Debt Management

DM 22

Written evidence submitted by the Citizens Advice Bureau

Summary

§ Citizens Advice believes that there are some good proposals in the Government response on personal insolvency, but in general we are disappointed that the Government has missed an opportunity to improve the options and protections available to people in financial difficulties. For instance Citizens Advice would have liked to have seen a firm commitment on more breathing space for people in temporary financial difficulties and a clear direction of travel on access to protection and debt relief for people currently unable to access either an IVA, bankruptcy or a Debt Relief Order

§ Citizens Advice continues to see problems in consumer credit markets and is particularly concerned that the most financially vulnerable are not being protected against exploitative practices.

§ We highlight problems with debt management, credit broking and payday lending to show how ineffective consumer credit regulation and a flawed system of debt remedies combine to make debt problems worse for some of the most financially vulnerable consumers.

§ We believe that the Government should rethink its decision not to redevelop the debt solutions landscape to provide a better, more coherent system. In particular, the Government should start work on implementation of the statutory debt management plan scheme that Parliament has already approved in the Tribunal, Courts and Enforcement Act 2007.

§ We urge the Government to quickly improve a consumer credit regulation regime that is failing to stop unscrupulous firms from preying on vulnerable consumers.

§ We urge the Government to take action to stop bank charges spiralling out of control for people in financial difficulties and to stop store card promotions being linked to retail offers and discounts

Introduction

Citizens Advice welcomes this opportunity to submit evidence to the Business, Innovation and Skills Committee inquiry on Debt Management.

The Citizens Advice service is a network of 394 independent advice centres that provide free, impartial advice from more than 3,500 locations in England and Wales, including GPs’ surgeries, hospitals, community centres, county courts and magistrates courts, and mobile services both in rural areas and to serve particular dispersed groups.

In 2010/11, the Citizens Advice service in England and Wales helped over two million people with over seven million problems. This included 550,000 people who made 2.3 million enquiries about debt related problems.

Over 960,000 of these enquiries were about consumer credit debts and ancillary credit services. Another 285,000 enquiries were about insolvency options (bankruptcy, Debt Relief Orders and Individual Voluntary Arrangements). A further 132,000 enquiries concerned non-debt related financial products and services, including 3,155 problems about debt management and credit repair companies.

We believe that this experience makes us well placed to comment on the issues covered by the Government’s consumer credit and personal insolvency review.

Background: Protecting financially vulnerable consumers

The foreword of the call for evidence document Managing borrowing and dealing with debt sets out the Government’s commitment to the reform of financial services regulation and ‘to curbing unsustainable lending and to the strengthening of consumer protections, particularly for the most vulnerable’.

Citizens Advice welcomes this commitment. But we believe that the Government now needs to ensure that both consumer credit regulation and the system of debt remedies to do more to support and protect financially vulnerable consumers.

Citizens Advice Bureaux continues to see cases where people in severe financial difficulties are being ripped off by unscrupulous firms or offered inappropriate solutions to deal with their debts. For instance:

Mis-sold d ebt management plans and i ndividual v oluntary a rrangements

We continue to see problems with mis-sold debt management plans and individual voluntary arrangements. In some of these cases this people have been sold inappropriate or unsustainable products. In other cases people have paid very large fees for a service that has provided little or no help or has actually made their debt problems worse. A few examples from hundreds of such cases reported by bureaux in the last few months help to illustrate the problem:

A CAB in the North East of England saw a 25 year old woman who, with her husband had been struggling financially and had contacted a company for assistance. They thought they were paying £150 per month to an i ndividual v oluntary a rrangement but it was a d ebt m anagement p lan, with £30 administration fees. The debt management company took the money from her bank account every time she was paid using her debit card number. She told them that this was causing her financial hardship and she was falling behind with her rent and council tax. As she was an introductory tenant with a social landlord, this had serious implications , as if she were taken to court for rent arrears, the court would have to grant possession to her landlord, even if she could pay off the arrears . But the debt management company refused to cancel or amend their plan; they told her to borrow money from family or friends. The woman had a young son and was frightened of losing her home.

A CAB in Yorkshire and the Humber saw a retired couple whose income came from pension and disability benefits. They were successfully repaying a bank loan at £130 per month. But they received sales marketing calls from a debt management company that hoodwinked them into entering into a debt management plan, which entailed a set up fee of £333 and a monthly fee of £30 simply to service the debt they were already repaying. In addition they were asked to sign a waiver to the statutory cooling-off period.

