Financial Services Bill

Memorandum submitted by Payplan (FS 02)

Preamble

1. Payplan i s a major provider of telephone - based debt advice and solutions. This year we will take on over 100,000 new debt cases. We are a Money Advice Trust partner agency and work closely with other providers within the free sector such as Citizens Advice Bureaux and National Debtline.

We operate using the "Fair Share" model whereby our services are free to consumers and paid for by creditors on a "polluter pays" principle of support in proportion to the amount of their debt we are managing. There is one other major provider funded using the Fair Share model (Consumer Credit Counselling Service) but the majority of operators charge consumers rather than their creditors.

2 There has recently been much discussion on the merits of better regulating the providers of debt management plans (DMPs). This arises from widespread concerns about the cost and quality of services provided to overindebted consumers including a detailed review by the Office of Fair Trading (OFT) in 2010 which found that:

"frontline advisers working for debt management companies generally lack sufficient competence and are providing consumers with poor advice based on inadequate information . " [1]

  Current legislation

3 Payplan and others believe that existing powers contained within the Tribunal s, Courts and Enforcement ( TCE ) Act 2007, which provide for the introduction of a statutory debt management scheme , could effectively address our concerns. Whilst Government has not ruled out this route :

"As there are clearly continuing concerns, we do not rule out the possibility of further statutory action in this area, and propose that the current order making powers in the TCE Act 2007 remain in place for the time being." [2]

4 The Government is currently exploring alternative routes:

"In recognition of the concerns that have been expressed, and in keeping with the Government’s commitment to pursue change via non-regulatory routes wherever possible, we will work with the various players within the DMP industry to improve current standards. The Government proposes a series of cross-industry meetings to work up a Protocol setting out what all parties can expect from a DMP. This would work alongside the OFT’s recently revised draft guidance, which sets out the standards the OFT expects of debt management businesses, but will be broader in scope as it will encompass the creditor community. Such engagement, however, to consider non-regulatory approaches does not mean we have reached any final conclusion not to regulate in any particular area of debt advice." [3]

5 Payplan sits on a working group established by The Insolvency Service to explore the potential for establishing a debt management protocol. We are confident that it will be possible to produce a protocol which addresses most areas of poor practice identified by the OFT and others. Payplan is less confident though that there will be a straightforward resolution to the issue of fees. The OFT says:

"Debt management services are a classic 'distress' purchase; consumers contacting debt management companies tend to be over-indebted, vulnerable and desperate for help with managing their financial difficulties. Consequently, consumers tend to make quick decisions about debt solutions and research from the Money Advice Trust has shown that consumers do not shop around for debt management services."

"The review also revealed new or emerging unfair business practices in the debt management sector that are not currently covered by the current Guidance such as:

• charging excessive fees disproportionate to the work undertaken. Some businesses were said to charge the equivalent of multiple monthly payments as initial set-up fees. Such practices can be severely detrimental to a consumer who may end up even more

over-indebted if creditors continue to apply interest and charges or if the plan fails because they cannot keep up with the payments." [4]

Potential for voluntary resolution

6 Payplan considers that a reasonable basis for charging fees should be analogous to the "fair share" model of a percentage of payments distributed to creditors with no initial set-up fee. This aligns the interests of consumers, creditors and providers in setting up plans which are sustainable over the long term and penalising providers who set-up plans which are unsustainable or inappropriate. There is likely though to be a strong commercial incentive for providers to sit outside any protocol. If a significant number of providers join a protocol which limits or removes their set-up fees then those who do not join will be able to compete very strongly for market share via marketing and advertising spend. Given the evidence referred to above, it is probable that this marketing advantage will more than offset any loss of business from sitting outside the protocol. The danger is that a protocol will fail if providers have no commercial incentive to join.

7 One idea mooted is to get a commitment from creditors to pay "fair share" to all providers who adopt the protocol. This would give a significant point of difference for consumers, increase the rate at which debts were repaid (since the "fair share" rate would be set at below current fee levels) and give providers who then chose to sit outside the protocol a real difficulty in demonstrating that their advice was in the best interests of their clients (which is a requirement of the OFT’s Debt Management Guidance). This would though be dependent upon gaining industry-wide support. There is, however, an opportunity for Government to encourage (and potentially mandate) such an approach via an amendment to the Financial Services and Markets Act 2000 contained within the Financial Services Bill. The 2000 Act already requires the Money Advice Service to take on and deliver the co-ordination and provision of debt advice.

Impact of the Financial Services Bill

8 The Financial Services Bill seeks to clarify the role of the Money Advice Service and explicitly includes debt management services within its remit:

Section 3R

(4) The consumer financial education function includes, in particular-

……….

(f) assisting members of the public with the management of debt;

(g) working with other organisations which provide debt services, with a view to improving-

(i) the availability to the public of those services;

(ii) the quality of the services provided;

(iii) consistency in the services available, in the way in which they are provided and in the advice given.

