Last week, the House of Commons held a debate on debt advice and debt management (starting at 3.21pm on that link). This was reported by Credit Today under the headline “MPs urge clampdown on consumer credit.”
Tracey Crouch, Conservative MP for Chatham and Aylesford, spoke at length on debt management companies. Her view (which is well put) is that commercial debt management companies push people who are struggling with debt into inappropriate debt management plans with high fees, without advising them about alternatives such as bankruptcy.
For those who don’t deal with debt, or who have been lucky (or sensible) enough not to get into it, a debt management plan is an arrangement whereby a debtor pays a consolidated monthly sum to a third party who distributes it to creditors in proportion to the size of the debts owed. If the third party is operating on a commercial basis (there are non-profit providers), it takes a fee out of the consolidated amount.
The most obvious thing about this is that the commercial providers are taking a fee for something that the debtor, albeit with some effort, could do for themselves. Lenders that have signed up to industry guidelines such as the Lending Code are supposed to deal fairly with debtors who are in financial difficulties and, if they follow through on that promise, will accept reduced payments at least on a temporary basis.
In practice, it isn’t always that easy. Lenders will send an income and expenditure form for the debtor to complete, and it is not unknown for wrangling to ensue about specific expenditures (do you really need Sky Sports?) and the exact proportion in which each creditor should be paid.
Then there is the mentality that develops in many people who collect debt for a living (including me, a hundred years or so ago). A certain proportion of the hard luck stories that every collector hears aren’t exactly a full and frank account, and the scepticism that this naturally breeds can be reinforced (in a minority of cases, I should stress) by poorly-designed collection processes and targets.
This can make dealing with creditors on your own behalf quite a battle, especially if you have quite a few to talk to. When you consider that many people who get into debt problems do so because of their reluctance to confront their situation, you can see why some debtors need a little help.
This should be where the non-profit debt advisors, chiefly the Consumer Credit Counselling Service and the Citizen’s Advice Bureau, come in. They provide independent advice on dealing with debt, including on insolvency options, and can liaise with creditors on a debtor’s behalf.
But they are, to put it mildly, somewhat stretched. The CCCS is funded by lenders, and has a notorious backlog (I have no idea if the two things are linked), and the CAB is suffering its own, Government-inflicted funding worries.
Hence the gap in the market for commercial debt management companies. Because they take a fee for debt management plans and individual voluntary arrangements, but cannot for bankruptcies or Debt Relief Orders (pdf), it is clear that they will promote the former over the latter.
Which brings us to the second problem, identified by Tracey Crouch in her Commons speech: what’s in the best interests of the debt management company isn’t always in the best interests of the debtor. It is not, in other words, impartial advice.
This matters for two reasons. First, some debtors for whom it might be appropriate to apply for bankruptcy or a Debt Relief Order (which would typically lead to debts being expunged sooner than under a debt management plan) will not receive advice on the pros and cons of the former and the criteria for obtaining the latter.
Second, the fee taken by the debt management company reduces the amount available for distribution to creditors. Boo for creditors, for sure, but this can also substantially increase the time that it takes the debtor to get clear of their debts.
You can add to this the relaxed approach to administration that some debt management companies display. It is not unheard of for payments to be delayed for months, and for requests for income and expenditure reviews to go unheeded.
Given that under Office of Fair Trading guidance creditors are not supposed to contact represented debtors directly, it’s possible for several months to go by before the debtor becomes aware of the problem. This can lead to additional interest and charges being incurred, which just adds to the time that it takes to pay off the debt.
With all these problems, it’s not surprising that MPs and regulators are piling in. As well as last week’s debate, the Select Committee on Business, Innovation and Skills is undertaking an inquiry into the issue, and following regulatory action against 50 firms the Office of Fair Trading issued revised guidance for the sector earlier this year.
It is, of course, always amusing to hear that Conservative MPs are shocked (shocked!) to find that businesses operating on a commercial basis are putting profit ahead of consumer interests. Perhaps we could rebrand the good type of regulation to distinguish it from that horrible red tape that stifles growth – baby blue tape, anyone?
Cheap shots aside, there is no doubt that Tracey Crouch, at least, is sincere in her views. David Allen Green has drawn my attention to this blog from earlier this year, in which she writes honestly about how her own struggles with debt inform her campaigning on this issue.
But as it happens, and as much as I wonder whether she and some of her colleagues are in the wrong party, I don’t quite agree with her on the remedy for this problem. I’m happy enough to see debt management companies regulated further, but the consumer credit sector is fairly highly regulated as it is and yet it’s not exactly free of bad behaviour.
What might work is for the Government to properly fund, or to require lenders to properly fund, the CCCS and the CAB so that they can both advertise their services effectively and handle the resulting caseload. Then consumers will have access to free and impartial advice, and there will be much less incentive to resort to fee charging services.
This might even be a policy that would benefit both business (through quicker repayments and lower defaults) and consumers, and might have the happy effect of reducing the amount of private debt at large. Given how often private debt seems to become public debt these days, that seems like a good thing.
Gosh, maybe Tracey Crouch and I should swap parties?*
*That’s a joke. If I ever display any Conservative tendencies again, you can shoot me.