A nother CAB in Yorkshire and the Humber saw a married man who had with three children and was working 16 hours per week as a chef. He also cared for his wife who was severely disabled and in receipt of disability living allowance. They also received tax credits, had no assets and lived in a council rented property. Despite this he was sold an IVA in 2010 to deal with his debt problems. The provider carried out a yearly review and requested a further 50 per cent of his income. This meant the IVA installment increased to £600 per month, including his wife’s disability benefits and their child benefit being treated as available income for the IVA. This left them with little disposable income and a debt remedy that was not in their best interest s .

A CAB in the South West of England saw a 43 year old woman with dependent children who was working and living in privately rented accommodation. After her home, which had been purchased under the right to buy scheme, was repossessed in 2009 she ended up with debts of around £35,000. The debt was exacerbating her depression and so she contacted a debt help company to discuss the possibility of bankruptcy. The company gave her misleading information about the costs of bankruptcy and sold her an IVA instead; even though she met none of the criteria that would make an IVA a suitable option rather than bankruptcy. She had no assets, no reason to avoid bankruptcy from the point of view of her work or social standing and her income was insufficient to maintain IVA payments. After taking out the IVA she fell behind with council tax and fell into rent arrears. Her debt problems got even worse.

Unscrupulous credit brokers ripping off financially vulnerable people

In March Citizens Advice published an evidence report Cashing in that highlighted problems with sub-prime credit brokers and debt management companies. We were particularly concerned about firms cold calling consumers and/or taking up-front fees (sometimes by unauthorised deductions from a person’s bank account) for a loan finding service. In many of these cases the person did not get the loan and was unable to get their money back. In over 40 per cent of the cases reported by bureaux the person was under financial pressure when they approached the credit broker.

Research by the Office of Fair Trading in response to our super-complaint found that these practices were widespread [1] . The OFT estimated that in the last year around 12 per cent of consumers had been contacted unexpectedly by a firm offering to help them help to find an unsecured loan. The OFT also estimated that in the last year around 270,000 consumers had paid an up-front fee, typically between £50 and £70, to a sub prime credit broker in the expectation of getting a loan. The same estimates suggested that 45 per cent people paying a fee were not offered a loan and 36 per cent were offered a different loan that that advertised. The research indicated that as many as two thirds of people that should have been entitled to a refund did not get one.

The OFT concluded that ‘there are a number of businesses in the unsecured subprime credit brokerage market whose business models are based on taking upfront fees for a service which they are unlikely to be able to provide’. Here we also note that the OFT has recently announced enforcement action against one of the largest credit brokerage firms; issuing a minded to revoke notice on Yes Loans and associated companies in 27 October. While Citizens Advice welcomes this action by the OFT, the problems we see involve many firms and previous enforcement action by the OFT does not seem to have cleaned up this market sector. Five months on from our super-complaint and Citizens Advice continues to see cases showing how bad practices by credit brokers are still causing hardship to financially vulnerable people.

A CAB in the East Midlands saw a 49 year old man who was recovering from a bi-polar disorder and was supported by a community psychiatric nurse. He lived on his own in social housing and worked part-time. He said that he had lost £495 that had been taken from his account by seven different credit brokerage companies. He never received a loan or refund from any of these companies and felt that they had 'ripped him off'.

A CAB in the South West of England saw an 18 year old man who was a serving soldier and still in training. He had applied on the internet to a credit brokerage firm who charged a fee and find him a loan. But it appeared that his details were passed to a number of other brokerage companies without his permission resulting in three companies charging him administration fees totaling £155.

A nother CAB in the South West of England saw a 19 year old woman who was homeless and applied to an online company for a loan online to help her deal with some debts. She cancelled within the 14 day limit but was still charged £68 and then another £68 by a similar company who she had had no contact with. She could only assume that they got her bank details from the first company.

Citizens Advice believes that the law should be changed to prohibit cold calling by credit brokers. We also believe that the law needs to be changed to prevent credit brokers from taking a free in advance for actually finding a consumer a loan. The current Consumer Credit Act protections on the return of fees by brokers is not working to protect consumers from this abuse.

People using high cost credit to deal with financial difficulties.

We estimate that around 16 per cent of people seeking advice from the CAB service about debt problems have one or more high cost credit debts. Furthermore, in recent years we have also seen an increase in the proportion of CAB debt clients who have one or more payday loans, rising from an estimated one per cent in Q1 2009/10 to four per cent on Q1 2010/11. This probably reflects the growth of the sector over this period. Citizens Advice sees a number of business conduct issues with payday lenders and other high cost credit firms. Indeed we continue to see evidence of unfair practices in all sections of the consumer credit market causing detriment to consumers.

