sources of free-to-client advice". This is over and above the requirement in the OFT’s debt management guidance.

6. Do you educate people who come to you about financial planning and budgeting so they are better able to manage their finances in future? Do you think there is capacity for you to do more of this?

DRF members are under no obligation to educate debtors. However many do, through email newsletters and references to blogs, etc., which help debtors manage their money effectively.

Most fee-charging debt resolution companies provide a higher level of continuing client support throughout the plan than free-to-client services, including regular reassessment of a client’s situation, assistance with creditor harassment and a "robust friend" when a client is unable to pay their monthly plan contribution.

DRF is concerned that much of the current pre-occupation with financial education is ill-judged and likely to be ineffective:

· 50% of people with debt problems are only unable to manage their debt because of an individual "financial shock"

· Most of the rest fall behind because of a more generic economic change (rising interest rates, increased unemployment, etc.,)

· Failure through irresponsibility is rare.

· 20% of UK school leavers are functionally illiterate and innumerate.

· The illiterate/innumerate are likely to be concentrated amongst the most excluded citizens of our society and are also, we believe, more likely to use credit without the necessary understanding of how  to control it. However, financial education will not benefit them as they do not have the basic tools to use it.

· The process of debt repayment in IVAs and DMPs encourages people to learn to manage their money (not necessarily true of bankruptcy).

· Therefore financial education is unlikely to be required by most debtors and cannot be acquired, because of lack of basic skills, by most of those who need it.

DRF would recommend that, instead of financial education, which would take curriculum time and resources away from renewed efforts to bring about universal literacy and numeracy, that resources should be devoted to the creation of a debt resolution culture that rewards those who do not walk away from debt by creating repayment plans that are affordable, achievable, represent the debtors’ best efforts and which, on completion, reward the debtor by removing stigma and restoring the financial status that enables them to obtain the financial products they need at rates that are not subject to penalties imposed because of their previous payment record.

7 December 2011