(5) In subsection (4) "debt services" means debt advice or assistan ce with the management of debt.

9 These changes, if enacted, would not require levy-raising powers to be used for the purpose of funding DMPs, but could be used to send a clear signal to stakeholders that it would be a straightforward and easily introduced alternative to voluntary agreement. If this lever is used effectively then we could quickly arrive at a situation where agreement is reached by the main providers and creditor trade bodies to introduce a protocol incorporating mandatory "Fair Share Contributions" (FSC) for protocol providers (who would be prevented from charging any additional fees). The attraction for organisations not already operating that model is that it would give them a clear point of difference and would allow them to compete alongside existing FSC providers. It seems probable that enough fee-charging debt management companies would see this as sufficient incentive to join and give the initiative a critical mass. Similarly it must be possible for creditors to influence a protocol strongly enough to ensure that:

· The scheme properly aligns the interests of providers with consumers and creditors (the fastest reasonably affordable repayment of debt with sufficient support to ensure the arrangement is sustainable)

· There is a sufficiently robust external audit to ensure compliance and confidence in the provision

· Liquidation of debt is faster as a result of setting the FSC rate below current fee levels

· Non-participants can be marginalised sufficiently to make it untenable to operate outside the protocol

10 Given the likely increase in the number of overindebted consumers who will seek advice this year and the clear benefits of agreeing a better way of dealing with their debts, the DMP protocol group has a window of opportunity to bring about a valuable change. The likelihood of this change being brought about will be much enhanced if the proposed changes to the 2000 Act are implemented as currently drafted.

11 Although enactment of the Financial Services B ill as currently worded would give Government a useful lever to influence change via a non-statutory route Payplan would also encourage use of the opportunity this draft law presents to amend other primary legislation to make a minor change to Part 5 ("Debt management and relief") of the TCE Act 2007. The annex to this Memorandum sets out the minor change necessary (including the detailed amendment itself) to allow a statutory debt management scheme to be effectively implemented if the voluntary route proves unsuccessful. Indeed, the very existence of such a measure on the statute books would also serve to focus the minds of providers in the sector that the Government stands ready to intervene statutorily and immediately if they fail to make the non-statutory route work.

Annex

Proposed change to section 124 of the Tribunal Courts and Enforcement Act 2007

As currently drafted, section 124(1) of the TCE Act 2007 provides

"The operator of an approved scheme may recover its costs by charging debtors or affected creditors (or both)."

and Section 124(2) provides:

"costs means the costs which the operator incurs, taking one year with another, in connection with the approved scheme, so far as those costs are reasonable"

It will be seen that this would permit charging models in which costs are recovered from either the debtor or the creditor, but it is understood that there is some ambiguity over the use of the word "costs", in particular whether that permits the making of charges which include a reasonable level of profit or whether it is limited to recovery of actual costs excluding any element of profit. Although there is a charitable sector, it is very small and unlikely to be able to cope as the sole providers of DMPs and there is clearly a market need for the fairshare model.

In these circumstances, the sole amendment which Payplan would suggest to the primary (though as yet unimplemented) legislation would be to clarify the provisions relating to costs in the following manner:

Section 124(1) should be amended to provide:

"The operator of an approved scheme may recover its charges by charging debtors or affected creditors (or both)."

and section 124(2) should be amended to provide:

"charges means the costs which the operator incurs, taking one year with another, in connection with the approved scheme, along with any charges made by the operator, so far as those costs and charges are reasonable."

If this route of amending the TCE Act 2007 were taken, any Regulations that were eventually made under it (if deemed necessary), so far as they related to charges and costs could simply provide:-

"Charges by approved operators

(a) An approved operator shall not impose charges by way of costs to the debtor and/or affected creditor under section 124(1) of the Act which are greater than either:-

1. []% of the relevant debt; or

2. £[], whichever is the smaller."

Alternatively, the Regulations could make provision for specific fees and charges according to a table of fees set out in a Schedule to the Statutory Instrument. This would allow them to be varied periodically to account for changes in the cost of providing debt management services.

Detail of proposed draft amendment to the Financial Services Bill

Page 163, line 19

After Clause 93

Insert the following new Clause

"Amendments of Tribunals, Courts and Enforcement Act 2007

Amendments of Tribunals, Courts and Enforcement Act 2007

(1) Section 124 of the Tribunals, Courts and Enforcement Act 2007 (charges by operator of approved scheme) is amended as follows.

(2) In subsection (1) for "costs" substitute "charges"

(3) In subsection (2) –

(a) for "costs", in the first instance, substitute "charges",

(b) after "scheme," insert "along with any charges made by the operator", and

(c) after "those costs" insert "and charges".

February 2012