But here we will highlight a particular problem of people using high cost short term credit to try to deal with existing financial difficulties. For instance, analysis of a sample of over 27,000 CAB debt clients suggested that people who had one or more payday loans had more debts than other unsecured loan borrowers and were more likely to have one or more debts with a debt collector or bailiff. Given that these are short term agreements, there is a strong suggestion that people were using these payday products to try to deal with their financial difficulties. However as the examples below illustrate, for some people these loans were unaffordable, inappropriate and only made their financial difficulties worse.

A CAB in the South East of England saw a 43 year old man who was married and had 3 children. He was working and had very good take home pay. He owed around £11,000 on loans and credit cards and had kept up with the repayment on this. But he became overstretched and started taking out payday loans. He had eight of these totaling around £5,000. Money was taken directly from his bank account and he was getting deeper and deeper into debt and continued to take out further payday loans to cover his expenses.

A CAB in the West Midlands saw a 28 year old man who was an agency worker on temporary contracts and on a low income. His partner had mental health problems and was unable to work. The couple had a 2 year old child. He came to the bureau for assistance with a variety of non-priority debts including a number of payday and text loans, taken out to pay off the previous ones. The companies dealt mostly by email and mobile phone. There were 13 creditors in all. He was also trying to deal with priority debts and had little spare income to deal with credit debts. He said he had been harassed by some of these companies and threatened with bailiffs.

A CAB in the South East of England was visited by a woman who was on a low income and had numerous debts. She took out a pay day loan online which was originally £350. She had to pay back £479 a month later which she did not have the necessary income to do. She found that she was now unable to make payments on other debts as the interest charged on the payday loan was so high that it left her with no disposible income. This had led her to fall further into debt as penalties and interest charges were added to her other debts.

We could cite more sectors, products and practices producing detriment for financially vulnerable consumers. But we believe the cases described above illustrate the two key problems that this credit and debt review needed to address.

§ Consumer credit regulation is failing to protect consumers and the most financially vulnerable consumers in particular.

§ People in financial difficulties do not always have a clear route to appropriate help with their debt problems.

These cases also show how these problems interact. Poorly regulated lending and collections practices can cause or contribute to unmanageable debt problems. People struggling to manage their debts can become be very vulnerable to unfair practices by firms offering credit or debt management services as a way of dealing with debt problems. This is why CAB money advisers often describe people as falling into a ‘cycle of debt’ or a ‘debt spiral’.

The Government review

As a result we believe that the Government has asked some of the right questions, both in the credit and personal insolvency strands of this review and in the related work on the future of consumer credit regulation.

The Government has only responded on the personal insolvency strand so far. An announcement is expected very soon on some of the issues raised in the credit side of the review. A statement on the broader future strategic direction of consumer credit regulation is expected in the new year.

Our reaction and comments on the personal insolvency review is set out below. This is followed by a summary of our view on what needs to change to ensure that the consumer credit regime provides better and more consistent protection for vulnerable consumers. Finally we give a view on the change we believe is necessary in respect of some of the key specific issues raised in the credit side of the credit and personal insolvency review.

Announcement on future money advice provision

Citizens Advice warmly welcomed the Government’s recognition of ‘the importance of ensuring that consumers have access to free and impartial advice on dealing with their debts’. This recognition is extremely important for the CAB service, at a time when the future funding of our debt advice services has been uncertain.

The Government had previously announced a decision to continue funding the fact-to-face debt advice project for this year. Last year this funding meant that projects managed by the CAB could employ around 350 debt advisers (full time equivalent) who were able to help 71,467 people with their debt problems. However the longer term future of the face-to-face debt advice project is still to be decided. We would also point out that the legal aid budget for debt advice is due to fall by 75 per cent from 2013, figures from the Ministry of Justice suggest that the number of people helped with debt problems will fall by 105,000 as a result [1] .

As a result Citizens Advice was particularly pleased that the Government announced, in this review response, that it is working to move provision of debt advice services onto a more sustainable footing in the future and has asked the Money Advice Service (MAS) to take responsibility for the co-ordination of these. MAS has been tasked to develop a model that ensures debt advice outcomes can be delivered in an effective, efficient way. Citizens Advice supports this aim but urges both the Government and MAS to ensure that this model pays particular attention to the needs of consumers who need extra support from debt advice services to ensure that their needs are met. Here we would also point to our 2011 evidence report Double disadvantage highlighting the problems faced by disabled CAB debt clients. The report found that creditors were not always or consistently taking proper account of the needs of disabled people and that this was connected to other unfair practices. However the report also found that advice services that are specifically focused on the needs of disabled people could break through these barriers and empower people to get control of their debt problems. The report was based on the experienced of clients of the face-to face (formerly Financial Inclusion Fund) disability project. This was a partnership between Citizens Advice, and four disability organisations [2] where 10 citizens advice bureaux gave advice tailored to the needs of disabled people. The advice delivered by this project had a higher cost per case because of the extra time and resources (such as access to British Sign Language interpreters) required to support the needs of these people. We believe that any future debt advice commissioning model must continue to support and expand such projects.

The Government’s response on personal insolvency

Welcome initiatives

Citizens Advice welcomes the following announcements:

§ The Government has announced that it will consult on increasing the debt level at which a creditor can petition to make a debtor bankrupt. This level was set at £750 when the Insolvency Act came into force in 1986 and has not been increased since. This is a very low hurdle for a legal remedy with such far reaching consequences for debtors, including the possibility of losing their home because of problems with unsecured debts. However we do not believe that the issue is just about updating this limit for inflation. Here we note that the Coalition Government agreement includes a commitment to ‘ban orders for sale on unsecured debts of less than £25,000’. Citizens Advice strongly supports this commitment, which we estimate would protect around 95 per cent of people form the threat of losing their home because of an unsecured debt. However to be effective this limit would have to extend to the creditor’s petition level for bankruptcy.

§ Access to basic bank accounts for undischarged bankrupts: In 2010 over 59,000 people were declared bankrupt. In the same year Citizens Advice published a evidence report, Called to account, that highlighted the problems that many undischarged bankrupts faced accessing a basic bank account for transactional banking. The report highlights the extra costs that people without access to a bank account face and the hardship this could cause. Many banks are unwilling to offer these accounts, citing their perception of a risk in insolvency law that the bank could become liable by claims from the trustee in bankruptcy in respect of after-acquired property. The Government has responded to concerns on this issue by committing to consulting on ways to amend the legislation to addressed the perceived risk. This is very welcome.

Nevertheless we have concerns about most of the other proposed remedies on personal insolvency and debt remedies generally:

A proposed cross industry protocol for debt management plans

The Government’s response document highlights how Debt Management Plans (DMPs) caused concerns among all stakeholders. The CAB service receives over 3,000 enquiries a year about debt management companies and Citizens Advice receives hundreds of qualitative reports on the bad advice, poor service and high fees that some customers of commercial debt management firms experience like the ones we cited earlier in this submission.

Indeed the Office of Fair Trading (that licenses debt management companies under the Consumer Credit Act 1974) undertook a compliance review of the debt management sector in 2010. The OFT found ‘widespread problems in the sector, which are a significant cause for concern’ and concluded that it needed to urgently implement an action plan to deal with non compliance and raise standards.

We have believe that action by the OFT has had a positive effect. A number of firms have exited the market and the OFT has taken and continues to take enforcement action against others. We have also seen efforts by the main sector trade body to improve standards and compliance monitoring. This is all welcome.

But one year on from the review ,Citizens Advice continues to see many of the same problems. Neither the OFT or self-regulation by trade associations has been effective in making the debt management market safe for consumers. We continue to see too many cases of financially vulnerable consumers being exploited by bad practices and unscrupulous firms.

We believe that this is partly a consequence of the commercial debt management sector with there is a core of larger firms and a long tail of smaller firms. Indeed the OFT estimates that between 2008 and 2010 it issued or renewed 3,697 consumer credit licences that included debt adjusting or debt counseling categories. The OFT also highlights the ‘rapid growth in new entrants into the fee charging debt management sector, operating mainly from internet-based websites’.

This describes a sector with low barriers to entry and a large population of firms offering a complex product through distance channels to financially vulnerable consumers. Consumers can also be isolated through unsolicited marketing. Cold calls and unsolicited text marketing is common in this sector, with the OFT estimating that around 26 per cent of consumers were unexpectedly contacted in the last year by a debt management company. The practice of charging upfront fees for ‘set up costs’ is also common so consumers can face significant barriers to switching. We have seen cases where these fees have been exceptionally high as the following examples illustrate.

A CAB in London saw aa lone parent who was struggling to repay her creditors following loss of employment and relationship breakdown. She needed help to deal with her creditors, went on-line, and found a debt management company. The woman paid an up-front administration fee of £1,600 and £40 of the £80 per month she was paying each month was also taken up by their fees.

A CAB in the South East of England saw a 44 year old woman who had signed up to a debt management plan in 2009. She had to pay upfront fees of £1200 and of the £96 monthly payment to them, £50 was their fees. However she was also receiving letters from her creditors threatening legal action. She also had a possession hearing that the bureau said was partly caused by paying the debt management company instead of her mortgage

The Government has responded to the concerns raised by stakeholders in the call for evidence by proposing a non-regulatory DMP protocol developed in a series of cross industry meetings to set out what all parties can expect from a DMP. The Government intends this to work alongside the OFT’s statutory debt management guidance.

Citizens Advice welcomes this initiative and looks forward to working with Government and other stakeholders to develop this proposal. However, we believe that it is likely to have only a limited impact on the problems that consumers are facing in this market. Indeed this proposal appears to be modelled on an earlier IVA protocol developed by the Insolvency Service that had similar aims, but we are still seeing evidence of IVA mis-selling.

While we are always supportive of well targeted self-regulation, we believe that this tends to work best when it applies to a relatively small community of firms who are all members of a trade association and who face significant reputational risk or barriers to exit. None of this seems to apply particularly well to the broader debt management sector at present.

The Government response goes on to say that ‘to consider non-regulatory approaches does not mean we have reached any final conclusion not to regulate in any particular area of debt advice’. Given that existing self regulation in the debt management sector had had little or no effect on the long tail of firms, Citizens Advice believes that the time for firmer action by Government to clean up the debt management sector has long since passed. Furthermore, we would point out that debt management firms are already required to hold a consumer credit licence and are regulated by the OFT. So we are unsure why the Government has preferred self regulation to ensuring that the regulatory scheme that it oversees is working as it should to protect consumers. We would therefore urge action by Government in three key areas as follows.

Specific action to tackle the reasons why consumers end up in bad relationships with debt management providers.

In particular we would ask the Government to consider:

§ Banning unsolicited marketing by debt management companies to stop firms targeting or isolating financially vulnerable consumers. We note that the OFT found considerable support for this among debt management businesses themselves, with 27 out of 49 firms responding to an OFT survey saying that they believed a ban on cold calling was justified.

§ Ban or at least limit the up-front fees debt management firms can charge to address barriers to switching and require firms to refund any upfront fees where a consumer wants to switch to another provider.

§ Better control of debt management company promotions to improve price transparency and alert consumers to other options and free debt advice in particular.

Give the consumer credit regulator better powers and resources to both prevent consumer detriment and act more quickly and decisively to deal with problems when they appear.

It is important to remember that the debt management firms are required to have a consumer credit licence. We will discuss consumer credit regulation below.

Give people in financial difficulties better options to deal with their debts so they are not drawn into using poor quality debt management firms or taken on high cost credit as a coping strategy.

We cover this issue in detail below.

Better options for dealing with debts

The personal insolvency part of the Government’s review asked how the current range of debt solutions could be improved. Citizens Advice welcomed the Government’s focus on this key issue for two reasons.

Firstly we would point out that Parliament passed legislation in 2007 specifically to update and improve the range of statutory debt solutions available to people in serious and temporary financial difficulties. Part Five of the Tribunal Courts and Enforcement Act 2007 set out four schemes that were developed after a long process of research and consultation:

§ An updating of the existing Administration Order (AO) scheme, a very useful and straightforward debt remedy that has fallen into disuse because of an outdated limit on the amount of debt that an applicant could have - £5,000

§ An Enforcement Restriction Order (ERO) that aimed to give people in temporary financial difficulties a period of ‘breathing space protection’ from collection or enforcement activity by creditors.

§ A Debt Relief Order (DRO) that provided a cheaper summary access to bankruptcy for people with debts below £15,000 and no income or assets

§ Framework legislation for a Statutory Debt Management Plan (SDMP).

In summary the package had two broad aims:

§ Give people in serious financial difficulties the protection and space they need to repay some of all of their debts in a sustainable and affordable way.

§ Improve access to debt relief for those that need a fresh start.

Citizens Advice supported both these aims and the package set out in the 2007 Act. However, with the exception of the Debt Relief Order, the package has never been implemented by government.

We appreciate that this legislation was the policy of a previous administration and that the current Government may have different aims and priorities. However the Part Five package did provide some credible solutions to many of the multiple debt problems Citizens Advice has been seeing for many years. As a result we fully expecting this Government review of personal insolvency to properly re-examine this ground.

We are disappointed that the review appears to have done so in only a cursory way. The ERO was dismissed as being ‘costly to implement’ and the Government announced its intention to consult on repealing the AO scheme because it is poorly used.

The only positive point was the announcement that the Government would keep the order making powers for the SDMP scheme in place for the time being. Citizens Advice has been calling for implementation of the SDMP scheme since the Act was passed. Importantly, and contrary to the Government’s response, the main point and benefit of the SDMP scheme would not be in providing better regulation of the commercial debt management sector – that remains a job for the OFT and consumer credit regulation to complete.

Instead Citizens Advice sees the SDMP scheme as an opportunity to build a more coherent, more accessible and effective system for helping people in financial difficulties to deal with their debts. Therefore we would urge the Government to do more than just keep these powers under review, but to start actively working on implementation of the SDMP provisions. Our reasons for this are based on the problems in the current system, which are the same problems we raised with Government in the run up to the 2007 Act.

The second reason why we welcomes a thorough review of personal insolvency is because our experience of helping people with serious debt problems tells us that the current system is not working well. Our response to the call for evidence discussed problems with individual elements of the system and with the system as a whole. This are briefly summarised below.

Problems with individual elements of the system of debt solutions

Negotiating with c reditors

The starting point is with the arrears management practices of individual creditors and debt collectors. The huge majority of debt problems are resolved by voluntary agreement between creditors and debtors (or their advisers). Forbearance and voluntary agreement are the foundations of all debt remedies and Citizens Advice welcomes the Government’s intention set out in this review to strengthen and build upon on. However Citizens Advice still sees too many cases of people facing overly aggressive collection and enforcement tactics by creditors or debt collectors who refuse to come to an agreement over affordable repayments. Citizens Advice has been working to address this problem in partnership with representatives of some 40 different creditors, both private firms and public bodies. Our report How to do the right thing sets out a number of actual good practice examples for creditors helping people to deal with financial difficulties. This is a good example of how cross sector working can produce good outcomes for consumers. We are hopeful that the report will help to spread the good practice examples more widely.

But unfortunately these examples will not necessarily become embedded in the practices of all creditors everywhere and they won’t be taken up by unscrupulous firms. Even the best cost-industry voluntary initiatives need to be supported by a strong statutory base to ensure that creditors cannot defect and that bad practice cannot undercut good practice.

Underpinning our work here is the believe that where people are engaging with their debt problems and paying what they can reasonable afford towards their debts they should be protected against aggressive creditors and should not see their debts continue to spiral upwards through interest, fees and charges. But we are still a long way off this point at present.

Debt management plans

We have already discussed business conduct problems in the commercial debt management sector. But all debt management plans also share the same limitations as a voluntary agreement with creditors. As voluntary agreements, debt management plans can give consumers no guarantee that creditors will accept offers, stop collection and enforcement action or freeze interest and charges.

Individual Voluntary arrangements

IVAs are currently the main alternative to bankruptcy where people with debt problems can get some guarantee of protection against their creditors. Indeed the Government cites the existence of IVAs as a reason why there is no need to develop the SDMP scheme.

But IVAs were not originally designed for a mass consumer market and are riddled with problems as a consumer debt remedy. Citizens Advice continues to see cases where people have been sold IVAs that were not suitable or sustainable. The Insolvency Service has recently consulted on improving the regulation in Insolvency Practitioners, following an OFT market study into corporate insolvency. Citizens Advice believes that the regulatory structure for IVAs needs to get significantly better at protecting consumers from unfair practices.

But even with a better regulatory structure this remedy remains problematic. IVAs can be expensive and only debtors with fairly substantial disposable incomes can access them. IVAs are also fairly inflexible to changing circumstances and where an IVA fails a consumer can end up in a worse position than where they started.

Debt Relief Orders

The DRO was designed to facilitate access to bankruptcy for people who could not afford the high fees and deposit needed to apply for bankruptcy. The Insolvency Service were able to reduce the DRO fee to £90 by requiring people to apply through an ‘approved intermediary’ and restricting the scheme to people with debts below £15,000 with no income of assets. The scheme has been effective at supporting people who needed debt relief but could not afford bankruptcy or meet the criteria for an IVA; over 25,000 debt relief orders were made in 2010. We understand that roughly 70 per cent of these were processed by CAB money advisers as authorised intermediaries.

However the debt limit has not been updated since the scheme was introduced and we are starting to see more cases of people who cannot get the help they need because their debts (or income or assets) are over the limit.

A CAB in Wales saw an unemployed man who lived alone in rented property. He did not have any disposable income and his only asset was a car worth around £500. His credit debts totalled between £15,000 and £16,000. He would benefit from a debt relief order but would not be able to access this strategy if his debts are over £15,000. The CAB considered that this option would have many benefits for him and allow him a fresh start in 12 months. He could go bankrupt, but would not be able to afford the fees.

A CAB in the East Midlands saw a woman who owed £16,900. She had had to sell her property as she could not maintain her mortgage repayments and was now in rented property. She could no longer work and had long term health problems including suicidal tendencies. The client wanted to go bankrupt, but did not have £450 for the deposit fee. The CAB had helped her apply for a charitable grant for the fees, but she was still receiving letters from her creditors which she found very distressing. There was no guarantee that the application for a charitable payment would be successful. Although the CAB felt that that bankruptcy was the best option for this client as her recovery period could take years, they noted that if the client had been able to apply for a debt relief order, she would have had this matter resolved by now.

Bankruptcy

Bankruptcy remains the most commonly used form of debt relief. But it is an expensive scheme and the high application fees, currently £700 or £1,400 for a couple with joint debts, are a significant barrier to help for most of the people seeking debt advice from the CAB service.

A CAB in the South East of England saw a man who was married and had one dependent child aged 16. He had now found work after being sick for a long time, but would still be on a low income. Some years ago, he and his wife had run up substantial debts (over £100,000 between them) - mainly related to failed business. They are no longer increasing their debt but had no means of repaying it. His wife had gone bankrupt a year earlier, but he could not afford the fees especially since the increase in the deposit fee in June 2011.

A CAB in Yorkshire and the Humber saw a couple in receipt of means-tested benefits, both of whom needed to go bankrupt. Bankruptcy would be a good option for them, as they had a number of debts, including a mortgage shortfall debt of £47,000. Deductions were being made from their benefit for some priority debts, and they could not afford to make offers to their other creditors. They were very stressed about the situation, but did not have £1,050 for two bankruptcy deposit fees.

Problems with the system as a whole

So the current ‘system’ of debt remedies is really a group of voluntary and statutory schemes that have developed over time. It is not a coherent, planned whole and as a system suffers from a number of significant flaws. The experience of CAB clients raises the follows issues:

§ The statutory debt remedies have explicit or implicit boundary criteria that exclude people from the debt relief they need. As a result people can ‘fall into the gaps’ between these boundaries leaving them without a suitable option

§ This produces the bizarre result that a person with significant disposable income can get both debt relief and protection from their creditors (through an IVA) while some of the most vulnerable debtors cannot.

§ There is currently no debt solution that provides support and protection for people experiencing an extended period of financial difficulty. In other words there is no effective statutory ‘breathing space’ scheme, even though this is what many people in financial difficulties need.

§ As the solutions do not articulate into a coherent system, there is no easy way for people to move between remedies if their circumstances change. For instance people who have paid for an IVA can find themselves back at square one if the remedy fails.

§ The gaps, limitations and failures of the system to support and protect people in financial difficulties creates an opportunity for unscrupulous traders to exploit financially vulnerable people.

What needs to change

Given these problems and the back story on the Tribunal, Courts and Enforcement Act we would have expected the Government’s response to have set out a clear direction of travel towards a more coherent system that met the key aim of strengthening consumer protections particularly for the most vulnerable.

But this has not happened. Instead the Government response argues that there is little evidence of the need for significant change. Citizens Advice was disappointed by this conclusion and also surprised given our long and continuing experience of the damage debt problems can cause and the way that some people in financial difficulties are being exploited by some traders.

There is much in the response that Citizens Advice strongly supports; we highlighted above our support for some of the specific policy proposals set out in the response and we support the Government’s efforts to seek improvements though self-regulation and cross industry working. This is good stuff.

But there is also a missed opportunity here to get to grips with the social consequences of debt problems once and for all. Therefore we would urge the Government to think again on two key points as follows:

§ The Government should reconsider the case for structural change to develop a coherent and effective system of debt solutions. The Government needs to work harder at understanding the current problems and developing proposals that move us forward.

§ As part of this, the Government should start working on plans to implement a statutory debt management plan scheme. We believe that the legislation is flexible enough to form the basis of a coherent single debt solution capable of providing breathing space, help for people to repay their debts and access for debt relief for those that need it.

Credit regulation

The credit and debt review does not touch directly on the overall effectiveness of consumer credit regulation. This is picked up in the parallel consultation A new approach to financial regulation: consultation of reforming the consumer credit regime published by the Department for Business, Innovation and Skills and HM Treasury in December 2010.

The consultation suggests moving consumer credit regulation to the proposed Financial Conduct Authority and putting consumer credit in scope of the Financial Services and Markets Act 2000. Citizens Advice broadly supports this position, as we believe that the current consumer credit regime has neither sufficient powers or resources to deal with the problems we continue to see in consumer credit markets.

Parliament is currently giving pre-legislative scrutiny to a draft Financial Services Bill that proposes to give the FCA more powers to prevent consumer problems in the financial services sector and deal more quickly and effectively with problems that do occur. This follows a long and detailed debate about why we have seen repeated widespread consumer problems with financial services (such as payment protection insurance) and the role of regulatory failure in these problems. But there has not been a similar debate about consumer credit regulation.

That is not to say that there has been no recent reform in consumer credit legislation. There has been significant reform with both an updating Consumer Credit Act in 2006 and the implementation of a European Directive on consumer credit in 2010. Both of these have improved the regulatory regime.

But this has not stopped consumers from experiencing many of the same problems with the conduct of consumer credit businesses. We are still seeing the same old problems with debt management. We are still seeing evidence of aggressive debt collection practices. We are still seeing examples of irresponsible lending. In addition we are starting to see problems with new and sectors and practices such as online credit broking, payday lending and the growth of unsolicited marketing of credit and debt management services.

As a result Citizens Advice does not believe that the consumer credit regulation is currently doing enough to protection consumers and the most vulnerable consumers in particular. Set out below is a brief summary of some of the key changes we believe to be necessary:

§ Their needs to be better control on firms entering the market and better scrutiny of business models. It is generally argued that low barriers to market entry is good for consumers as it encourages competition. But this is not true of consumer credit, particularly at the margins of the market where rogue firms are finding it too easy to exploit financially vulnerable consumers

§ The regime needs to be less focused on enforcement action against firms behaving badly and more focused on stopping bad practice in the first place. We believe that this requires the same positive rule making powers that FSMA provides for other financial services, including the proposed ‘product intervention’ powers.

§ The Consumer Credit Act provides consumers with some important substantive legal rights that need to be retained. However we believe that the regulator need to do more to develop the content of high level consumer protections (like the unfair credit relationship test) through its Part 8 powers and court action if necessary.

§ We think that OFT guidance is very good and this part of the current regime needs to be retained. But the guidance need more teeth to be truly effective.

§ We believe that consumer credit regulation lacks any real deterrent power – many firms are simply not sufficiently worried about action by the OFT to avoid unfair practices. Therefore we would like to see better intermediate sanctions – the £50,000 fine introduced by the 2006 Act has proved to be a useless deterrent.

§ The current Consumer Credit Act explicitly forbids the OFT from ordering firms to compensate consumers for unfair practices. This is a huge weakness to the deterrent power of credit regulation. Firms know that they can profit from bad practice. The power to order firms to review past business and compensate consumers has proved to be one of FSA’s most powerful tools.

§ The enforcement process is also painfully slow. Firms that the OFT considers unfit to hold a credit licence can continue to trade and cause consumers harm for years as the process winds through layers of adjudication and appeal. The Government needs to speed up the enforcement process to better protect consumers.

§ If the Government does decide to transfer consumer credit to the FCA; it will be important that we do not see any gap in consumer protection during the handover period and it will be important that the expertise of the OFT licensing teams is not lost.

Specific credit issues raised in the review

A response from the Government on the specific credit issues in the review is expected shortly, so we cannot give much comment on this. However we have briefly set out issues we would like to see addressed in the areas contained in the coalition commitments (bank charges and store cards).

Bank c harges

Citizens Advice remains concerned about cases where people in financial difficulties see their overdraft debts spiralling upwards because of charges. For instance:

A CAB in London saw a 55 year old man who worked part time and needed a bank account. He had difficulty reading and writing. He thought he was getting ordinary free current account but was given a fee charging packaged account instead with features that were no use to him. He lost his lost job and had taken all the money from the account that he had deposited. But he did not realise that he was being charged every month. An overdraft grew and charges added to the account. When he tried to close the account he was told he couldn't because it was in red. The debt had grown to nearly £1000. This consisted entirely of bank charges.

A CAB in the South East saw a 20 year old woman who had learning difficulties and limited literacy skills. She went into a small unauthorised overdraft in 2010. Charges increased the debt to £600. The bureau wrote to the bank who agreed to write off £450 of this, but the woman had already paid £155 in bank charges.

We want the government to take action to ensure that this problems is addressed. This means getting the banks to be better at spotting people in financial difficulties earlier and putting a more forceful limit on the level charges that can banks can levy on people in financial difficulties.

Store c ards

The Government has proposed both cooling off period for store cards. We are not sure that this is workable or a solution that actually meets the problems we see with store cards.

A CAB in Wales saw a 79 year old widower in receipt of disability benefits and pension credit. He went to a local store to buy a bed costing £179. Although he had the cash with him to pay for the bed, a sales assistant suggested he take out a store card to pay for it instead. The client accepted this but was unaware of the terms of the agreement. On receiving the store card, he cut it up, never using it again. The client had been paying the minimum payment every month for over two years. He had paid a total of £237.72. The CAB was concerned to note that his last statement showed a balance of £239.33. This meant that the cost of the bed was £477, of which £298 were charges.

A CAB in the South West saw a 24 year old man who had been working for a chain store for three months. He felt that he had been put under undue pressure to sell their store card, with threats of termination of employment, should he not complete one sale per week. The client said that this was not mentioned during his training, nor in his terms and conditions. He told the CAB that all sales assistants at the store were in the same position.

Instead we would to see measures to stop retail offers being linked to store cards and store card promotions.

16 November 2011